U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019 ¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______. |
Commission file number: 001-35011
DYNASIL CORPORATION OF AMERICA
(Exact name of registrant as specified in its charter)
Delaware | 22-1734088 | ||
(State or other jurisdiction of | (I.R.S. Employer | ||
incorporation or organization) | Identification No.) |
313 Washington Street, Suite 403, Newton, MA | 02458 | ||
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (617) 668-6855
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 daysdays. YesxNo¨
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). YesxNo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ | Accelerated filer¨ | |
Non-accelerated filer | Smaller reporting companyx | |
Emerging growth company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes¨No¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Nox
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange of which registered | ||
Common stock | DYSL | Nasdaq Capital Market |
As of February 6, 2018May 7, 2019 there were 17,175,17517,541,300 shares of common stock, par value $.0005 per share, outstanding.
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
INDEX
2 |
PART I – FINANCIAL INFORMATION
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, | September 30, | |||||||||||||||
2019 | 2018 | |||||||||||||||
December 31, | September 30, | (Unaudited) | ||||||||||||||
2017 | 2017 | |||||||||||||||
ASSETS | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | $ | 961,000 | $ | 2,415,000 | $ | 350,000 | $ | 2,327,000 | ||||||||
Accounts receivable, net of allowances of $195,000 and $200,000 at December 31, 2017 and September 30, 2017, respectively | 3,750,000 | 3,407,000 | ||||||||||||||
Costs in excess of billings and unbilled receivables | 1,230,000 | 1,317,000 | ||||||||||||||
Accounts receivable, net of allowances of $267,000 and $262,000 at March 31, 2019 and September 30, 2018, respectively | 3,950,000 | 4,069,000 | ||||||||||||||
Unbilled receivables | 2,553,000 | 1,214,000 | ||||||||||||||
Contract assets | 19,000 | 1,000 | ||||||||||||||
Inventories, net of reserves | 4,491,000 | 4,326,000 | 4,525,000 | 4,106,000 | ||||||||||||
Prepaid expenses and other current assets | 792,000 | 973,000 | 847,000 | 664,000 | ||||||||||||
Total current assets | 11,224,000 | 12,438,000 | 12,244,000 | 12,381,000 | ||||||||||||
Property, Plant and Equipment, net | 7,377,000 | 7,032,000 | 8,020,000 | 8,098,000 | ||||||||||||
Other Assets | ||||||||||||||||
Intangibles, net | 978,000 | 987,000 | 701,000 | 755,000 | ||||||||||||
Deferred tax asset | 2,109,000 | 2,642,000 | 4,198,000 | 4,333,000 | ||||||||||||
Goodwill | 5,951,000 | 5,940,000 | 5,900,000 | 5,900,000 | ||||||||||||
Long term contract assets | 26,000 | 7,000 | ||||||||||||||
Security deposits | 58,000 | 58,000 | 53,000 | 58,000 | ||||||||||||
Total other assets | 9,096,000 | 9,627,000 | 10,878,000 | 11,053,000 | ||||||||||||
Total Assets | $ | 27,697,000 | $ | 29,097,000 | $ | 31,142,000 | $ | 31,532,000 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Equipment line of credit | $ | 484,000 | $ | - | ||||||||||||
Current portion of long-term debt | $ | 1,840,000 | $ | 2,007,000 | 1,307,000 | 1,246,000 | ||||||||||
Capital lease obligations, current | 78,000 | 91,000 | ||||||||||||||
Capital lease obligations, current portion | 33,000 | 40,000 | ||||||||||||||
Accounts payable | 1,899,000 | 2,380,000 | 2,218,000 | 2,355,000 | ||||||||||||
Deferred revenue | 34,000 | 129,000 | ||||||||||||||
Contract liabilities | 25,000 | 253,000 | ||||||||||||||
Accrued expenses and other liabilities | 2,336,000 | 2,667,000 | 2,469,000 | 2,803,000 | ||||||||||||
Total current liabilities | 6,187,000 | 7,274,000 | 6,536,000 | 6,697,000 | ||||||||||||
Long-term Liabilities | ||||||||||||||||
Long-term debt, net of current portion | 1,358,000 | 1,045,000 | 1,660,000 | 2,075,000 | ||||||||||||
Capital lease obligations, net of current portion | 68,000 | 81,000 | 38,000 | 52,000 | ||||||||||||
Deferred tax liability, net | 236,000 | 234,000 | 205,000 | 205,000 | ||||||||||||
Other long-term liabilities | 163,000 | 38,000 | 180,000 | 175,000 | ||||||||||||
Total long-term liabilities | 1,825,000 | 1,398,000 | 2,083,000 | 2,507,000 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3 |
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)
March 31, | September 30, | |||||||||||||||
December 31, | September 30, | 2019 | 2018 | |||||||||||||
2017 | 2017 | (Unaudited) | ||||||||||||||
Stockholders' Equity | ||||||||||||||||
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 17,929,183 and 17,893,763 shares issued, 17,119,023 and and 17,083,603 shares outstanding at December 31, 2017 and September 30, 2017, respectively. | 9,000 | 9,000 | ||||||||||||||
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 18,301,216 and 18,152,074 shares issued, 17,491,056 and and 17,341,914 shares outstanding at March 31, 2019 and September 30, 2018, respectively. | 9,000 | 9,000 | ||||||||||||||
Additional paid in capital | 21,499,000 | 21,406,000 | 22,060,000 | 21,865,000 | ||||||||||||
Accumulated other comprehensive income (loss) | (504,000 | ) | (539,000 | ) | (696,000 | ) | (700,000 | ) | ||||||||
Accumulated deficit | (1,716,000 | ) | (919,000 | ) | ||||||||||||
Retained earnings | 862,000 | 841,000 | ||||||||||||||
Less 810,160 shares of treasury stock - at cost | (986,000 | ) | (986,000 | ) | (986,000 | ) | (986,000 | ) | ||||||||
Total Dynasil stockholders' equity | 18,302,000 | 18,971,000 | 21,249,000 | 21,029,000 | ||||||||||||
Noncontrolling interest | 1,383,000 | 1,454,000 | 1,274,000 | 1,299,000 | ||||||||||||
Total stockholders' equity | 19,685,000 | 20,425,000 | 22,523,000 | 22,328,000 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 27,697,000 | $ | 29,097,000 | $ | 31,142,000 | $ | 31,532,000 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4 |
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
Three Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||
December 31, | March 31, | March 31, | ||||||||||||||||||||||
2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
Net revenue | $ | 9,189,000 | $ | 9,143,000 | $ | 11,532,000 | $ | 10,255,000 | $ | 21,560,000 | $ | 19,443,000 | ||||||||||||
Cost of revenue | 5,614,000 | 5,618,000 | 7,174,000 | 6,310,000 | 13,510,000 | 11,958,000 | ||||||||||||||||||
Gross profit | 3,575,000 | 3,525,000 | 4,358,000 | 3,945,000 | 8,050,000 | 7,485,000 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Sales and marketing | 279,000 | 266,000 | 477,000 | 388,000 | 875,000 | 667,000 | ||||||||||||||||||
Research and development | 308,000 | 196,000 | 147,000 | 215,000 | 324,000 | 524,000 | ||||||||||||||||||
General and administrative | 3,157,000 | 2,987,000 | 3,410,000 | 3,262,000 | 6,652,000 | 6,418,000 | ||||||||||||||||||
Total operating expenses | 3,744,000 | 3,449,000 | 4,034,000 | 3,865,000 | 7,851,000 | 7,609,000 | ||||||||||||||||||
Income (loss) from operations | (169,000 | ) | 76,000 | 324,000 | 80,000 | 199,000 | (124,000 | ) | ||||||||||||||||
Interest expense, net | 43,000 | 67,000 | 46,000 | 45,000 | 88,000 | 88,000 | ||||||||||||||||||
Income (loss) before taxes | (212,000 | ) | 9,000 | 278,000 | 35,000 | 111,000 | (212,000 | ) | ||||||||||||||||
Income tax (benefit) | 660,000 | (2,730,000 | ) | 206,000 | (1,255,000 | ) | 141,000 | (595,000 | ) | |||||||||||||||
Net income (loss) | (872,000 | ) | 2,739,000 | 72,000 | 1,290,000 | (30,000 | ) | 383,000 | ||||||||||||||||
Less: Net income (loss) attributable to noncontrolling interest | (75,000 | ) | (69,000 | ) | ||||||||||||||||||||
Less: Net loss attributable to noncontrolling interest | (4,000 | ) | (33,000 | ) | (13,000 | ) | (108,000 | ) | ||||||||||||||||
Net income (loss) attributable to common stockholders | $ | (797,000 | ) | $ | 2,808,000 | $ | 76,000 | $ | 1,323,000 | $ | (17,000 | ) | $ | 491,000 | ||||||||||
Net income (loss) | $ | (872,000 | ) | $ | 2,739,000 | $ | 72,000 | $ | 1,290,000 | $ | (30,000 | ) | $ | 383,000 | ||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||
Foreign currency translation | 35,000 | (295,000 | ) | 145,000 | 222,000 | 4,000 | 257,000 | |||||||||||||||||
Total comprehensive income (loss) | (837,000 | ) | 2,444,000 | 217,000 | 1,512,000 | (26,000 | ) | 640,000 | ||||||||||||||||
Less: comprehensive income (loss) attributable to noncontrolling interest | (75,000 | ) | (69,000 | ) | (4,000 | ) | (33,000 | ) | (13,000 | ) | (108,000 | ) | ||||||||||||
Total comprehensive income (loss) attributable to common stockholders | $ | (762,000 | ) | $ | 2,513,000 | $ | 221,000 | $ | 1,545,000 | $ | (13,000 | ) | $ | 748,000 | ||||||||||
Basic net income (loss) per common share | $ | (0.05 | ) | $ | 0.17 | $ | 0.00 | $ | 0.08 | $ | (0.00 | ) | $ | 0.03 | ||||||||||
Diluted net income (loss) per common share | $ | (0.05 | ) | $ | 0.17 | $ | 0.00 | $ | 0.08 | $ | (0.00 | ) | $ | 0.03 | ||||||||||
Weighted average shares outstanding | ||||||||||||||||||||||||
Basic | 17,433,249 | 17,133,468 | 17,379,113 | 17,090,530 | ||||||||||||||||||||
Diluted | 17,433,249 | 17,133,468 | 17,379,113 | 17,090,530 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5 |
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
Additional | Other | Total | ||||||||||||||||||||||||||||||||||
Common | Common | Paid-in | Comprehensive | Accumulated | Treasury Stock | Noncontrolling | Stockholders' | |||||||||||||||||||||||||||||
For the three months ended December 31, 2017 | Shares | Amount | Capital | Income (Loss) | Deficit | Shares | Amount | Interest | Equity | |||||||||||||||||||||||||||
Balance, September 30, 2017 | 17,893,763 | $ | 9,000 | $ | 21,406,000 | $ | (539,000 | ) | $ | (919,000 | ) | 810,160 | $ | (986,000 | ) | $ | 1,454,000 | $ | 20,425,000 | |||||||||||||||||
Issuance of shares of common stock under employee stock purchase plan | 4,420 | - | 4,000 | - | - | - | - | - | 4,000 | |||||||||||||||||||||||||||
Stock-based compensation costs | 31,000 | - | 89,000 | - | - | - | - | 4,000 | 93,000 | |||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | 35,000 | - | - | - | - | 35,000 | |||||||||||||||||||||||||||
Net income (loss) | - | - | - | - | (797,000 | ) | - | - | (75,000 | ) | (872,000 | ) | ||||||||||||||||||||||||
Balance, December 31, 2017 | 17,929,183 | $ | 9,000 | $ | 21,499,000 | $ | (504,000 | ) | $ | (1,716,000 | ) | 810,160 | $ | (986,000 | ) | $ | 1,383,000 | $ | 19,685,000 |
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Common Amount | ||||||||||||||||
Balance, beginning of period | $ | 9,000 | $ | 9,000 | $ | 9,000 | $ | 9,000 | ||||||||
Balance, end of period | 9,000 | 9,000 | 9,000 | 9,000 | ||||||||||||
Additional Paid-in Capital | ||||||||||||||||
Balance, beginning of period | 21,946,000 | 21,499,000 | 21,865,000 | 21,406,000 | ||||||||||||
Issuance of shares of common stock under employee stock purchase plan | 4,000 | 4,000 | 9,000 | 8,000 | ||||||||||||
Stock-based compensation costs | 110,000 | 132,000 | 186,000 | 221,000 | ||||||||||||
Balance, end of period | 22,060,000 | 21,635,000 | 22,060,000 | 21,635,000 | ||||||||||||
Other Comprehensive Income (Loss) | ||||||||||||||||
Balance, beginning of period | (841,000 | ) | (504,000 | ) | (700,000 | ) | (539,000 | ) | ||||||||
Foreign currency translation adjustment | 145,000 | 222,000 | 4,000 | 257,000 | ||||||||||||
Balance, end of period | (696,000 | ) | (282,000 | ) | (696,000 | ) | (282,000 | ) | ||||||||
Retained Earnings (Accumulated Deficit) | ||||||||||||||||
Balance, beginning of period | 770,000 | (1,751,000 | ) | 841,000 | (919,000 | ) | ||||||||||
Impact of change in accounting policy | - | - | 22,000 | - | ||||||||||||
Xcede stock surrender of Series A Preferred | 16,000 | - | 16,000 | - | ||||||||||||
Net income (loss) | 76,000 | 1,323,000 | (17,000 | ) | 491,000 | |||||||||||
Balance, end of period | 862,000 | (428,000 | ) | 862,000 | (428,000 | ) | ||||||||||
Treasury Stock | ||||||||||||||||
Balance, beginning of period | (986,000 | ) | (986,000 | ) | (986,000 | ) | (986,000 | ) | ||||||||
Balance, end of period | (986,000 | ) | (986,000 | ) | (986,000 | ) | (986,000 | ) | ||||||||
Noncontrolling Interest | ||||||||||||||||
Balance, beginning of period | 1,292,000 | 1,383,000 | 1,299,000 | 1,454,000 | ||||||||||||
Stock-based compensation costs | 2,000 | 5,000 | 4,000 | 9,000 | ||||||||||||
Xcede stock surrender of Series A Preferred | (16,000 | ) | - | (16,000 | ) | - | ||||||||||
Net income (loss) | (4,000 | ) | (33,000 | ) | (13,000 | ) | (108,000 | ) | ||||||||
Balance, end of period | 1,274,000 | 1,355,000 | 1,274,000 | 1,355,000 | ||||||||||||
Total Stockholders' Equity | $ | 22,523,000 | $ | 21,303,000 | $ | 22,523,000 | $ | 21,303,000 | ||||||||
Common Shares | ||||||||||||||||
Number of shares, beginning of period | 18,198,121 | 17,929,183 | 18,152,074 | 17,893,763 | ||||||||||||
Issuance of shares of common stock under employee stock purchase plan | 5,512 | 3,536 | 11,830 | 7,956 | ||||||||||||
Stock-based compensation costs | 97,583 | 76,152 | 137,312 | 107,152 | ||||||||||||
Number of shares, end of period | 18,301,216 | 18,008,871 | 18,301,216 | 18,008,871 | ||||||||||||
Treasury Shares | ||||||||||||||||
Number of shares, beginning of period | 810,160 | 810,160 | 810,160 | 810,160 | ||||||||||||
Number of shares, end of period | 810,160 | 810,160 | 810,160 | 810,160 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6 |
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, | March 31, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | (872,000 | ) | $ | 2,739,000 | $ | (30,000 | ) | $ | 383,000 | ||||||
Adjustments to reconcile net income (loss) to net cash: | ||||||||||||||||
Stock compensation expense | 93,000 | 89,000 | 190,000 | 230,000 | ||||||||||||
Foreign exchange loss (gain) | (7,000 | ) | 41,000 | 8,000 | (33,000 | ) | ||||||||||
Depreciation and amortization | 299,000 | 311,000 | 693,000 | 610,000 | ||||||||||||
Deferred income taxes | 533,000 | (2,730,000 | ) | 136,000 | (710,000 | ) | ||||||||||
Non-cash R&D services | 163,000 | 38,000 | - | 200,000 | ||||||||||||
Other | 44,000 | 35,000 | 14,000 | 50,000 | ||||||||||||
Other changes in assets and liabilities: | ||||||||||||||||
Accounts receivable, net | (333,000 | ) | (374,000 | ) | 120,000 | (811,000 | ) | |||||||||
Unbilled receivables | (1,299,000 | ) | 472,000 | |||||||||||||
Contract assets | (37,000 | ) | - | |||||||||||||
Inventories | (198,000 | ) | (280,000 | ) | (437,000 | ) | (279,000 | ) | ||||||||
Costs in excess of billings and unbilled receivables | 88,000 | 249,000 | ||||||||||||||
Prepaid expenses and other assets | 51,000 | 189,000 | (180,000 | ) | 189,000 | |||||||||||
Accounts payable | (483,000 | ) | (99,000 | ) | (137,000 | ) | (646,000 | ) | ||||||||
Accrued expenses and other liabilities | (236,000 | ) | (790,000 | ) | (335,000 | ) | 123,000 | |||||||||
Deferred revenue | (95,000 | ) | 2,000 | |||||||||||||
Contract liabilities | (228,000 | ) | (3,000 | ) | ||||||||||||
Net cash from operating activities | (953,000 | ) | (580,000 | ) | (1,522,000 | ) | (225,000 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of property, plant and equipment | (609,000 | ) | (91,000 | ) | (561,000 | ) | (1,005,000 | ) | ||||||||
Purchase of intangibles | (16,000 | ) | (20,000 | ) | - | (45,000 | ) | |||||||||
Net cash from investing activities | (625,000 | ) | (111,000 | ) | (561,000 | ) | (1,050,000 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of common stock | 4,000 | 4,000 | 10,000 | 8,000 | ||||||||||||
Principal payments on capital leases | (26,000 | ) | (28,000 | ) | (21,000 | ) | (50,000 | ) | ||||||||
Proceeds from (payments of) equipment line of credit, net | 281,000 | - | 484,000 | 281,000 | ||||||||||||
Proceeds from (payments of) bank and subordinated debt, net | (141,000 | ) | (219,000 | ) | (360,000 | ) | (277,000 | ) | ||||||||
Net cash from financing activities | 118,000 | (243,000 | ) | 113,000 | (38,000 | ) | ||||||||||
Effect of exchange rates on cash and cash equivalents | 6,000 | (49,000 | ) | (7,000 | ) | 28,000 | ||||||||||
Net change in cash and cash equivalents | (1,454,000 | ) | (983,000 | ) | (1,977,000 | ) | (1,285,000 | ) | ||||||||
Cash and cash equivalents, beginning | $ | 2,415,000 | $ | 2,607,000 | $ | 2,327,000 | $ | 2,415,000 | ||||||||
Cash and cash equivalents, ending | $ | 961,000 | $ | 1,624,000 | $ | 350,000 | $ | 1,130,000 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Cash paid during the year for: | ||||||||||||||||
Interest | $ | 37,000 | $ | 47,000 | $ | 83,000 | $ | 77,000 | ||||||||
Tax payments (refunds) | 4,000 | - | (5,000 | ) | 5,000 | |||||||||||
Non cash activities: | ||||||||||||||||
Recapitalization of Xcede - conversion of non controlling notes payable to preferred stock | - | 3,104,000 | ||||||||||||||
Subsidiary stock options issued to settle liabilities | - | 82,000 | ||||||||||||||
Subsidiary debt issued to fund research activities | - | 500,000 | ||||||||||||||
Xcede stock surrender of Series A Preferred | 18,000 | - |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7 |
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying consolidated balance sheet as of DecemberMarch 31, 2017,2019, the consolidated statements of operations and comprehensive income (loss) for the three and six months ended DecemberMarch 31, 20172019 and 2016,2018, changes in stockholders’ equity for the three and six months ended DecemberMarch 31, 20172019 and 2018, and cash flows for the threesix months ended DecemberMarch 31, 20172019 and 20162018 of Dynasil Corporation of America and subsidiaries (the “Company”), and the related information contained in these notes have been prepared by management and are unaudited. Xcede Technologies, Inc. (“Xcede”) is a joint venture between Dynasil Biomedical and Mayo Clinic to spin out and separately fund the development of a tissue sealant technology. As of DecemberMarch 31, 2017,2019, Dynasil Biomedical owned 62%63% of Xcede’s stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. The remaining 38%37% of Xcede’s stock is owned by others and is accounted for under the rules applicable to non-controlling interest. Certain prior year balances have been reclassified to conform to the current year presentation. These reclassifications did not affect previously reported net income or stockholders’ equity. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles for the periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year.
The preparation of our unaudited consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 20172018 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission.
The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of DecemberMarch 31, 2017,2019, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Quarterly Report on Form 10-Q, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date of the filing of this Quarterly Report on Form 10-Q with the SEC.
Note 2 – Recent Accounting Pronouncements
Effective October 1, 2017,2018, the Company adopted Accounting Standards Codification (“ASC”) 606,Revenue from Contracts with Customers, and all the guidance issued in Accounting Standard Update 2016-09,Improvements to Employee Share-Based Payment Accounting, which intends to simplify various aspects of how share-based payments are accounted for and presented in financial statements. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The new standard contains severalrelated amendments that will simplifyusing the accounting for employee share-based payment transactions, includingmodified retrospective transition method. Under the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. In addition, the new standard eliminates the limitation on recognition of excess stock compensation benefits until such benefits are actually realized, and instead applies the general recognition standard to these deferred tax assets. This standard will be applied using a modified retrospective approach, the Company applied the standards to new contracts and those that were not completed as of October 1, 2018 which resulted in a cumulative adjustment to increase the retained earnings in the amount of $22,000. Prior periods will not be retrospectively adjusted, but the Company will recognize forfeituresmaintain dual reporting for the year of awards as they occur.initial application in order to maintain comparability of the periods presented. The cumulative effect of the changes made to the October 1, 2018 unaudited consolidated balance sheet for the adoption of the ASU had no impact on the retained earnings, other components of equity or net assetsTopic 606 was as of the beginning of the period of adoption. For the three month period ended December 31, 2017, the Company recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. The Company has elected to present the cash flow statement on a prospective transition method and no prior periods have been adjusted.follows:
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Balance at | Adjustment for | Adjusted balance at | ||||||||||
September 30, 2018 | Topic 606 | October 1, 2018 | ||||||||||
Assets: | ||||||||||||
Unbilled receivables | 1,214,000 | 40,000 | 1,254,000 | |||||||||
Inventories, net of reserves | 4,106,000 | (18,000 | ) | 4,088,000 | ||||||||
Liabilities: | ||||||||||||
Contract liabilities | 253,000 | - | 253,000 | |||||||||
Stockholders' equity: | ||||||||||||
Retained earnings | 841,000 | 22,000 | 863,000 |
EffectiveContract assets were formerly reported within costs in excess of billings and unbilled receivables. Contract liabilities were formerly reported as deferred revenue. The titles have been changed in the table below to be consistent with accounts currently used under the new standard.
September 30, 2018 | ||||||||
As Reported | As Adopted | |||||||
Unbilled receivables | 1,215,000 | 1,214,000 | ||||||
Contract assets | - | 1,000 | ||||||
Security and other deposits | 65,000 | 58,000 | ||||||
Long term contract assets | - | 7,000 | ||||||
Deferred revenue | 253,000 | - | ||||||
Contract liabilities | - | 253,000 |
The Company receives payments from customers based on a billing schedule as established in our contracts. Contract asset relates to our conditional right to consideration for our completed performance under the contract. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract liability relates to payments received in advance of performance under the contract. Contract liabilities are recognized as revenue as (or when) we perform under the contract. The Company recognized revenue in the amount of $137,000 during the three months ended March 31, 2019 and $252,000 during the six months ended March 31, 2019 for amounts included in the contract liability balance at September 30, 2018.
Under the new standard, most contracts in the Innovation and Development (formerly Contract Research) segment, which primarily provide contract research services, were not materially impacted upon the adoption of Topic 606 as revenue will continue to be recognized over time. Contracts in the Optics segment generally provide for the following revenue sources: standard product sales, custom product development and sales, and non-recurring engineering contracts. Revenues for this segment are recognized using either the “point in time” or “over time” methods of Topic 606, depending upon the revenue source. The change in revenue recognition for the Optics segment related to certain custom optics products and the related non-recurring engineering costs which changed from “point in time” to “over time” upon the adoption of Topic 606. This change will result in the recognition of revenue over time when compared to existing standards with the cumulative adjustment relating to contracts that are not complete as of September 30, 2018 recognized as an adjustment of $22,000 to opening retained earnings on October 1, 2017,2018. The revenue for the standard products will be recognized using the "point in time" model of Topic 606, and the timing of such revenue recognition is not expected to differ materially from the historical revenue recognition. Other immaterial adjustments related to the Optics segment that are sometimes offered to customers include customer rights of return and volume discounts. The Company has elected the practical expedient that the Company adoptedwill not be required to adjust promised amounts of consideration for the guidance issued in Accounting Standard Update 2016-17,Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which amends the consolidation guidance on how a reporting entity that is the single decision makereffects of a VIE should treat indirect interestssignificant financing component if the transfer of promised goods or services will occur in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiaryone year or less.
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The impact of that VIE. Thethe adoption of this ASU did not have an impactASC 606 on the Company’s consolidated financial statements.statements for the three and six months ended March 31, 2019 was immaterial as compared to what would have been reported under the previous guidance.
Innovation and Development Segment Revenues
The Company performs research and development for U.S. Federal government agencies, educational institutions and commercial organizations. The Company accounts for a research contract when a contract has been executed, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of the contract price is considered probable. Revenue from Contracts with Customers (Topic 606) Section A—Summaryis earned under reimbursement of costs plus fees, fixed price, or time and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40).In May 2014, the FASB issued ASU 2014-09 which outlines a single comprehensive model for entities to use in accounting for revenue arising frommaterial type contracts.
The Company’s contracts with agencies of the U.S. government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract or ratably throughout the contract as the services are provided. In evaluating the probability of funding for purposes of assessing collectability of the contract price, the Company considers previous experience with the customers, communication with the customers regarding funding status, and supersedes most currentknowledge of available funding for the contract or program. If funding is not assessed as probable, revenue recognition guidance, including industry-specific guidance. Usingis deferred until realization is reasonably assured.
Under the typical payment terms of the Company’s U.S. government contracts, the customer pays either performance-based payments or progress payments. Performance-based payments, which are typically used in the firm fixed price contracts, are interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments, which are typically used in the Company’s cost-plus type contracts, are interim payments based on costs incurred as the work progresses. For the Company’s U.S. government cost-plus contracts, the customer generally pays during the performance period for 80%-90% of the actual costs incurred. Because the customer retains a small portion of the contract price until completion of the contract and audit of allowable costs, cost-plus type contracts generally result in revenue recognized in excess of billings which the Company presents as contract assets on the balance sheet. Amounts billed and due from customers are classified as receivables on the balance sheet, whereas amounts earned, but not yet billed to the Company’s customers due to timing, are classified as unbilled receivables on the balance sheet. The Company recognizes a liability for performance-based payments paid in advance which are in excess of the revenue recognized and presents these guidelines, a comprehensive framework was establishedamounts as contract liabilities on the balance sheet.
To determine the proper revenue recognition method for determining how much revenue to recognizeresearch and when itdevelopment contracts, the Company evaluates whether two or more contracts should be recognized.combined and accounted for as one single modified contract and whether the combined or single contract should be accounted for as more than one performance obligation. For instances where a contract has options that were bid with the initial contract and awarded at a later date, the Company combines the options with the original contract when options are awarded. For most contracts, the customer contracts for research with multiple milestones that are interdependent, thus, the entire contract is accounted for as one performance obligation. The standardeffect of the combined or modified contract on the transaction price and measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Contract revenue recognition is measured over time as the Company performs the work because of continuous transfer of knowledge and control to the customer. For U.S. government contracts which are typically subject to the Federal Acquisition Regulation ("FAR"), this continuous transfer of knowledge and control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for cost incurred plus a reasonable profit, and take control of any work in process. From time to time, as part of normal management processes, facts may change, causing revisions to estimated total costs or revenues expected. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.
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Because of knowledge and control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the principlenature of the services to be provided. The Company generally uses the input method, more specifically the cost-to-cost measure of progress for the contracts because it best depicts the transfer of knowledge and control to the customer which occurs as the Company incur costs on these contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The underlying bases for estimating contract research revenues are measurable expenses, such as labor, subcontractor costs and materials, and data that are updated on a regular basis for purposes of preparing cost estimates. The Company’s research contracts generally have a period of performance of six months to three years, and estimates of contract costs have historically been consistent with actual results. Revisions in these estimates between accounting periods to reflect changing facts and circumstances have not had a material impact on operating results, and the Company does not expect future changes in these estimates to be material. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.
Under cost-plus contracts, the Company is reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and paid a fixed fee representing the profit negotiated between the Company and the contracting agency. Revenue from cost-plus contracts is recognized as costs are incurred plus an entity shouldestimate of applicable fees earned. The Company considers fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of the contract.
Revenue from time and materials contracts is recognized based on direct labor hours expended at contract billing rates plus other billable direct costs. The Company has elected the practical expedient to recognize revenue in the amount for which it has the right to depictinvoice the transfercustomer, provided that invoiced amount corresponds directly with the value to the customer of the Company’s performance to date.
Fixed price contracts may include either a product delivery or specific service performance throughout a period. For fixed price contracts that are based on the proportional performance method and involve a specified number of deliverables, the Company recognizes revenue based on the proportion of the cost of the deliverables compared to the cost of all deliverables included in the contract as this method more accurately measures performance under these arrangements. For fixed price contracts that provide for the development and delivery of a specific prototype or product, revenue is recognized based upon the performance completed to date, using an output method of revenue recognition based on milestones reached.
Whether certain costs under government contracts are allowable is subject to audit by the government. Certain indirect costs are charged to contracts using provisional or estimated indirect rates, which are subject to later revision based on government audits of those costs. Management is of the opinion that costs subsequently disallowed, if any, would not likely have a significant impact on revenues recognized for those contracts.
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Optics Segment Revenues
The Company produces standard and customized products for commercial organizations, educational institutions, and U.S. Federal government agencies. In addition, the Company also offers services which include non-recurring engineering services. To determine the proper revenue recognition method for Optics contracts, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. The Company recognizes revenue when the performance obligation has been satisfied by transferring the control of the product or service to the customer. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on their relative stand-alone selling prices. In such circumstances, the Company uses the observable price of goods or services which are sold separately in similar circumstances to customerssimilar customers. If these prices are not observable, then the Company will estimate the stand-alone selling price using information that is reasonably available. For the majority of the Company’s standard products and services, price list, and discount structures related to customer type are available. For products and services that do not have price list and discount structures, the Company may use one or more of the following: (i) adjusted market assessment approach or (ii) expected cost plus a margin approach. The adjusted market approach requires evaluation of the market in an amount that reflects the consideration to which the entity expectsCompany sells goods or services and estimates the price that a customer in that market would be willing to be entitled in exchangepay for those goods or services. ASU 2014-09 alsoThe expected cost plus margin approach requires additional disclosure aboutthe Company to forecast expected costs of satisfying the performance obligation and then add a reasonable margin for that good or service. Shipping and handling activities primarily occur after a customer obtains control and are considered fulfillment cost rather than separate performance obligations. Similarly, sales and similar taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer are excluded from the measurement of the transaction price.
Unfulfilled Performance Obligations
For standard products, the Company recognizes revenue at a point in time when control passes to the customer. Absent substantial product acceptance clauses, this is based on the shipping terms. For custom products that require engineering and development based on customer requirements and provide for cost plus reasonable margin throughout the contract, the Company recognizes revenue over time using the output method for any items shipped and any finished goods or work in process that is produced for balances of open sales orders. For any finished goods or work in process that has been produced for the balance of open sales orders the Company recognizes revenue by applying the average selling price for such open order to the lesser of the on hand balance in finished goods or open sales order quantity which the Company presents as a contract asset on the balance sheet. Cost of sales is recognized based on the standard cost of the finished goods and work in process associated with this revenue and inventory balances are reduced accordingly.
Unfulfilled performance obligations represent amounts expected to be earned on executed contracts. Indefinite delivery and quantity contracts and unexercised options are not reported in total unfulfilled performance obligations. Unfulfilled performance obligations include funded obligations, which is the amount for which money has been directly authorized by the U.S. government and by a commercial customer for which a purchase order has been received, and unfunded obligations, representing firm orders for which funding has not yet been appropriated. The approximate value of our Innovation and Development segment unfulfilled performance obligations was $32.8 million at March 31, 2019. The Company expects to satisfy 46% of the performance obligations in fiscal year 2019, 41% in fiscal year 2020, and the remaining amount by fiscal year 2024. The approximate value of our Optics segment unfulfilled performance obligations was $3.2 million at March 31, 2019. The Company expects to satisfy 86% of the performance obligations in fiscal year 2019 and 14% in fiscal year 2020.
The Company disaggregates revenue from contracts with customers by geographic locations, customer-type, contract type, timing of recognition, and major categories for each segments, as the Company believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changesare affected by economic factors. See details in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. At this time, the Company plans to adopt this standard through the modified retrospective approach. The ASU becomes effective for the Company at the beginning of its 2019 fiscal year. In 2016 and 2017, the FASB issued several ASU’s related to ASU 2014-09, which simplify and provide additional guidance to companies for implementation of the standard. To be consistent with this core principle, an entity is required to apply the following five-step approach:tables below.
The Company is currently evaluating how
Three Months Ended March 31, 2019 | Six Months Ended March 31, 2019 | |||||||||||||||||||||||
Optics | Innovation & Development | Total | Optics | Innovation & Development | Total | |||||||||||||||||||
Total Revenue by Geographic Location | ||||||||||||||||||||||||
United States | $ | 3,605,000 | $ | 5,168,000 | $ | 8,773,000 | $ | 6,880,000 | $ | 9,353,000 | $ | 16,233,000 | ||||||||||||
Asia | 858,000 | 7,000 | 865,000 | 1,773,000 | 22,000 | 1,795,000 | ||||||||||||||||||
Europe | 1,701,000 | 12,000 | 1,713,000 | 3,186,000 | 51,000 | 3,237,000 | ||||||||||||||||||
Other | 62,000 | 119,000 | 181,000 | 108,000 | 187,000 | 295,000 | ||||||||||||||||||
Total | $ | 6,226,000 | $ | 5,306,000 | $ | 11,532,000 | $ | 11,947,000 | $ | 9,613,000 | $ | 21,560,000 | ||||||||||||
Total Revenue by Contract Type | ||||||||||||||||||||||||
Firm-fixed price | $ | 6,226,000 | $ | 605,000 | $ | 6,831,000 | $ | 11,947,000 | $ | 1,163,000 | $ | 13,110,000 | ||||||||||||
Non-Firm Fixed price | - | 4,701,000 | 4,701,000 | - | 8,450,000 | 8,450,000 | ||||||||||||||||||
Total | $ | 6,226,000 | $ | 5,306,000 | $ | 11,532,000 | $ | 11,947,000 | $ | 9,613,000 | $ | 21,560,000 | ||||||||||||
Total Revenue by Major Customer Type | ||||||||||||||||||||||||
U.S. government revenue | $ | - | $ | 5,035,000 | $ | 5,035,000 | $ | 3,000 | $ | 9,216,000 | $ | 9,219,000 | ||||||||||||
U.S. commercial revenue | 3,605,000 | 132,000 | 3,737,000 | 6,877,000 | 137,000 | 7,014,000 | ||||||||||||||||||
Foreign commercial and other revenue | 2,621,000 | 139,000 | 2,760,000 | 5,067,000 | 260,000 | 5,327,000 | ||||||||||||||||||
Total | $ | 6,226,000 | $ | 5,306,000 | $ | 11,532,000 | $ | 11,947,000 | $ | 9,613,000 | $ | 21,560,000 | ||||||||||||
Total Revenue by Major Products/Services | ||||||||||||||||||||||||
Optical components | $ | 6,194,000 | $ | - | $ | 6,194,000 | $ | 11,833,000 | $ | - | $ | 11,833,000 | ||||||||||||
Contract research | - | 5,223,000 | 5,223,000 | - | 9,421,000 | 9,421,000 | ||||||||||||||||||
Other products and services | 32,000 | 83,000 | 115,000 | 114,000 | 192,000 | 306,000 | ||||||||||||||||||
Total | $ | 6,226,000 | $ | 5,306,000 | $ | 11,532,000 | $ | 11,947,000 | $ | 9,613,000 | $ | 21,560,000 | ||||||||||||
Total Revenue by Timing of Recognition | ||||||||||||||||||||||||
Goods/services transferred over time | $ | 508,000 | $ | 5,223,000 | $ | 5,731,000 | $ | 1,068,000 | $ | 9,421,000 | $ | 10,489,000 | ||||||||||||
Goods transferred at a point in time | 5,718,000 | 83,000 | 5,801,000 | 10,879,000 | 192,000 | 11,071,000 | ||||||||||||||||||
Total | $ | 6,226,000 | $ | 5,306,000 | $ | 11,532,000 | $ | 11,947,000 | $ | 9,613,000 | $ | 21,560,000 |
Service Concession Arrangements (Topic 853): Determining the adoptionCustomer of ASU 2014-09 will impact its consolidated financial statements and results of operations by applying the five-step approach to each revenue stream. This evaluation includes completing an inventory of revenue streams by like contracts to allow for ease of implementation, monitoring developments for the manufacturing industry and government contractors, and evaluating potential changes to our business processes, systems, and controls to support the recognition and disclosure under the new standard. The Company has engaged a third party to assist in evaluating the impact of this new standard on its consolidated financial statements and related disclosures. The Company plans to complete the conversion and implementation phases by the end of fiscal year 2018 in conjunction with future interpretative guidance.
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.Operation Services.In May 2017, the FASB issued ASU No. 2017-092017-10 which was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexityprovides guidance for operating entities when applying the guidance in Topic 718, “Compensation – Stock Compensation” to changes in the terms and conditions ofthey enter into a share-based payment award.service concession arrangement with a public-sector grantor. This update is required beginning with the Company’s 2019 fiscal year and should be applied prospectively to award modifications after the effective date. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.
Business Combinations (Topic 805): Clarifying the Definition of a Business:In January 2017, the FASB issued ASU 2017-01 which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for the Company in the fiscal year beginning October 1, 2018.2018, at the time the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company is currently in the process of assessing the impact ofimplemented this ASU on itsOctober 1, 2018 and it is not expected to have a material impact on the Company’s consolidated financial statements.position, results of operations or cash flows.
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.In October 2016, the FASB issued ASU 2016-16 which eliminates the exception, other than for inventory transfers, under current U.S. GAAP under which the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. Upon adoption of ASU 2016-16, the Company will recognize the tax expense from the sale of that asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. This new guidance is effective for the Company beginning in fiscal 2019, with early adoption permitted. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. The cumulative-effect adjustment, if any, would consist of the net impact from (1) the write-off of any unamortized tax expense previously deferred and (2) recognition of any previously unrecognized deferred tax assets, net of any necessary valuation allowances. The impact of the adoption of this standard ison future periods will be dependent on future asset transfers, which generally occur in connection with acquisitions and other business structuring activities. The Company implemented this ASU on October 1, 2018 and it did not expected to have a material impact on the Company’s consolidated financial statements.position, results of operations or cash flows.
Service Concession ArrangementsBusiness Combinations (Topic 853)805): DeterminingClarifying the CustomerDefinition of a Business. In January 2017, the Operation Services.FASB issued ASU 2017-01 which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company implemented this ASU on October 1, 2018 and it did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.In May 2017, the FASB issued ASU 2017-10No. 2017-09 which provideswas issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance for operating entities when they enter intoin Topic 718, “Compensation – Stock Compensation” to changes in the terms and conditions of a service concession arrangement with a public-sector grantor. The ASU becomesshare-based payment award. This update is effective for the Company atin the beginning of its 2019 fiscal year at the time the Company adopts Accounting Standards Update No. 2014-09,Revenue from Contracts with Customers (Topic 606).beginning October 1, 2018. The Company is currently in the process of assessing the impactadoption of this ASUstandard did not have a material impact on itsthe Company’s consolidated financial statements.position, results of operations, or cash flows.
Leases (Topic 842). In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842),(as subsequently amended by ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20) which requires lesseesthat a lessee recognize in the statement of financial position a liability to put mostmake lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases on their balance sheetswith a term of 12 months or less, a lessee is permitted to make an accounting policy election by recognizingclass of underlying asset not to recognize lease assets and lease liabilities. As with previous guidance, there continues to be a lessee’s rightsdifferentiation between finance leases and obligations, while expensesoperating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. Lease assets and liabilities arising from both finance and operating leases will continue to be recognized in the statement of financial position. ASU 2016-02 leaves the accounting for leases by lessors largely unchanged from previous GAAP. The transitional guidance for adopting the requirements of ASU 2016-02 calls for a similar mannermodified retrospective approach that includes a number of optional practical expedients that entities may elect to today’s legacy lease accounting guidance. Thisapply. In addition, ASU could also significantly affect2018-11 provides for an additional (and optional) transition method by which entities may elect to initially apply the financial ratios used for external reportingtransition requirements in Topic 842 at that Topic’s effective date with the effects of initially applying Topic 842 recognized as a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption and other purposes, suchwithout retrospective application to any comparative prior periods presented. Also, ASU 2018-20 provides certain narrow-scope improvements to Topic 842 as debt covenant compliance. This newit relates to lessors. The guidance isin ASU 2016-02 will become effective for the Company as of the beginning inof the 2020 fiscal 2020, with early adoption permitted.year. The Company is currently in the process ofhas begun reviewing vendor relationships and assessing the impact of this ASU on its consolidated financial statements with the intention to adopt this ASU in fiscal year 2020.
Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment:Impairment. In January 2017, the FASB issued ASU 2017-04 which simplifies the test for goodwill impairment.impairment by eliminating Step 2 from the Goodwill impairment test. This new guidance is effective for the Company beginning in fiscal year 2021. The Company is currently in the process of assessing the impactadoption of this ASUstandard is not expected to have a material impact on its consolidatedthe Company’s financial statements.
On December 22, 2017, the date the Tax Cuts and Jobs Act (“2017 Tax Act”) was signed into law, the Securities and Exchange Commission staff issuedStaff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance regarding accounting for the income tax effects of the Tax Cuts Act, including the impact of the Tax Cuts Act on deferred tax assets and liabilities for financial statements issued in the reporting period that includes the enactment date of December 22, 2017. The Company estimated and accounted for the tax implications of the Tax Cuts Act in the quarter ended December 31, 2017 and the resultant changes are reflected in the current financial statements.
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Note 3 – Xcede Technologies, Inc. Joint Venture
In October 2013, the Company, through its subsidiary Dynasil Biomedical (“DBM”), formed Xcede, a joint venture with Mayo Clinic, in order to spin out and separately fund the development of its hemostatic tissue sealant technology, which formerly comprised the majority of its expense within the biomedical segment.
Beginning at its inception and through November 2016, Xcede funded its pre-clinical research activities through the issuance of $5.2 million in the aggregate principal amount of convertible notes bearing interest at 5% (“the Notes”) pursuant to a note purchase agreement dated October 2013 and most recently amended in. In November 2016 that provided for the issuance of up to $5.2 million in the aggregate principal amount of2016, the Notes from external investors and certain directors and officers of the Company. The Notes were convertible into equity of Xcede.
In November 2016, Dynasil committed to invest $1.2 million of cash into Xcede over the following 18 months, of which $0.9 million has been invested as of December 31, 2017 in exchange for Series B convertible preferred stock of Xcede (“Series B Preferred”). The value of the Series B Preferred, as it is wholly owned by DBM, was eliminated in consolidation. In conjunction with Dynasil’s committed investment, all $5.5 million in existing Notes and accrued interest were converted into 5,394,120 shares of Series A convertible preferred stock of Xcede (“Series A Preferred”) at a 20% discount to the price per share of the Series B Preferred, in accordance with the amended provisions of the Notes. The original conversion terms of the Notes were amended to require conversion into Series A Preferred rather than the class of stock issued in conjunction with the financing (Series B Preferred). Because the original conversion terms of the Notes were amended and as a result of assessing the impact of the rights and features of the Note amendment and their effect on the value to the issuer and holders, the transaction is recorded at fair value with a resulting gain on extinguishment of debt in the quarter ended December 31, 2016. Fair value was determined by management based on an independent valuation using a market and income approach and an option pricing model to allocate value to the respective shares. The fair value of the Series A Preferred was approximately $3.6 million on the date of issuance, as compared to the carrying value of the convertible principal and accrued interest of $5.5 million, resulting in a gain of approximately $1.9 million. Due to the related party nature of the transaction, this gain was recorded within the equity of Xcede. Of that $1.9 million, approximately $1.6 million was attributed to DBM and eliminated in consolidation, and approximately $0.3 million was attributed to noncontrolling interest.
Series A Preferred participants include both outside investors (accounted for as noncontrolling interest) and DBM. The outside investors converted $3.1 million of Notes and accrued interest into 3,055,551 shares of Series A Preferred. DBM converted the remaining $2.4 million of Notes and accrued interest into 2,338,569 shares of Series A Preferred.
Additionally, DBM invested $1.2 million of cash into Xcede in exchange for Series B convertible preferred stock of Xcede (“Series B Preferred”). Series A Preferred was issued at a 20% discount to the price per share of the Series B Preferred, in accordance with the amended provisions of the Notes. The value of whichDBM’s Series A Preferred and Series B Preferred, as they are wholly owned by DBM, is eliminated in consolidation.
Each share of Series A Preferred and Series B Preferred (together “the Preferred Stock”) shall beis convertible, at the option of the holder, into such number of fully paid and non-assessable shares of Xcede common stock (“Common Stock”) as determined by dividing the original issue price, as defined, by the conversion price in effect on the date of conversion, which is 1:1. Each holder of the Preferred Stock shall haveis entitled to one vote for each share of Common Stock that the holder of the Preferred Stock would be entitled to receive upon the conversion of the holder’s Preferred Stock into Common Stock. Upon any liquidation event, which includes certain change of control events, following payment of pre-equity distributions, the remaining proceeds or net assets of Xcede shall be paid and distributed in the following amounts and order of priority: (1) to satisfy the liquidation preference payment due to each holder of Series B Preferred, (2) to satisfy the liquidation preference payment due to each holder of Series A Preferred, (3) payment in full of any acquisition transaction payment, and (4) the remaining assets available to be distributed ratably among the holders of the Common Stock. If a liquidation event were to occur, the Series A Preferred’s liquidation value would be $1.016 per share and Series B Preferred’s liquidation value would be $1.27 per share. As of DecemberMarch 31, 2017,2019, the liquidation value of the Series B Preferred would be approximately $1.1$1.5 million and the Series A Preferred would be approximately $5.5 million, of which $2.4 million is DBM’s portion and $3.1 million would be attributed to noncontrolling shareholders.
As of DecemberMarch 31, 2017,2019, DBM owned approximately 62%63% of Xcede’s outstanding Common Stock and Preferred Stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. Due to the Series A Preferred having a liquidation preference and therefore not representing a residual interest, cumulative net losses of Xcede are attributed only to common stockholders in accordance with common stock ownership. Noncontrolling interest represents the value of the Series A Preferred and common stock not owned by DBM plus 17% of cumulative losses of Xcede based on the 17% common stock ownership held by noncontrolling interests.
Due to the issuance of Preferred Stock, DBM’s ownership percentage in Xcede decreased to less than 80%. Based on this ownership percentage, beginning in fiscal year 2017, Xcede is no longer included in the Dynasil consolidated federal tax return and the Company is no longer able to offset taxable income or benefit from net operating losses and other tax attributes related to Xcede. (See Note 11 – Income Taxes.)
As previously disclosed, in JanuaryIn 2016, Xcede announced that it had signed three agreements with Cook Biotech Inc. of West Lafayette, Indiana (“Cook”CBI”), including a Development Agreement, a License Agreement and a Supply Agreement, in connection with the development, regulatory approval and production of Xcede’s hemostatic patch (“Xcede’s(the “Xcede Patch”). In November 2016, Xcede entered into another Services Agreement, a Secured Promissory Note, a Loan Agreement, a Security Agreement and an Intellectual Property Security Agreement (collectively the “Note Agreement”) with Cook, in which CookCBI committed to fund up to $1.5 million for the pre-clinical testing of, and subject to the receipt of applicable regulatory approvals to initiate first in human clinical trials for the Xcede Patch. Under the terms of the Note Agreement,Xcede utilized $0.5 million in CBI services in exchange for a note that is currently outstanding.
On July 20, 2018, Xcede received a notice of termination from CBI claiming that the services performed by Cook,results of a recent animal study showed that it is not commercially reasonable, in CBI’s assessment, to continue to the next development phase of the Patch.
In light of the foregoing, Xcede has committedhalted clinical trial preparations at this time and has curtailed its operations to a multiple draw credit facility inminimal level while the aggregate amount notBoard of Directors of Xcede evaluates alternatives, including the viability of modifying the Xcede Patch to exceed $1.5 million. Three drawsaddress the shortcomings cited by CBI and/or the possible sale or license of principalXcede IP assets, subject to amending CBI’s security interest. Additionally, Xcede and the Company’s RMD subsidiary have begun an investigation of possible continued development of the Xcede Patch, which includes seeking government funding of this development. In April 2019, RMD filed an application for a Phase I SBIR grant for $225,000, which is currently being reviewed. There can be no assurances with respect to any such alternatives or that any additional outside funding to continue development of the Xcede Patch will be available each in the amount of $500,000, upon satisfaction of conditions identified in the Note Agreement. The principal amounts outstanding bear interest at a fixed rate of 2% and are secured by all the rights of Xcede under the Development Agreement, Supply Agreement, and License Agreement, all the rights to the data and work product arising from the clinical trial being performed under the Services Agreement, all regulatory approvals for the Xcede Patch, all patent and patent applications owned or controlled by Xcede, and all trademark and service mark registrations and applications. The note is recorded at fair value net of unamortized discount based on an imputed interest rate of 5.4%. The outstanding principal and unpaid interest are due and payable in full at the earlier of closing of an acquisition transaction or December 31, 2025. Xcede will recognize research and development expense as the related services are performed by Cook. There was approximately $163,000 and $38,000 of research and development expense recognized during the three months ended December 31, 2017 and 2016, respectively.Xcede.
Note 4 –- Inventories
Inventories, net of reserves, consists of the following:
December 31, | September 30, | March 31, | September 30, | |||||||||||||
2017 | 2017 | 2019 | 2018 | |||||||||||||
Raw Materials | $ | 2,647,000 | $ | 2,540,000 | $ | 2,626,000 | $ | 2,362,000 | ||||||||
Work-in-Process | 806,000 | 798,000 | 930,000 | 890,000 | ||||||||||||
Finished Goods | 1,038,000 | 988,000 | 969,000 | 854,000 | ||||||||||||
$ | 4,491,000 | $ | 4,326,000 | $ | 4,525,000 | $ | 4,106,000 |
Note 5 – Intangible Assets
Intangible assets at DecemberMarch 31, 20172019 and September 30, 20172018 consist of the following:
Useful | Gross | Accumulated | ||||||||||||
December 31, 2017 | Life (years) | Amount | Amortization | Net | ||||||||||
Acquired Customer Base | 5 to 15 | $ | 741,000 | $ | 570,000 | $ | 171,000 | |||||||
Know How | 15 | 512,000 | 324,000 | 188,000 | ||||||||||
Trade Names | Indefinite | 282,000 | - | 282,000 | ||||||||||
Patents | 20 | 348,000 | 11,000 | 337,000 | ||||||||||
Biomedical Technologies | 5 | 260,000 | 260,000 | - | ||||||||||
$ | 2,143,000 | $ | 1,165,000 | $ | 978,000 |
Useful | Gross | Accumulated | ||||||||||||
September 30, 2017 | Life (years) | Amount | Amortization | Net | ||||||||||
Acquired Customer Base | 5 to 15 | $ | 737,000 | $ | 551,000 | $ | 186,000 | |||||||
Know How | 15 | 512,000 | 316,000 | 196,000 | ||||||||||
Trade Names | Indefinite | 281,000 | - | 281,000 | ||||||||||
Patents | 20 | 333,000 | 9,000 | 324,000 | ||||||||||
Biomedical Technologies | 5 | 260,000 | 260,000 | - | ||||||||||
$ | 2,123,000 | $ | 1,136,000 | $ | 987,000 |
Useful | Gross | Accumulated | ||||||||||||
March 31, 2019 | Life (years) | Amount | Amortization | Net | ||||||||||
Acquired Customer Base | 5 to 15 | $ | 719,000 | $ | 633,000 | $ | 86,000 | |||||||
Know How | 15 | 512,000 | 367,000 | 145,000 | ||||||||||
Trade Names | Indefinite | 273,000 | - | 273,000 | ||||||||||
Patents | 20 | 223,000 | 26,000 | 197,000 | ||||||||||
Biomedical Technologies | 5 | 260,000 | 260,000 | - | ||||||||||
$ | 1,987,000 | $ | 1,286,000 | $ | 701,000 | |||||||||
Useful | Gross | Accumulated | ||||||||||||
September 30, 2018 | Life (years) | Amount | Amortization | Net | ||||||||||
Acquired Customer Base | 5 to 15 | $ | 719,000 | $ | 601,000 | $ | 118,000 | |||||||
Know How | 15 | 512,000 | 350,000 | 162,000 | ||||||||||
Trade Names | Indefinite | 272,000 | - | 272,000 | ||||||||||
Patents | 20 | 223,000 | 20,000 | 203,000 | ||||||||||
Biomedical Technologies | 5 | 260,000 | 260,000 | - | ||||||||||
$ | 1,986,000 | $ | 1,231,000 | $ | 755,000 |
Amortization expense for the three months ended DecemberMarch 31, 20172019 and 20162018 was $27,000 and $28,000, respectively. Amortization expense for the six months ended March 31, 2019 and $26,000,2018 was $54,000 and $56,000, respectively.
16 |
Estimated amortization expense for each of the next five fiscal years and thereafter is as follows:
2018 (9 months) | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | ||||||||||||||||||||||
Acquired Customer Base | $ | 60,000 | $ | 80,000 | $ | 31,000 | $ | - | $ | - | $ | - | $ | 171,000 | ||||||||||||||
Know How | 26,000 | 34,000 | 34,000 | 34,000 | 34,000 | 26,000 | 188,000 | |||||||||||||||||||||
Patents | 9,000 | 11,000 | 11,000 | 11,000 | 11,000 | 162,000 | 215,000 | |||||||||||||||||||||
$ | 95,000 | $ | 125,000 | $ | 76,000 | $ | 45,000 | $ | 45,000 | $ | 188,000 | $ | 574,000 |
As of December 31, 2017, Xcede had $122,000 in patents that have not been granted, therefore, the amortization related to these patents is not included in the five-year amortization table above.
2019 (6 months) | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | ||||||||||||||||||||||
Acquired Customer Base | $ | 40,000 | $ | 46,000 | $ | - | $ | - | $ | - | $ | - | $ | 86,000 | ||||||||||||||
Know How | 17,000 | 34,000 | 34,000 | 34,000 | 26,000 | - | 145,000 | |||||||||||||||||||||
Patents | 6,000 | 11,000 | 11,000 | 11,000 | 11,000 | 147,000 | 197,000 | |||||||||||||||||||||
$ | 63,000 | $ | 91,000 | $ | 45,000 | $ | 45,000 | $ | 37,000 | $ | 147,000 | $ | 428,000 |
The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its long-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of long-lived assets, during the threesix months ended DecemberMarch 31, 2017.2019 and 2018.
Note 6 – Goodwill
Goodwill is subject to an annual impairment test. The Company considers many factors which may indicate the requirement to perform additional, interim impairment tests. These include:
· | A significant adverse long term outlook for any of its industries; |
· | An adverse finding or rejection from a regulatory body involved in new product regulatory approvals; |
· | Failure of an anticipated commercialization of a product or product line; |
· | Unanticipated competition or the introduction of a disruptive technology; |
· | The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit; |
· | A loss of key personnel; and |
· | An expectation that a reporting unit carrying goodwill, or a significant portion of a reporting unit, will be sold or otherwise disposed of. |
There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of goodwill, during the threesix months ended DecemberMarch 31, 2017.2019 and 2018.
Note 7 – Debt
Subordinated Debt
On January 3,November 27, 2018, the Company amended the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the loan and defer principal repayment requirements to November 30, 2018.2019. Such amendment also increasedextended the interest rate of the notematurity date from six percent (6%)July 31, 2019 to seven percent (7%) per annum.November 30, 2021.
17 |
Note 8 – Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing the net income or loss attributable to common shares by the weighted average number of common shares outstanding. Diluted earnings per common share adjusts basic earnings per share for the effects of common stock options, common stock warrants, convertible preferred stock and other potential dilutive common shares outstanding during the periods.
For the three and six months ended DecemberMarch 31, 2017,2019 and 2018, no common share equivalents related to stock options or unvested restricted stock were included in the calculation of dilutive shares, since there was a loss attributable to common shareholders and the inclusion of common share equivalents would be anti-dilutive.
For purposes of computing diluted earnings per share for the three months ended December 31, 2016, no common stock options were included in the calculation of dilutive shares, as all of the 123,14795,602 and 160,537 common stock options outstanding, respectively, had exercise prices above the applicable quarterlyperiod’s average market price per share and theirthe inclusion of common share equivalents would be anti-dilutive.
For Additionally, for the three and six months ended DecemberMarch 31, 2016, 90,0002019 and 2018, 30,000 and 40,000 shares of restricted common stock were excluded from the calculation of dilutive shares, respectively, as the effect of their inclusion would be anti-dilutive.
The computation of the weighted shares outstanding for the three months ended DecemberMarch 31, 20172019 and 20162018 is as follows:
December 31, 2017 | December 31, 2016 | March 31, 2019 | March 31, 2018 | |||||||||||||
Weighted average shares outstanding | ||||||||||||||||
Basic | 17,047,690 | 16,808,729 | 17,433,249 | 17,133,468 | ||||||||||||
Effect of dilutive securities | ||||||||||||||||
Stock options | - | - | ||||||||||||||
Restricted stock | - | - | ||||||||||||||
Dilutive average shares outstanding | 17,047,690 | 16,808,729 | ||||||||||||||
Stock Options | - | - | ||||||||||||||
Restricted Stock | - | - | ||||||||||||||
Dilutive Average Shares Outstanding | 17,433,249 | 17,133,468 |
The computation of the weighted shares outstanding for the six months ended March 31, 2019 and 2018 is as follows:
March 31, 2019 | March 31, 2018 | |||||||
Weighted average shares outstanding | ||||||||
Basic | 17,379,113 | 17,090,530 | ||||||
Effect of dilutive securities | ||||||||
Stock Options | - | - | ||||||
Restricted Stock | - | - | ||||||
Dilutive Average Shares Outstanding | 17,379,113 | 17,090,530 |
Note 9 –- Stock Based Compensation
The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model.
The expected volatility was determined with reference to the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that the options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant. The dividend yield is expected to be zero because historically the Company has not paid dividends on common stock.
The Company’s Xcede joint venture adopted an Equity Incentive Plan in 2013 which provides for, among other incentives, the granting of options to purchase shares in Xcede’s common stock to officers, directors, employees and consultants. The options granted generally vest over a three year period. The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model using assumptions generally consistent with those used for Company stock options. Because Xcede is not publicly traded, the expected volatility is estimated with reference to the average historical volatility of a group of publicly traded companies that are believed to have similar characteristics to Xcede.
18 |
As of March 31, 2019, DBM owned approximately 63% of Xcede’s outstanding Common Stock and Preferred Stock. No significant change in the Company’s position with respect to the ownership of Xcede’s stock occurred during the three months ended March 31, 2019.
Stock compensation expense for the three and six months ended DecemberMarch 31, 20172019 and 20162018 is as follows:
Three Months Ended | Three Months Ended | |||||||
Stock Compensation Expense | December 31, 2017 | December 31, 2016 | ||||||
Stock grants | $ | 39,000 | $ | 39,000 | ||||
Restricted stock grants | 13,000 | 13,000 | ||||||
Option grants | 12,000 | 12,000 | ||||||
Employee stock purchase plan | 1,000 | 1,000 | ||||||
Subsidiary option grants | 28,000 | 24,000 | ||||||
Total | $ | 93,000 | $ | 89,000 |
Three Months Ended | Three Months Ended | |||||||
March 31, 2019 | March 31, 2018 | |||||||
Stock Grants | $ | 91,000 | $ | 91,000 | ||||
Restricted Stock Grants | 9,000 | 13,000 | ||||||
Option Grants | - | 5,000 | ||||||
Employee Stock Purchase Plan | 1,000 | - | ||||||
Subsidiary Option Grants | 11,000 | 28,000 | ||||||
Total | $ | 112,000 | $ | 137,000 | ||||
Six Months Ended | Six Months Ended | |||||||
March 31, 2019 | March 31, 2018 | |||||||
Stock Grants | $ | 142,000 | $ | 130,000 | ||||
Restricted Stock Grants | 24,000 | 26,000 | ||||||
Option Grants | - | 17,000 | ||||||
Employee Stock Purchase Plan | 2,000 | 1,000 | ||||||
Subsidiary Option Grants | 22,000 | 56,000 | ||||||
Total | $ | 190,000 | $ | 230,000 |
At DecemberMarch 31, 2017,2019, there was approximately $75,000$32,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period of approximately eightthirteen months.
Restricted Stock Grants
A summary of restricted stock activity for the threesix months ended DecemberMarch 31, 20172019 is presented below:
Restricted Stock Activity for the Three Months ended December 31, 2017 | Shares | Weighted-Average Grant-Date Fair Value | ||||||||||||||
Nonvested at September 30, 2017 | 70,000 | $ | 1.73 | |||||||||||||
Restricted Stock Activity for the Six Months ended March 31, 2019 | Shares | Weighted-Average Grant-Date Fair Value | ||||||||||||||
Nonvested at September 30, 2018 | 60,000 | $ | 1.61 | |||||||||||||
Granted | - | - | - | |||||||||||||
Vested | (10,000 | ) | $ | 1.70 | (30,000 | ) | 1.73 | |||||||||
Cancelled | - | - | - | - | ||||||||||||
Nonvested and expected to vest at December 31, 2017 | 60,000 | $ | 1.73 | |||||||||||||
Nonvested and expected to vest at March 31, 2019 | 30,000 | $ | 1.48 |
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Stock Option Grants
During the threesix months ended DecemberMarch 31, 2017,2019, no Dynasil stock options were granted. A summary of stock option activity for the threesix months ended DecemberMarch 31, 20172019 is presented below:
Options Outstanding | Weighted Average Exercise Price per Share | Weighted Average Remain Contractual Term (in Years) | ||||||||||
Balance at September 30, 2017 | 196,769 | $ | 1.98 | 1.64 | ||||||||
Outstanding and exercisable at September 30, 2017 | 196,769 | $ | 1.98 | 1.64 | ||||||||
Granted | - | - | ||||||||||
Exercised | - | - | ||||||||||
Cancelled | - | - | ||||||||||
Balance at December 31, 2017 | 196,769 | $ | 1.98 | 1.39 | ||||||||
Outstanding and exercisable at December 31, 2017 | 196,769 | $ | 1.98 | 1.39 |
Options Outstanding | Weighted Average Exercise Price per Share | Weighted Average Remain Contractual Term (in Years) | ||||||||||
Balance at September 30, 2018 | 160,537 | $ | 2.01 | 0.93 | ||||||||
Outstanding and exercisable at September 30, 2018 | 160,537 | $ | 2.01 | 0.93 | ||||||||
Granted | - | - | ||||||||||
Exercised | - | - | ||||||||||
Cancelled | (64,935 | ) | 2.33 | |||||||||
Balance at March 31, 2019 | 95,602 | $ | 1.80 | 0.84 | ||||||||
Outstanding and exercisable at March 31, 2019 | 95,602 | $ | 1.80 | 0.84 |
Subsidiary Stock Option Grants
During the threesix months ended DecemberMarch 31, 2017,2019, no Xcede stock options were granted. A summary of Xcede stock option activity for the threesix months ended DecemberMarch 31, 20172019 is presented below:
Options Outstanding | Weighted Average Exercise Price per Share | Weighted Average Remain Contractual Term (in Years) | ||||||||||
Balance at September 30, 2017 | 1,375,956 | $ | 1.00 | 8.70 | ||||||||
Outstanding and exercisable at September 30, 2017 | 923,617 | 1.00 | 8.30 | |||||||||
Granted | - | - | ||||||||||
Exercised | - | - | ||||||||||
Cancelled | - | - | ||||||||||
Balance at December 31, 2017 | 1,375,956 | 1.00 | 8.44 | |||||||||
Outstanding and exercisable at December 31, 2017 | 1,020,078 | $ | 1.00 | 8.11 |
Options Outstanding | Weighted Average Exercise Price per Share | Weighted Average Remain Contractual Term (in Years) | ||||||||||
Balance at September 30, 2018 | 1,300,956 | $ | 1.00 | 7.31 | ||||||||
Outstanding and exercisable at September 30, 2018 | 1,229,685 | 1.00 | 7.11 | |||||||||
Granted | - | - | ||||||||||
Exercised | - | - | ||||||||||
Cancelled | - | - | ||||||||||
Balance at March 31, 2019 | 1,300,956 | 1.00 | 6.60 | |||||||||
Outstanding and exercisable at March 31, 2019 | 1,266,581 | $ | 1.00 | 6.60 |
At DecemberMarch 31, 2017,2019, the Company’s Xcede joint venture had approximately $125,000$21,000 of unrecognized stock compensation expense associated with stock options expected to be recognized over a weighted average period of ninesix months.
Note 10 – Segment, Customer and Geographical Reporting
Segment Financial Information
Dynasil reports three reportable segments: contract researchinnovation and development (“Innovation and Development”), (formerly known as the Contract Research”)Research segment), optics (“Optics”) and biomedical (“Biomedical”). Within these segments, there is a segregation of operating segments based upon the organizational structure used to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure. The Optics segment aggregates four operating segments – Dynasil Fused Silica, Optometrics, Hilger Crystals (“Hilger”), and Evaporated Metal Films – that manufacture commercial products, including optical crystals for sensing in the security and medical imaging markets, as well as optical components, optical coatings and optical materials for scientific instrumentation and other applications. The Contract ResearchInnovation and Development segment is one of the largest small business participants in U.S. government-funded research. The Biomedical segment consists of a single operating segment, Dynasil Biomedical Corporation (“Dynasil Biomedical”), a medical technology incubator which owns rights to certain early stage medical technologies. Dynasil Biomedical holds common and preferred stock in the Xcede joint venture which is developing a tissue sealant technology and currently has no other operations.
20 |
The Company’s segment information for the three months ended DecemberMarch 31, 20172019 and 20162018 is summarized below:
Results of Operations for the Three Months Ended December 31, | ||||||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||
Results of Operations for the Three Months Ended March 31, | Results of Operations for the Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2019 | 2019 | |||||||||||||||||||||||||||||||
Optics | Contract Research | Biomedical | Total | Optics | Innovation and Development* | Biomedical | Total | |||||||||||||||||||||||||
Revenue | $ | 4,942,000 | $ | 4,247,000 | $ | - | $ | 9,189,000 | $ | 6,226,000 | $ | 5,306,000 | $ | - | $ | 11,532,000 | ||||||||||||||||
Gross profit | 1,724,000 | 1,851,000 | - | 3,575,000 | 2,159,000 | 2,199,000 | - | 4,358,000 | ||||||||||||||||||||||||
GM % | 35 | % | 44 | % | - | 39 | % | 35 | % | 41 | % | - | 38 | % | ||||||||||||||||||
Operating expenses | 1,576,000 | 1,723,000 | 445,000 | 3,744,000 | 1,871,000 | 2,141,000 | 22,000 | 4,034,000 | ||||||||||||||||||||||||
Operating income (loss) | 148,000 | 128,000 | (445,000 | ) | (169,000 | ) | 288,000 | 58,000 | (22,000 | ) | 324,000 | |||||||||||||||||||||
Depreciation and amortization | 231,000 | 65,000 | 3,000 | 299,000 | 292,000 | 60,000 | 3,000 | 355,000 | ||||||||||||||||||||||||
Capital expenditures | 590,000 | 19,000 | 16,000 | 625,000 | 313,000 | 47,000 | - | 360,000 | ||||||||||||||||||||||||
Intangibles, net | 453,000 | 188,000 | 337,000 | 978,000 | 358,000 | 145,000 | 198,000 | 701,000 | ||||||||||||||||||||||||
Goodwill | 1,012,000 | 4,939,000 | - | 5,951,000 | 961,000 | 4,939,000 | - | 5,900,000 | ||||||||||||||||||||||||
Total assets | $ | 18,969,000 | $ | 8,114,000 | $ | 614,000 | $ | 27,697,000 | $ | 21,482,000 | $ | 9,456,000 | $ | 204,000 | $ | 31,142,000 |
Results of Operations for the Three Months Ended December 31, | ||||||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
Results of Operations for the Three Months Ended March 31, | Results of Operations for the Three Months Ended March 31, | |||||||||||||||||||||||||||||||
2018 | 2018 | |||||||||||||||||||||||||||||||
Optics | Contract Research | Biomedical | Total | Optics | Innovation and Development* | Biomedical | Total | |||||||||||||||||||||||||
Revenue | $ | 4,405,000 | $ | 4,738,000 | $ | - | $ | 9,143,000 | $ | 5,910,000 | $ | 4,345,000 | $ | - | $ | 10,255,000 | ||||||||||||||||
Gross profit | 1,574,000 | 1,951,000 | - | 3,525,000 | 2,050,000 | 1,895,000 | - | 3,945,000 | ||||||||||||||||||||||||
GM % | 36 | % | 41 | % | - | 39 | % | 35 | % | 44 | % | - | 38 | % | ||||||||||||||||||
Operating expenses | 1,328,000 | 1,740,000 | 381,000 | 3,449,000 | 1,858,000 | 1,813,000 | 194,000 | 3,865,000 | ||||||||||||||||||||||||
Operating income (loss) | 246,000 | 211,000 | (381,000 | ) | 76,000 | 192,000 | 82,000 | (194,000 | ) | 80,000 | ||||||||||||||||||||||
Depreciation and amortization | 234,000 | 74,000 | 3,000 | 311,000 | 247,000 | 61,000 | 3,000 | 311,000 | ||||||||||||||||||||||||
Capital expenditures | 91,000 | - | 20,000 | 111,000 | 339,000 | 58,000 | 29,000 | 426,000 | ||||||||||||||||||||||||
Intangibles, net | 474,000 | 222,000 | 337,000 | 1,033,000 | 455,000 | 179,000 | 363,000 | 997,000 | ||||||||||||||||||||||||
Goodwill | 883,000 | 4,939,000 | - | 5,822,000 | 1,070,000 | 4,939,000 | - | 6,009,000 | ||||||||||||||||||||||||
Total assets | $ | 18,785,000 | $ | 8,407,000 | $ | 1,060,000 | $ | 28,252,000 | $ | 20,903,000 | $ | 8,028,000 | $ | 586,000 | $ | 29,517,000 |
*Formerly Contract Research
21 |
The Company’s segment information for the six months ended March 31, 2019 and 2018 is summarized below:
Results of Operations for the Six Months Ended March 31, | ||||||||||||||||
2019 | ||||||||||||||||
Optics | Innovation and Development* | Biomedical | Total | |||||||||||||
Revenue | $ | 11,947,000 | $ | 9,613,000 | $ | - | $ | 21,560,000 | ||||||||
Gross profit | 4,009,000 | 4,041,000 | - | 8,050,000 | ||||||||||||
GM % | 34 | % | 42 | % | - | 37 | % | |||||||||
Operating expenses | 3,756,000 | 4,020,000 | 75,000 | 7,851,000 | ||||||||||||
Operating income (loss) | 253,000 | 21,000 | (75,000 | ) | 199,000 | |||||||||||
Depreciation and amortization | 566,000 | 120,000 | 7,000 | 693,000 | ||||||||||||
Capital expenditures | 497,000 | 64,000 | - | 561,000 | ||||||||||||
Intangibles, net | 358,000 | 145,000 | 198,000 | 701,000 | ||||||||||||
Goodwill | 961,000 | 4,939,000 | - | 5,900,000 | ||||||||||||
Total assets | $ | 21,482,000 | $ | 9,456,000 | $ | 204,000 | $ | 31,142,000 |
Results of Operations for the Six Months Ended March 31, | ||||||||||||||||
2018 | ||||||||||||||||
Optics | Innovation and Development* | Biomedical | Total | |||||||||||||
Revenue | $ | 10,853,000 | $ | 8,590,000 | $ | - | $ | 19,443,000 | ||||||||
Gross profit | 3,740,000 | 3,745,000 | - | 7,485,000 | ||||||||||||
GM % | 34 | % | 44 | % | - | 38 | % | |||||||||
Operating expenses | 3,433,000 | 3,537,000 | 639,000 | 7,609,000 | ||||||||||||
Operating income (loss) | 307,000 | 208,000 | (639,000 | ) | (124,000 | ) | ||||||||||
Depreciation and amortization | 477,000 | 126,000 | 7,000 | 610,000 | ||||||||||||
Capital expenditures | 928,000 | 77,000 | 45,000 | 1,050,000 | ||||||||||||
Intangibles, net | 455,000 | 179,000 | 363,000 | 997,000 | ||||||||||||
Goodwill | 1,070,000 | 4,939,000 | - | 6,009,000 | ||||||||||||
Total assets | $ | 20,903,000 | $ | 8,028,000 | $ | 586,000 | $ | 29,517,000 |
*Formerly Contract Research
Customer Financial Information
For boththree and six months ended March 31, 2019, one customer in the Optics segment represented more than 10% of the total segment revenue. For the three and six months ended DecemberMarch 31, 2017 and 2016,2018, no customer in the Optics segment represented more than 10% of the total segment revenue.
For the three and six months ended DecemberMarch 31, 2017, four2019, three customers of the Contract ResearchInnovation and Development segment, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue. For the three and six months ended DecemberMarch 31, 2016, three2018, four customers of the Contract ResearchInnovation and Development segment, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue.
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Geographic Financial Information
Revenue by geographic location in total and as a percentage of total revenue, for the three months ended DecemberMarch 31, 20172019 and 20162018 are as follows:
Three Months Ended | Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||
December 31, 2017 | December 31, 2016 | March 31, 2019 | March 31, 2018 | |||||||||||||||||||||||||||||
Geographic Location | Revenue | % of Total | Revenue | % of Total | Revenue | % of Total | Revenue | % of Total | ||||||||||||||||||||||||
United States | $ | 7,353,000 | 80 | % | $ | 7,189,000 | 79 | % | $ | 8,773,000 | 76 | % | $ | 8,129,000 | 79 | % | ||||||||||||||||
Asia | 865,000 | 7 | % | 671,000 | 7 | % | ||||||||||||||||||||||||||
Europe | 1,268,000 | 14 | % | 1,086,000 | 12 | % | 1,713,000 | 15 | % | 1,365,000 | 13 | % | ||||||||||||||||||||
Other | 568,000 | 6 | % | 868,000 | 9 | % | 181,000 | 2 | % | 90,000 | 1 | % | ||||||||||||||||||||
$ | 9,189,000 | 100 | % | $ | 9,143,000 | 100 | % | $ | 11,532,000 | 100 | % | $ | 10,255,000 | 100 | % |
Revenue by geographic location in total and as a percentage of total revenue, for the six months ended March 31, 2019 and 2018 are as follows:
Six Months Ended | Six Months Ended | |||||||||||||||
March 31, 2019 | March 31, 2018 | |||||||||||||||
Geographic Location | Revenue | % of Total | Revenue | % of Total | ||||||||||||
United States | $ | 16,233,000 | 75 | % | $ | 15,481,000 | 80 | % | ||||||||
Asia | 1,795,000 | 8 | % | 1,193,000 | 6 | % | ||||||||||
Europe | 3,237,000 | 15 | % | 2,633,000 | 13 | % | ||||||||||
Other | 295,000 | 2 | % | 136,000 | 1 | % | ||||||||||
$ | 21,560,000 | 100 | % | $ | 19,443,000 | 100 | % |
Note 11 –- Income Taxes
The Company uses the asset and liability approach to account for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss and tax credit carry forwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates, and tax laws, in the respective tax jurisdiction then in effect.
Dynasil Corporation of America and its wholly-owned U.S. subsidiaries file a consolidated federal income tax return and various state returns. The Company’s U.K. subsidiary files tax returns in the U.K. Prior to November 18, 2016, the Company’s subsidiary, Xcede was included in the federal and state tax returns filed by Dynasil. As of November 18, 2016, Dynasil’s ownership in Xcede was reduced to approximately 59%. As a result, Xcede willis no longer be included in Dynasil’s federal consolidated tax return and will filefiles a separate federal return. Xcede will continuecontinues to be included in the Dynasil consolidated state tax filings pursuant to the respective state tax requirements.
In assessing the ability to realize the net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
As a result of Xcede’s de-consolidation from the Company’s federal tax returns, the Company willis no longer be able to offset taxable income with Xcede’s current or cumulative net operating losses. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined that it is more likely than not that the federal deferred tax assets of the new Dynasil federal consolidated group will be realized based upon positive earnings history and expected future profits of the group. As a result, the federal deferred tax asset valuation allowance associated with the Dynasil federal consolidated group has beenwas reversed resulting in an income tax benefit in the amount of $2.7 million during the quarter ending December 31, 2016. Going forward, as the Company records income, it will be able to utilize the NOLs (net operating losses) within its deferred tax assets. Based upon the Company’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of the Company’s state and separate Xcede deferred tax assets is sufficient to warrant the continued need for a valuation allowance against these deferred tax assets.
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As a result of Xcede’s decision to halt clinical trial preparations and curtail operations to a minimal level while the Board of Directors of Xcede evaluates alternative avenues to develop the Xcede Patch, following the July 2018 notice of termination from Cook Biotech Inc. (“CBI”) claiming that the results of a recent animal study showed that it is not commercially reasonable, in CBI’s assessment, to continue to the next development phase of the Xcede Patch, the Company has concluded that it is more likely than not that the deferred tax assets associated with the Company’s unitary state filings will be realized based on future profit for the group and thus has reversed the related valuation allowance on the Company’s NOLs of approximately $0.6 million. In addition, the Company conducted a research and experimentation study which released the tax valuation allowance and increased deferred tax assets by $0.6 million. The reversal resulted in an income tax benefit of approximately $1.2 million recorded during the year ended September 30, 2018.
The Company applies the authoritative provisions related to accounting for uncertainty in income taxes. As required by these provisions, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being reached upon ultimate settlement with the relevant tax authority. As of DecemberMarch 31, 20172019 and September 30, 2017,2018, the Company has no liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statement of operations. As of DecemberMarch 31, 20172019 and September 30, 2017,2018, the Company had no accrued interest or penalties related to uncertain tax positions. The Company currently has no federal or state tax examinations in progress.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The 2017 Tax Act, which iswas effective on December 22, 2017, significantly revisesrevised the U.S. tax code by, among other changes, lowering the corporate income tax rate from 35% to 21%, requiring a one-time transition tax on accumulated foreign earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings. At December 31, 2017, theThe Company has not completed its accounting for the tax effects of the 2017 Tax Act; however, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax.Act.
The Company re-measured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and provisionally recorded an income tax expense of $0.5$0.7 million related to such re-measurement in the first quarter of fiscalended December 31, 2018. It is still analyzing certain aspects of the Tax Act and refining its calculations during the measurement period.
The one-time transition tax iswas based on the total unremitted earnings of the Company’s foreign subsidiary, Hilger, that haswhich had previously been deferred from U.S. income taxes. The Company recorded a provisional amountprovision for its one-time transition liability of its foreign subsidiary resulting in additional income tax expense of $0.1$0.2 million in fiscal year 2018.
During the firstfiscal year ended, September 30, 2018, the Company has federal research credits of $2.9 million, primarily resulted from a benefit in the second quarter of fiscal 2018.year 2018 related to R&E tax credits for the years ended 2013 through 2016. The Company has not yet completed its calculation offederal credits begin expiring in fiscal year 2030. During the total unremitted earnings of Hilger. The transition tax is based in part on the amount of those earnings held in cash and other specified assets. The amount may change whenfiscal year ended September 30, 2018, the Company finalizes the calculationhad state research credits of Hilger’s total unremitted earnings previously deferred from U.S. federal taxation and finalize the amounts held$852,000 which begin expiring in cash or other specified assets.fiscal year 2027.
The effective tax rates were (309%)74% and 679%(3,586%) for the three months ended DecemberMarch 31, 20172019 and 2016,2018, respectively. The resultseffective tax rates were 127% and 281% for boththe six months ended March 31, 2019 and 2018, respectively. The effective tax rates for the three month periodsand six months ended DecemberMarch 31, 2017 and 2016 had significant events which resulted in an extreme variation in tax rates.2019 were a result of the anticipated non-deductible transaction costs resulting from the Board of Directors’ plan to cease the registration of the Company’s common stock under federal securities laws (see Note 12 - Subsequent Events). The effective tax rate for the threesix months ended DecemberMarch 31, 20172018 was due to the recently signed 2017 Tax Act. The effective tax rate for the three months ended December 31, 2016 was the result of the tax benefit of $2.7 million recorded for the release of the valuation allowance as a result of the tax deconsolidation of its Xcede subsidiary.2017 Tax Act. The effective tax rate excluding the impact of the 2017 Tax Act was (16%) for the threesix months ended DecemberMarch 31, 2017. The effective tax rate excluding the impact of the valuation allowance was (25%) for the three months ended December 31, 2016. 2018.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s tax filings for federal and state jurisdictions for the tax years beginning with 2013 are still subject to examination.
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Note 12 – Subsequent Events
On January 3, 2018,April 30, 2019, the Company amendedconverted the Note Purchase Agreementoutstanding balance on the equipment line of credit with MassachusettsMiddlesex Savings Bank (“Middlesex”) of approximately $484,000, which was outstanding on March 31, 2019, into a five year term note with an interest rate of 5.17%. Additionally, on May 1, 2019, the Company’s equipment line of credit was renewed for $750,000 through April 30, 2020, at which time the outstanding balance will be converted into a five year term note.
On May 2, 2019, the Company announced that a Special Committee of the Company’s Board of Directors comprised of three independent directors has recommended, and its Board of Directors has approved, a plan to cease the registration of the Company’s common stock under federal securities laws following the completion of a proposed reverse stock split transaction and to delist its shares of common stock from trading on the Nasdaq Capital Resource Company. (See Note 7 – Debt.)Market. It is expected that this plan would be effectuated in the late summer 2019, subject to Dynasil’s stockholders approving the proposed reverse stock split at a Special Meeting of Stockholders, as described below.
Dynasil is taking these steps to avoid the substantial cost and expense of being a public reporting company and to focus the Company's resources on enhancing long-term stockholder value. The Company anticipates savings exceeding $900,000 on an annual basis as a result of the proposed deregistration and delisting transaction.
The proposed reverse stock split is a 1-for-8,000 split, in which holders of less than 8,000 shares of the Company’s common stock would be cashed out at a price of $1.15 per share for their pre-split number of shares. Such price represents a premium above the common stock’s closing price on May 1, 2019 and is supported by a fairness opinion by Mirus Capital Advisors Inc., whom the Special Committee engaged for such purpose. Stockholders owning 8,000 or more shares of the Company’s common stock prior to the reverse stock split would remain stockholders in Dynasil, which would no longer be encumbered by the expenses and distraction of a public reporting company. The number of shares they would own following the proposed transaction would be unchanged, as immediately after the reverse stock split a forward split of 8,000-for-1 would be applied to the continuing stockholders, negating any effects to them. Dynasil estimates that approximately 1.4 million shares (or less than 8% of the shares of its common stock currently outstanding) would be cashed out in the proposed transaction and the aggregate cost to the Company of the proposed transaction would be approximately $1.6 million, plus transaction expenses, which are estimated to be approximately $650,000. Dynasil intends to fund such costs using cash-on-hand and borrowings available under its existing credit facilities.
Dynasil’s Board of Directors has determined the proposed transaction is in the best interests of all of the Company’s stockholders. Dynasil currently realizes none of the traditional benefits of public company status, yet incurs all of the significant annual expenses and indirect costs associated with being a public company. Without its public company status, Dynasil would have an ongoing cost structure befitting its current and foreseeable scale of operations and its management would be able to have an increased focus on core operations.
Subject to regulatory clearance of the Company’s proxy statement to be filed relating to the proposed stock splits and stockholder approval thereof, it is anticipated that the proposed transaction would become effective shortly after the Special Meeting of Stockholders, which is expected to be held this summer 2019. Approval of the proposed transaction requires the affirmative vote of a majority of the shares cast (represented in person or by proxy) and entitled to vote at the Special Meeting. As of the date hereof, the Company’s directors and executive officers own approximately 37% of the Company’s currently issued and outstanding shares and are expected to vote “FOR” the transaction.
Promptly after the Special Meeting, the Company expects to terminate the registration of its common stock with the SEC and de-list its common stock from the Nasdaq Capital Market. As a result, at such time, (i) the Company would cease to file annual, quarterly, current, and other reports and documents with the SEC, and stockholders would cease to receive annual reports and proxy statements, and (ii) the Company’s common stock would no longer be listed on the Nasdaq Capital Market.
The Board reserves the right to change the ratio of the reverse stock split to the extent they believe it is necessary or desirable in order to accomplish the goal of staying below 300 record holders. They may also abandon the proposed reverse stock split at any time prior to the completion of the proposed transaction if they believe that the proposed transaction is no longer in the best interests of the Company or its stockholders.
The Company has evaluated subsequent events through the date the financial statements were released.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto contained herein and in the Dynasil Corporation of America ("Dynasil", the "Company" or "we") Form 10-K for the fiscal year ended September 30, 2017.2018.
General Business Overview
Operations
Consolidated revenue for the first quarter ended DecemberMarch 31, 20172019 was $9.2$11.5 million, compared to revenue of $9.1$10.3 million for the firstsecond quarter of fiscal year 2017.2018. This slight$1.2 million or 12% increase resulted from a 12%5% increase in Optics segment revenue largely offset byand a 10% decrease22% increase in Contract ResearchInnovations and Development segment revenue.
CostGross profit for the quarter ended March 31, 2019 was $4.4 million, or 38% of revenue, as compared to the gross profit of $3.9 million, or 38% of revenue for the quarter ended DecemberMarch 31, 2017 was $5.6 million or 61% of revenue, essentially the same as the cost of revenue and percent of revenue for the quarter ended December 31, 2016.2018.
Total operating expenses were $3.7$4.0 million for the three monththree-month period ended DecemberMarch 31, 2017 as compared to $3.42019, a 3% increase over the $3.9 million in operating expenses for the same period in fiscal year 2017.three months ended March 31, 2018. The increase was attributable to promotional activities from our new marketing team along with higher patent and recruiting expenses. The operating expenses in our Biomedical segment increaseddecreased by $0.2 million over the same period last year. In the first two quarters of fiscal year over year, as2018, our majority owned joint venture, Xcede Technologies, Inc. (“Xcede”), preparedwas preparing for clinical trials. As described below, these activities have since been suspended due to a notice of termination Xcede received from Cook Biotech, Inc. (“CBI”) in July 2018, in which CBI asserted its first-in-humantermination rights under the Note Agreement and Development Agreement between Xcede and CBI, claiming that in CBI’s assessment it is not commercially reasonable to continue to the next development phase of Xcede’s hemostatic patch.
In light of the foregoing, Xcede has halted clinical trial application aspreparations at this time and has curtailed its operations to a minimal level while the primary reason forBoard of Directors of Xcede evaluates alternatives, including the increase.viability of modifying the Xcede Patch to address the shortcomings cited by CBI and/or the possible sale or license of Xcede IP assets, subject to amending CBI's security interest. Additionally, operating expenses in our Optics segment increased, largely as the result of recent personnel additionsCompany’s RMD subsidiary and the related charges.
Our Biomedical segment primarily consistsXcede have begun an investigation of the resultspossible continued development of the Xcede Patch, which includes seeking government funding of this development. In April 2019, Xcede filed an application for a government grant seeking $225,000, which is currently being reviewed. There can be no assurances with respect to any such alternatives or that any additional outside funding to continue development of the Xcede Patch will be available to Xcede. Without such funding, the Board of Directors of Xcede which incurred $1.4 million in research expenses in fiscal year 2017 and $0.4 millionmay be required to cease all operations of Xcede. In the event that such a determination were to be made by the Xcede Board of Directors in the current quarter as Xcede continues to develop its hemostatic tissue sealant technology. We expect Xcede will incur similar or increasing amounts of expenses in each quarter in fiscal year 2018 as it continues its development activities and initiates its planned clinical trial. In November 2016,future, the Company entered into an agreementexpects that it would be required to account for Xcede at such time as discontinued operations in accordance with Xcede pursuant to whichASC 205-20 and would recognize a non-cash gain based on the losses absorbed by the Company in excess of their actual ownership percentage. This potential gain will have no impact on the Company’s cash position when and if it agreed to invest up to $1.2 million of cash into Xcede overis recognized or in the following 18 months. We expect Xcede will continue to need additional external investor funding in order to pursue its planned clinical trials and regulatory approvals of its tissue sealant technology.future.
Income (loss) from operations for the quarter ended DecemberMarch 31, 20172019 was a loss of $0.2$0.3 million, compared with income of $0.1 million for the quarter ended DecemberMarch 31, 2016, as a result of the growth-oriented higher operating expenses in fiscal year 2018.
The provision for income taxes for the firstsecond quarter of 20182019 was $0.7approximately $0.2 million, as compared to a benefit of $2.7$1.3 million for the second quarter of fiscal year 2018. The second quarter 2018 provision was primarily the result of the estimate of the PATH 2015 R&E Tax Credit for the years 2012 thru 2016 that the Company was in the process of conducting in fiscal year 2018.
Net income attributable to common stockholders was essentially breakeven, or $0.00 per share, as compared to $1.3 million, or $0.08 per share for the quarters ended March 31, 2019 and 2018, respectively, largely as a result of the income tax event in the fiscal year 2018.
Recent Business Developments
On May 2, 2019, the Company announced that a Special Committee of the Company’s Board of Directors comprised of three independent directors has recommended, and its Board of Directors has approved, a plan to cease the registration of the Company’s common stock under federal securities laws following the completion of a proposed reverse stock split transaction and to delist its shares of common stock from trading on the Nasdaq Capital Market. It is expected that this plan would be effectuated in the late summer 2019, subject to Dynasil’s stockholders approving the proposed reverse stock split at a Special Meeting of Stockholders, as described below.
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Dynasil is taking these steps to avoid the substantial cost and expense of being a public reporting company and to focus the Company's resources on enhancing long-term stockholder value. The Company anticipates savings exceeding $900,000 on an annual basis as a result of the proposed deregistration and delisting transaction.
The proposed reverse stock split is a 1-for-8,000 split, in which holders of less than 8,000 shares of the Company’s common stock would be cashed out at a price of $1.15 per share for their pre-split number of shares. Such price represents a premium above the common stock’s closing price on May 1, 2019 and is supported by a fairness opinion by Mirus Capital Advisors Inc., whom the Special Committee engaged for such purpose. Stockholders owning 8,000 or more shares of the Company’s common stock prior to the reverse stock split would remain stockholders in Dynasil, which would no longer be encumbered by the expenses and distraction of a public reporting company. The number of shares they would own following the proposed transaction would be unchanged, as immediately after the reverse stock split a forward split of 8,000-for-1 would be applied to the continuing stockholders, negating any effects to them. Dynasil estimates that approximately 1.4 million shares (or less than 8% of the shares of its common stock currently outstanding) would be cashed out in the proposed transaction and the aggregate cost to the Company of the proposed transaction would be approximately $1.6 million, plus transaction expenses, which are estimated to be approximately $650,000. Dynasil intends to fund such costs using cash-on-hand and borrowings available under its existing credit facilities.
Dynasil’s Board of Directors has determined the proposed transaction is in the best interests of all of the Company’s stockholders. Dynasil currently realizes none of the traditional benefits of public company status, yet incurs all of the significant annual expenses and indirect costs associated with being a public company. Without its public company status, Dynasil would have an ongoing cost structure befitting its current and foreseeable scale of operations and its management would be able to have an increased focus on core operations.
Subject to regulatory clearance of the Company’s proxy statement to be filed relating to the proposed stock splits and stockholder approval thereof, it is anticipated that the proposed transaction would become effective shortly after the Special Meeting of Stockholders, which is expected to be held this summer 2019. Approval of the proposed transaction requires the affirmative vote of a majority of the shares cast (represented in person or by proxy) and entitled to vote at the Special Meeting. As of the date hereof, the Company’s directors and executive officers own approximately 38% of the Company’s currently issued and outstanding shares and are expected to vote “FOR” the transaction.
Promptly after the Special Meeting, the Company expects to terminate the registration of its common stock with the SEC and de-list its common stock from the Nasdaq Capital Market. As a result, at such time, (i) the Company would cease to file annual, quarterly, current, and other reports and documents with the SEC, and stockholders would cease to receive annual reports and proxy statements, and (ii) the Company’s common stock would no longer be listed on the Nasdaq Capital Market.
The Board reserves the right to change the ratio of the reverse stock split to the extent they believe it is necessary or desirable in order to accomplish the goal of staying below 300 record holders. They may also abandon the proposed reverse stock split at any time prior to the completion of the proposed transaction if they believe that the proposed transaction is no longer in the best interests of the Company or its stockholders.
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Results of Operations
Results of Operations for the Three Months Ended March 31, | ||||||||||||||||
2019 | ||||||||||||||||
Optics | Innovation and Development* | Biomedical | Total | |||||||||||||
Revenue | $ | 6,226,000 | $ | 5,306,000 | $ | - | $ | 11,532,000 | ||||||||
Gross profit | 2,159,000 | 2,199,000 | - | 4,358,000 | ||||||||||||
GM % | 35 | % | 41 | % | - | 38 | % | |||||||||
Operating expenses | 1,871,000 | 2,141,000 | 22,000 | 4,034,000 | ||||||||||||
Operating income (loss) | 288,000 | 58,000 | (22,000 | ) | 324,000 | |||||||||||
Depreciation and amortization | 292,000 | 60,000 | 3,000 | 355,000 | ||||||||||||
Capital expenditures | 313,000 | 47,000 | - | 360,000 | ||||||||||||
Intangibles, net | 358,000 | 145,000 | 198,000 | 701,000 | ||||||||||||
Goodwill | 961,000 | 4,939,000 | - | 5,900,000 | ||||||||||||
Total assets | $ | 21,482,000 | $ | 9,456,000 | $ | 204,000 | $ | 31,142,000 |
Results of Operations for the Three Months Ended March 31, | ||||||||||||||||
2018 | ||||||||||||||||
Optics | Innovation and Development* | Biomedical | Total | |||||||||||||
Revenue | $ | 5,910,000 | $ | 4,345,000 | $ | - | $ | 10,255,000 | ||||||||
Gross profit | 2,050,000 | 1,895,000 | - | 3,945,000 | ||||||||||||
GM % | 35 | % | 44 | % | - | 38 | % | |||||||||
Operating expenses | 1,858,000 | 1,813,000 | 194,000 | 3,865,000 | ||||||||||||
Operating income (loss) | 192,000 | 82,000 | (194,000 | ) | 80,000 | |||||||||||
Depreciation and amortization | 247,000 | 61,000 | 3,000 | 311,000 | ||||||||||||
Capital expenditures | 339,000 | 58,000 | 29,000 | 426,000 | ||||||||||||
Intangibles, net | 455,000 | 179,000 | 363,000 | 997,000 | ||||||||||||
Goodwill | 1,070,000 | 4,939,000 | - | 6,009,000 | ||||||||||||
Total assets | $ | 20,903,000 | $ | 8,028,000 | $ | 586,000 | $ | 29,517,000 |
*Formerly Contract Research
Consolidated revenue for the quarter ended March 31, 2019, was $11.5 million, a 12% increase as compared with revenue of $10.3 million for the quarter ended March 31, 2018.
Optics segment revenue increased $0.3 million, or 5%, for the three months ended March 31, 2019 compared with the same period in the prior year, primarily as a result of revenue growth in three of the four operating units in this segment. The growth in this quarter is largely the result of increased orders from a few of our large key customers.
Innovation and Development segment revenue increased by $1.0 million or 22% to $5.3 million for the second quarter of fiscal year 2019, as compared with the same period in the prior year due to an increase in funded research contract awards. The research backlog for the Innovation and Development segment remains strong at $32.8 million at March 31, 2019.
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The Biomedical segment has no revenue as it is currently exploring development options for Xcede’s tissue sealant technology.
Cost of revenue for the quarter ended March 31, 2019 was 62%, or $7.2 million, as compared to 62% or $6.3 million for the quarter ended March 31, 2018.
Gross profit for the three months ended March 31, 2019 was $4.4 million, compared to $3.9 million, for the three months ended March 31, 2018. The gross profit as a percent of revenue for the second quarter in both 2019 and 2018 was 38%. The gross profit for the Optics segment was $2.2 million for the quarter ended March 31, 2019, compared to $2.0 million, for the quarter ended March 31, 2018. The gross profit as a percent of revenue for the Optics segment was 35% in both the second quarter of 2019 and 2018. The Innovation and Development segment gross profit increased to $2.2 million, as compared to $1.9 million in the same period in fiscal year 2018, as a result of actively working on an increased number of contract research projects in 2019. Gross profit as a percent of revenue decreased in the second quarter of 2019 by 3% as compared to 2018 due to fewer commercial product sales in 2019 which have higher margins than contract research sales.
The Biomedical segment, through Xcede, is engaged in exploring development options for a tissue sealant technology which has not been approved for commercial use, and consequently it has no gross profit.
Total operating expenses increased to $4.0 million for the three months ended March 31, 2019 from $3.9 million for the same quarter in fiscal year 2018. Operating expenses for the Optics segment remained essentially the same in the second quarter year over year. Innovation and Development segment expenses increased to $2.1 million in the second quarter of fiscal year 2019, as compared to $1.8 million in the second quarter of fiscal year 2018, as a result of increases in patent and hiring costs. Biomedical segment expenses decreased by $0.2 million in the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to the cessation of work on its preparations for first-in-human clinical trials.
As a result of the items discussed above, income from operations for the three months ended March 31, 2019 was $0.3 million compared to of $0.1 million for the same period in fiscal year 2017.2018.
Net interest expense was essentially the same in both the three month periods ended March 31, 2019 and 2018.
The provision for income taxes for the second quarter of 2019 was approximately $0.2 million, as compared to a benefit of $1.3 million for the second quarter of fiscal year 2018. The second quarter 2018 provision was primarily the result of the estimate of the PATH 2015 R&E Tax Credit for the years 2012 thru 2016 that the Company was in the process of conducting in fiscal year 2018.
Net income for the three months ended March 31, 2019 was essentially breakeven, or $0.00 in basic earnings per share, as compared to $1.3 million, or $0.08 in basic earnings per share, for the quarter ended March 31, 2018.
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Results of Operations – Year to Date
Results of Operations for the Six Months Ended March 31, | ||||||||||||||||
2019 | ||||||||||||||||
Optics | Innovation and Development* | Biomedical | Total | |||||||||||||
Revenue | $ | 11,947,000 | $ | 9,613,000 | $ | - | $ | 21,560,000 | ||||||||
Gross profit | 4,009,000 | 4,041,000 | - | 8,050,000 | ||||||||||||
GM % | 34 | % | 42 | % | - | 37 | % | |||||||||
Operating expenses | 3,756,000 | 4,020,000 | 75,000 | 7,851,000 | ||||||||||||
Operating income (loss) | 253,000 | 21,000 | (75,000 | ) | 199,000 | |||||||||||
Depreciation and amortization | 566,000 | 120,000 | 7,000 | 693,000 | ||||||||||||
Capital expenditures | 497,000 | 64,000 | - | 561,000 | ||||||||||||
Intangibles, net | 358,000 | 145,000 | 198,000 | 701,000 | ||||||||||||
Goodwill | 961,000 | 4,939,000 | - | 5,900,000 | ||||||||||||
Total assets | $ | 21,482,000 | $ | 9,456,000 | $ | 204,000 | $ | 31,142,000 |
Results of Operations for the Six Months Ended March 31, | ||||||||||||||||
2018 | ||||||||||||||||
Optics | Innovation and Development* | Biomedical | Total | |||||||||||||
Revenue | $ | 10,853,000 | $ | 8,590,000 | $ | - | $ | 19,443,000 | ||||||||
Gross profit | 3,740,000 | 3,745,000 | - | 7,485,000 | ||||||||||||
GM % | 34 | % | 44 | % | - | 38 | % | |||||||||
Operating expenses | 3,433,000 | 3,537,000 | 639,000 | 7,609,000 | ||||||||||||
Operating income (loss) | 307,000 | 208,000 | (639,000 | ) | (124,000 | ) | ||||||||||
Depreciation and amortization | 477,000 | 126,000 | 7,000 | 610,000 | ||||||||||||
Capital expenditures | 928,000 | 77,000 | 45,000 | 1,050,000 | ||||||||||||
Intangibles, net | 455,000 | 179,000 | 363,000 | 997,000 | ||||||||||||
Goodwill | 1,070,000 | 4,939,000 | - | 6,009,000 | ||||||||||||
Total assets | $ | 20,903,000 | $ | 8,028,000 | $ | 586,000 | $ | 29,517,000 |
*Formerly Contract Research
Revenue for the six months ended March 31, 2019 increased 11% to $21.6 million, a $2.2 million increase over the six months ended March 31, 2018.
Optics segment revenue increased $1.1 million, or 10%, for the six months ended March 31, 2019, compared with the same period in the prior year, primarily as a result of revenue growth in three of the four operating units in this segment. Our Optics segment revenue showed increased orders from a number of our larger established customers.
Revenue from our Innovation and Development segment increased $1.0 million, or 12%, for the six months ended March 31, 2019 as compared to the same period in 2018, primarily due to increased orders from some of our key government customers, partially offset by a delay in our commercial product orders.
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The Biomedical segment had no revenue in either the six months ended March 31, 2019 or 2018.
Gross profit for the six months ended March 31, 2019 was $8.1 million, or 37% of sales, compared to $7.5 million, or 38% of sales for the six months ended March 31, 2018. The $0.6 gross profit increase was attributed to the higher revenue generated in the first six months.
Gross profit for the Optics segment increased approximately $0.3 million to $4.0 million for the six months ended March 31, 2019, compared to the gross profit for the same period in fiscal year 2018, primarily as a result of the increase in revenues in the first six months of fiscal 2019 as compared to the same period in 2018.
Gross profit for the Innovation and Development segment increased by approximately $0.3 million to $4.0 million for the six months ended March 31, 2019, compared to the six months ended March 31, 2018, largely due to the increased revenue year over year.
The Biomedical segment, through Xcede, is developing a tissue sealant technology which has not been approved for commercial use and consequently has no gross profit.
Total operating expenses increased $0.3 million to $7.9 million for the six months ended March 31, 2019, as compared to the total operating expenses of $7.6 million for the six months ended March 31, 2018. This increase was spread fairly consistently across the organization as we have added and upgraded resources in 2019, compared to 2018, as we work on new initiatives.
Income (loss) from operations was $0.2 for the six months ended March 31, 2019 and ($0.1) for the same six month period in 2018.
Net interest expense for both the six month periods ended March 31, 2019 and 2018 was $0.1 million.
The provision for income taxes for the first six months of 2019 was a $0.1 million as compared to a benefit of $0.6 million for the same period in fiscal year 2018. The 2018 provision was primarilythe result of the $1.3 million PATH 2015 R&E Tax Credit estimate for the years 2012 thru 2016 that was recognized in the second quarter of 2018, offset by the result of the 2017 Tax Act, in which we estimated the rate reduction impact to be $0.5 million, the earnings and profit transition tax of our Hilger Crystals subsidiary to be $0.1 million and a currentthe first quarter earnings provision of $0.1 million. The 2017 benefit resulted from the deconsolidation of Xcede, which means the Company can no longer offset taxable income with Xcede’s net operating loss results or carryforwards. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined that it is more likely than not that the federal, deferred tax assets, such as NOLs (net operating losses), of the new Dynasil federal consolidated group will be realized based upon positive earnings history and expected future profits of the group. As a result, the valuation allowance associated with the Dynasil federal consolidated group was reversed, which resulted in an income tax benefit in the amount of $2.7 million during the quarter ended December 31, 2016. Based upon the Company’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of the Company’s state and separate Xcede deferred tax assets is sufficient to warrant the continued need for a full valuation allowance against these deferred tax assets.
Net income (loss) was a loss of $0.8 million, or ($0.05) per share, as comparedattributable to income of $2.8 million, or $0.17 per share,common stockholders for the quarters ended December 31, 2017 and 2016 respectively, largely as a result of the two discrete income tax events in the two periods.
Results of Operations
Results of Operations for the Three Months Ended December 31, | ||||||||||||||||
2017 | ||||||||||||||||
Optics | Contract Research | Biomedical | Total | |||||||||||||
Revenue | $ | 4,942,000 | $ | 4,247,000 | $ | - | $ | 9,189,000 | ||||||||
Gross profit | 1,724,000 | 1,851,000 | - | 3,575,000 | ||||||||||||
GM % | 35 | % | 44 | % | - | 39 | % | |||||||||
Operating expenses | 1,576,000 | 1,723,000 | 445,000 | 3,744,000 | ||||||||||||
Operating income (loss) | 148,000 | 128,000 | (445,000 | ) | (169,000 | ) | ||||||||||
Depreciation and amortization | 231,000 | 65,000 | 3,000 | 299,000 | ||||||||||||
Capital expenditures | 590,000 | 19,000 | 16,000 | 625,000 | ||||||||||||
Intangibles, net | 453,000 | 188,000 | 337,000 | 978,000 | ||||||||||||
Goodwill | 1,012,000 | 4,939,000 | - | 5,951,000 | ||||||||||||
Total assets | $ | 18,969,000 | $ | 8,114,000 | $ | 614,000 | $ | 27,697,000 |
Results of Operations for the Three Months Ended December 31, | ||||||||||||||||
2016 | ||||||||||||||||
Optics | Contract Research | Biomedical | Total | |||||||||||||
Revenue | $ | 4,405,000 | $ | 4,738,000 | $ | - | $ | 9,143,000 | ||||||||
Gross profit | 1,574,000 | 1,951,000 | - | 3,525,000 | ||||||||||||
GM % | 36 | % | 41 | % | - | 39 | % | |||||||||
Operating expenses | 1,328,000 | 1,740,000 | 381,000 | 3,449,000 | ||||||||||||
Operating income (loss) | 246,000 | 211,000 | (381,000 | ) | 76,000 | |||||||||||
Depreciation and amortization | 234,000 | 74,000 | 3,000 | 311,000 | ||||||||||||
Capital expenditures | 91,000 | - | 20,000 | 111,000 | ||||||||||||
Intangibles, net | 474,000 | 222,000 | 337,000 | 1,033,000 | ||||||||||||
Goodwill | 883,000 | 4,939,000 | - | 5,822,000 | ||||||||||||
Total assets | $ | 18,785,000 | $ | 8,407,000 | $ | 1,060,000 | $ | 28,252,000 |
Consolidated revenue for the first quarter of fiscal year 2018, which ended December 31, 2017, was $9.2 million, a marginal increase, as compared with revenue of $9.1 million for the quarter ended December 31, 2016.
The Optics segment revenue increased $0.5 million, or 12%, for the threesix months ended DecemberMarch 31, 2017 compared with the same period in the prior year, primarily as a result of the resumption of more normalized purchasing by two of the segment’s largest customers, as well as revenue growth in the U.S. operating units in this segment.
Contract Research segment revenue decreased approximately $0.5 million,2019 was essentially breakeven or 10%, compared with the same period in the prior year, as a result of a reduction in both commercial product revenue, as some orders did not come in as expected, and contract revenue, as Department of Energy contracts have shown some cut backs. The research backlog for the Contracts Research segment remains strong at $30.5 million at December 31, 2017.
The Biomedical segment has no revenue as it is currently developing a hemostatic and sealant product to control bleeding in surgical applications based on Xcede’s innovative adhesive technology.
Cost of revenue for the first quarter of 2017 was 61%, or $5.6 million, nearly the same as for the quarter ended December 31, 2016.
Gross profit for the three months ended December 31, 2017 was $3.6 million, or 39% of revenues, compared to $3.5 million, also 39% of revenues, for the three months ended December 31, 2016. Gross profit for the Optics segment decreased by 1% to 35% of revenue, or $1.7 million, at December 31, 2017 compared to 36% of revenues, or $1.6 million, for the quarter ended December 31, 2016. The decrease in gross profit was the result of the product mix and higher material costs in some product lines. The Contract Research segment gross profit decreased to $1.9 million, as compared to $2.0 million in the same period in fiscal year 2017 as the result of the lower revenue. Gross profit as a percent of revenue increased to 44% in the Contract Research segment compared to 41% in the first quarter of 2017 as fewer outside resources were used in the first three months of fiscal year 2018.
The Biomedical segment, through Xcede, is developing a hemostatic tissue sealant technology which has not been approved for commercial use and consequently has no gross profit.
Total operating expenses increased to $3.7 million for the three months ended December 31, 2017 from $3.4 million for the same quarter in fiscal year 2017. Operating expenses for the Optics segment increased $0.2 million due to personnel additions and related charges, as well as legal, advertising and travel costs. Contract Research segment expenses remained close to the same level of spending in the first quarter of fiscal year 2017 as in the same period last year. Biomedical segment expenses increased by $0.1 million in the three months ended December 31, 2017, compared to the three months ended December 31, 2016, primarily due to increases related to its first-in-human clinical trial preparations, offset by lower administrative expenses.
As a result of the items discussed above, income from operations for the three months ended December 31, 2017 was a loss of $0.2 million compared to income of $0.1 million for the same period in fiscal year 2017.
Net interest expense was approximately $0.1 million for both the three months ended December 31, 2017 and 2016.
The provision for income taxes for the first quarter of 2018 was $0.7 million as compared to a benefit of $2.7 million for the same period in fiscal year 2017. The 2018 provision was primarily the result of the 2017 Tax Act in which we estimated the rate reduction impact to be $0.5 million, the earnings and profit transition tax of our Hilger Crystals subsidiary to be $0.1 million and a current quarter earnings provision of $0.1 million. The 2017 benefit resulted from the deconsolidation of Xcede, which means the Company no longer is able to offset taxable income with Xcede’s net operating loss results or carryforwards.
Net income (loss) for the three months ended December 31, 2017 was a loss of $0.8 million, or ($0.05) in0.00) basic earnings per share, compared withto net income of $2.8$0.5 million or $0.17 in$0.03 basic earnings per share for the quartersix months ended DecemberMarch 31, 2016.2018.
Liquidity and Capital Resources
Liquidity Overview and Outlook
Net cash as of DecemberMarch 31, 20172019 was $1.0$0.4 million, or approximately $1.4$1.9 million less than the net cash of $2.4$2.3 million at September 30, 2017.2018.
As of DecemberMarch 31, 2017,2019, the Company was in full compliance with the termsall of all its outstanding indebtedness which consisted of $1.3 million of senior debt borrowed under the $2.0 million fixed rate, five-year term note that was established in February 2016 with Middlesex Savings Bank, $0.3 million owed to Middlesex Savings Bank under the newly established equipment line of credit, and $0.8 million of subordinated debt owed to the Massachusetts Capital Resources Company.bank covenants. The Company has $4.0 million of additional availabilityavailable cash under its Middlesex Savings Bank line of credit based on its collateral calculations as of DecemberMarch 31, 2017.2019. Management believes that theits cash andon hand, together with availability under the linesits line of credit, discussed above are adequate to meet the Company’s current liquidity requirements for the next twelve months.
On January 3,November 27, 2018, the Company amended the Note Purchase Agreement (the “Note”) with Massachusetts Capital Resource Company (“MCRC”) to reinstate the interest onlyinterest-only payment requirements of the loan and defer principal repayment requirements to November 30, 2018, and institute2019. Such amendment also extended the maturity date from July 31, 2019 to November 30, 2021. On March 31, 2019, approximately $865,000 in principal was outstanding on the MCRC loan.
On April 30, 2019, the Company converted the outstanding balance on the equipment line of credit with Middlesex Savings Bank (“Middlesex”) of approximately $484,000, which was outstanding on March 31, 2019, into a 1% rate increase, raising the Note’sfive year term note with an interest rate to 7% per annum.of 5.17%. Additionally, on May 1, 2019, the Company’s equipment line of credit was renewed for $750,000 through April 30, 2020, at which time the outstanding balance will be converted into a five year term note.
During the quarter ended DecemberOn March 31, 2016, the Company’s Xcede subsidiary converted all of its approximately $5.5 million of convertible notes and accrued interest into 5,394,120 shares of Xcede Series A preferred stock (as more fully described in Note 3, “Xcede Technologies, Inc. Joint Venture”).
As of December 31, 2017,2019, Xcede had $0.5 million of outstanding indebtedness owed to CBI. The note was recorded at fair value at issuance net of unamortized discount based on an imputed interest rate of 5.4%. On July 20, 2018, Xcede received a notice of termination from CBI, which consistedincluded CBI’s assertion that the foregoing study results trigger an immediate repayment of athe $500,000 promissory note issuedowed by Xcede to Cook Biotech Inc. (“Cook”)CBI under the Note Agreement and cancelled the remaining availability under the Note Agreement. While Xcede vigorously contests this assertion, at this time it is unclear how this matter will be resolved between Xcede and CBI. The Company carries the promissory note in November 2016short-term debt. Upon termination of the CBI agreements, research and due on December 31, 2025. Xcede has agreeddevelopment expense of $35,000 was recorded to use the proceeds fromaccrete the note to fund its planned first in human trial for its hemostatic tissue sealant product. Also in November 2016, Dynasil agreed to invest $1.2 million inface value. See Note 3 – Xcede over the next two fiscal years to fund Xcede’s non-clinical operations. With the committed resources from the Company and Cook, Xcede’s management believes it has sufficient funding to complete its planned first in human trial, but it is continuing to seek various financing alternatives to fund further development activities and its pursuit of regulatory approval.Technologies, Inc. Joint Venture.
Cash From Operating Activities
In total, including the changes in accounts receivable, inventories, pre-paid expenses, accounts payable and accrued expenses, operating activities used cash of $1.0$1.5 million for the threesix months ended DecemberMarch 31, 2017.2019. Approximately $0.2$0.4 million of the cash was used for inventory increases to ensure the proper supply of raw materialsmaterial is available to meet customer demand and the remaining $0.8$0.5 million was used due to the decrease in thepay down year end accrued expenses and accounts payable. In addition, unbilled receivables increased and contract liabilities decreased, which used approximately $1.5 million of cash along with an increase in prepaid expenses of $0.1 million. The decreases in cash were offset by net income, net of non-cash items of approximately $1.0 million.
Cash From Investing and Financing Activities
The Company used cash of approximately $0.6 million for the purchase of property, plant, equipment and patentsequipment for the threesix months ended DecemberMarch 31, 2017.2019.
Total outstanding bank debt as of DecemberMarch 31, 20172019 increased approximately $0.1$0.2 million to $3.2$3.5 million from $3.1$3.3 million at September 30, 2017.2018. The net cash increase from financing activities during the threesix months ended DecemberMarch 31, 20172019 was approximately $0.1 million as a result of $0.2$0.4 million in principal payments to Middlesex Savings Bank, offset by $0.3approximately $0.5 million in financing from the new Middlesex Savings Bank equipment line of credit.
Critical Accounting Policies and Estimates
There haveDuring the six months ended March 31, 2019, we adopted ASU 2014-09, which provides for new requirements in regards to revenue recognition. See Note 2 – Recent Accounting Pronouncements for further details. Aside from the adoption of ASU 2014-09, there been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2017.2018. 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, 20172018 as well as the notes to the financial statements contained in this Quarterly Report on Form 10-Q.
The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
RevenuesWe generate revenues from contract research, product sales, and non-recurring engineering contracts.
Our Optics segment produces standard and customized products for commercial organizations, educational institutions, and U.S. Federal government agencies. In addition, we also offer services which include non-recurring engineering services. We recognize revenue when the saleperformance obligation has been satisfied by transferring the control of the Company’sproduct or service to the customer. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on their relative stand-alone selling prices. In such circumstances, the Company uses the observable price of goods or services which are sold separately in similar circumstances to similar customers. If these prices are not observable, then we will estimate the stand-alone selling price using information that is reasonably available. For the majority of our standard products and services, price list, and discount structures related to customer type are recognized when persuasive evidenceavailable. For products and services that do not have price list and discount structures, we may use one or both of an arrangement exists, delivery has occurredthe following: (i) adjusted market assessment approach or (ii) expected cost plus a margin approach. The adjusted market approach requires evaluation of the market in which we sell goods or services have been rendered,and estimation of the price is fixedthat a customer in that market would be willing to pay for those goods or determinable,services. The expected cost plus margin approach requires the Company to forecast expected costs of satisfying the performance obligation and collectability is reasonably assured. The Company generally ships products F.O.B. shipping point. Revenue fromthen add a reasonable margin for that good or service. Shipping and handling activities primarily occur after a customer obtains control and are considered fulfillment cost rather than separate performance obligations.
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Our Innovation and Development segment performs research and development activitiesfor U.S. Federal government agencies, educational institutions and commercial organizations. We account for a research contract when a contract has been executed, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of the contract price is derived generally from the following types of contracts:considered probable. Revenue is earned under reimbursement of costs plus fees, fixed price, or time and material type contracts. Revenue is recognized when the products are shipped per customers’ instructions,contract has been approved by both parties, each entity can identify each’s party’s rights regarding goods and services to be transferred, the payment terms have been identified, the contract has been executed, the contract or sales pricecommercial substance, and it is fixed or determinable, deliveryprobable that we will collect substantially all of services or products has occurred and the Company’s ability to collect the contract price is considered reasonably assured.
Government funded services revenues from cost plus contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the contracts’ fixed fees. Revenue from fixed-type contracts is recognized under the percentage of completion method with estimated costs and profits included in contract revenue as work is performed. Revenues from time and materials contracts are recognized as costs are incurred at amounts generally commensurate with billing amounts. Recognition of losses on projects is taken as soon as the loss is reasonably determinable.
The majority of the Company’s contract research revenue is derived from the United States government and government related contracts. Such contracts have certain risks which include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under United States government contracts are subject to audit. The Company believes that the results of such audits will not have a material adverse effect on its financial position or its results of operations.
In May 2014, the FASB issued ASU 2014-09 which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Using these guidelines, a comprehensive framework was established for determining how much revenue to recognize and when it should be recognized. The standard is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to beit is entitled in exchange for thosethe goods or services. ASU 2014-09 also requires additional disclosure aboutservices transferred.
Under the nature, amount, timing and uncertaintytypical payment terms of revenue and cash flows arising fromour U.S. government contracts, the customer pays either performance-based payments or progress payments. Performance-based payments, which are typically used in the firm fixed price contracts, including significant judgments and changesare interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments, which are typically used in judgments and assets recognized fromour cost-plus type contracts, are interim payments based on costs incurred to fulfill a contract. Entities haveas the option of using either a full retrospective or a modified retrospective approachwork progresses. For our U.S. government cost-plus contracts, the customer generally pays during the performance period for the adoption80%-90% of the new standard. At this time,actual costs incurred. Because the Company planscustomer retains a small portion of the contract price until completion of the contract and audit of allowable costs, cost-plus type contracts generally result in revenue recognized in excess of billings which we present as contract assets on the balance sheet. Amounts billed and due from customers are classified as receivables on the balance sheet, whereas amounts earned, but not yet billed to adopt this standard throughthe Company’s customers due to timing, are classified as unbilled receivables on the balance sheet. We recognize a liability for performance-based payments paid in advance which are in excess of the revenue recognized and presents these amounts as contract liabilities on the balance sheet.
Effective October 1, 2018, we adopted Topic 606,Revenue from Contracts with Customers, using the modified retrospective approach. The ASU becomes effective for the Company at the beginning of its 2019 fiscal year. In 2016transition method, and 2017, the FASB issued several ASU’s related to ASU 2014-09, which simplify and provide additional guidance to companies for implementation of the standard. To be consistent with this core principle, an entity is required to apply the following five-step approach:
We are currently evaluating how the adoption of ASU 2014-09 will impact our consolidated financial statements and result of operations by applying the five-step approach to each revenue stream. This evaluation includes completing an inventory of revenue streams by like contracts to allow for ease of implementation, monitoring developments for the manufacturing industry and government contractors, and evaluating potentialimplemented changes to ourits business processes, systems and controls to support therevenue recognition and disclosurethe related disclosures under this ASU. Under the modified retrospective approach, we applied the standards to new standard. The Companycontracts and those that were not completed as of October 1, 2018. For those contracts not completed as of October 1, 2018, this method resulted in a cumulative adjustment to increase the Company’s retained earnings in the amount of $22,000.
This guidance has engaged a third partyresulted in very few changes in revenue recognition for the standard contracts in both the Optics and the Innovation and Development segments. This new guidance may lead to assistrecognition of certain revenue transactions sooner than in evaluating the impact of this new standardpast on its consolidated financial statementscontracts that require us to maintain stated inventory levels, as we have an enforceable right to payment for the required inventory, and related disclosures. We planon contracts such as engineering services and design and tooling transactions, as we have an enforceable right to complete the conversion and implementation phases by the end of fiscal year 2018 in conjunction with future interpretative guidance.payment for these performance obligations satisfied over time.
Goodwill
Goodwill is subject to an annual impairment test. We consider many factors which may indicate the requirement to perform additional, interim impairment tests. These include:
· | A significant adverse long term outlook for any of our industries; |
· | An adverse finding or rejection from a regulatory body involved in new product regulatory approvals; |
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· | Failure of an anticipated commercialization product line; |
· | Unanticipated competition or a disruptive technology introduction; |
· | The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit; |
· | A loss of key personnel; and |
· | An expectation that a reporting unit carrying goodwill, or a significant portion of a reporting unit, will be sold or otherwise disposed of. |
Goodwill is tested by reviewing the carrying value compared to the fair value at the reporting unit level. Fair value for the reporting unit is derived using the income approach. Under the income approach, fair value is calculated based on the present value of estimated future cash flows. Assumptions by management are necessary to evaluate the impact of operating and economic changes and to estimate future cash flows. Management’s evaluation includes assumptions on future growth rates and cost of capital that are consistent with internal projections and operating plans.
The Company generally performs its annual impairment testing of goodwill during the fourth quarter of its fiscal year, or more frequently if events or changes in circumstances indicate that the assets might be impaired. The Company tests impairment at the reporting unit level using the two-step process. The Company’s primary reporting units tested for impairment are Radiation Monitoring Devices, which comprises our Contract ResearchInnovation and Development segment, and Hilger Crystals, a component of our Optics segment.
Intangible Assets
The Company’s intangible assets consist of acquired customer relationships and trade names of Hilger Crystals, Ltd., acquired know-how of Radiation Monitoring Devices, Inc. and purchased and patented biomedical technologies within the Biomedical segment. The Company amortizes its intangible assets with definitive lives over their useful lives, which range from 5 to 20 years, based on the time period the Company expects to receive the economic benefit from these assets. No impairment charge was recorded during the three monthsix-month periods ended DecemberMarch 31, 20172019 or 2016.2018.
The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its intangible and indefinite-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of intangible and indefinite-lived assets, during the threesix months ended DecemberMarch 31, 2017.2019.
Impairment of Long-Lived Assets
The Company’s long-lived assets include property, plant and equipment and intangible assets subject to amortization. The Company evaluates long-lived assets for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized.
The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its long-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of long-lived assets, during the threesix months ended DecemberMarch 31, 2017.2019.
Allowance for Doubtful Accounts Receivable
The Company performs ongoing credit evaluations of our customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been minimal, within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.
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Stock-Based Compensation
The Company accounts for stock-based compensation using fair value. Compensation costs are recognized for stock-based compensation granted to employees and directors. Options and restricted stock awards are recorded as an expense over the requisite service period based on the grant date estimated fair value of the grant, which in the case of options is determined using the Black-Scholes option pricing model.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We regularly evaluate our ability to recover the reported amount of our deferred income tax assets considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse.
Recent Accounting Pronouncements
See Note 2, "Recent Accounting Pronouncements" in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the adoption of ASC 2014-09, which provides for new requirements in regards to revenue recognition, as well as respective dates of adoption or expected adoption and effects on our consolidated financial position, results of operations and cash flows.
Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding results of operations, our compliance with the financial covenants under our loan agreements with Middlesex Savings Bank and Massachusetts Capital Resource Company, our expectations regarding results of operations, the commercialization of our technology, including the Xcede patch and our dual mode detectors, the expecting timing of the First-in-Human clinical trial of the Xcede patch, the success of efforts to develop a successful Xcede Patch and to fund Xcede, results of our pre-clinical and planned clinical trials, regulatory approvals,that development, our development of new technologies including at Dynasil Biomedical, the adequacy of our current financing sources to fund our current operations, our growth initiatives, governmental budgetary and funding matters, our capital expenditures, and the strength of our intellectual property portfolio.portfolio, perceived benefits and costs of the proposed stock split transaction, the number of shares of the Company’s common stock that are expected to be cashed out in the such transaction and the timing and stockholder approval of such transaction.. These forward-looking statements may be identified by the use of words such as “plans”,“plans,” “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” “continue”“continue,” or similar terms, though not all forward-looking statements contain such words. The actual results of the future events described in such forward lookingforward-looking statements could differ materially from those stated in such forward lookingforward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to develop and commercialize our products, including obtaining regulatory approvals, the size and growth of the potential markets for our products and our ability to serve those markets, the rate and degree of market acceptance of any of our products, general economic conditions, costs and availability of raw materials and management information systems, our ability to obtain and maintain intellectual property protection for our products, Xcede’s ability to produce preclinical data sufficient to enable it to initiate clinical studies of hemostatic patch, clinical results of Xcede’s programs which may not support further development, the ability of our RMD business unit to identify and pursue possible continued development opportunities for the Xcede patch, which is not assured, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, changing priorities or reductions in government spending, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to comply with our debt obligations, our ability to deleverage our balance sheet, our ability to identify and execute on acquisition opportunities and integrate such acquisitions into our business, seasonality, the many variables that may impact the Company’s projected cost savings, variables and seasonality,risks related to consummation of the proposed stock split transaction, SEC regulatory review of the Company’s filings related to the such transaction, and the continuing determination of the Board of Directors and Special Committee that such transaction is in the best interests of all stockholders. as well as the uncertainties set forth in the Company’s Annual Report on Form 10-K, filed on December 20, 2017,21, 2018, including the risk factors contained in Item 1A, and from time to time in the Company's other filings with the Securities and Exchange Commission. The Company disclaims any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
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ITEM 4 CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified under the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of DecemberMarch 31, 2017.2019. Based on thisthe evaluation of our managementdisclosure controls and procedures as of March 31, 2019, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2017, thesesuch date, our disclosure controls and procedures were effective atnot effective.
As disclosed in our Annual Report on Form 10-K for the year ended September 30, 2018, we identified a material weakness in our internal control over financial reporting as of September 30, 2018. Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) are an integral part of disclosure controls and procedures. This material weakness, which is described in detail in our 2018 Annual Report on Form 10-K, can be summarized as relating to our controls over the revenue recognition process. Specifically, we lacked personnel with an appropriate level of knowledge, experience and training in contract review and management to provide reasonable assurance level.that revenue was being properly recorded in accordance with GAAP. Additionally, as our cost recognition system for contract revenue is a manual entry system, additional training and in-depth review for accuracy and completeness are required.
The measures that we have identified and implemented to address the material weakness are also discussed in detail in our 2018 Form 10-K. The Company believes that it has taken steps that it believes will remediate the previously identified material weakness. However, certain controls designed and implemented during the second quarter of the 2019 fiscal year to address the material weakness in the initial contract review and period-end financial reporting processes have not been operational for a sufficient period of time to allow management to conclude that they are operating effectively. As a result, management has determined as of March 31, 2019 the control deficiency that existed in the prior year still exists, and, that our internal controls do not effectively mitigate the risk that a material misstatement in our financial statements could occur and not be prevented or detected. We expect the evaluation and testing of the steps previously taken to remediate the previously identified material weaknesses will continue throughout fiscal year 2019 in order to allow management sufficient basis to conclude that the controls are operating effectively.
Changes in Internal Control Over Financial Reporting
As a result of our adoption of the new revenue standard (Topic 606), we implemented controls to ensure adequate evaluation of contracts and assessment of the impact of the new accounting standard related to revenue recognition on our financial statements to facilitate its adoption on October 1, 2018. There were nonot any significant changes into our internal control over financial reporting due to the adoption of the new standard, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) during the most recent fiscal quarterperiod covered by this Quarterly Report or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controlcontrols over financial reporting.
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In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed herein and in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2017,2018, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Qreport and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.Risks Related To Dynasil’s Stock
On December 22, 2017, President Trump signed into lawSubject to stockholder approval, the “Tax Cutsboard of directors of the Company has approved a plan to effectuate a reverse/forward stock split to reduce the number of record holders of the Common Stock and Jobs Act” (“TCJA”) that significantly reformsterminate the Internal Revenue Coderegistration of 1986, as amended, or the Code. The TCJA, among other things, includes changesCommon Stock under the Exchange Act.
If the proposed reverse/forward stock split is effected, the Company intends to U.S. federal tax rates, imposes significant additional limitationsterminate the registration of the Common Stock under the Exchange Act. Following deregistration, the Company will no longer file annual reports on the deductibility of interestForm 10-K, quarterly reports on Form 10-Q, and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. Our net deferred tax assets and liabilitiescurrent reports on Form 8-K. Accordingly, there will be revalued atsignificantly less information regarding the newly enacted U.S. corporate rate,Company available to stockholders and potential investors. In addition, the impact, ifCompany will no longer be subject to the provisions of the Sarbanes-Oxley Act and certain of the liability provisions of the Exchange Act, although the Company will still be subject to the antifraud provisions of the Exchange Act and any applicable state securities laws. Following deregistration, the Company’s executive officers, directors and 10% stockholders will no longer be recognized in our tax expenserequired to file reports relating to their transactions in the yearCommon Stock with the SEC. In addition, the Company’s executive officers, directors and 10% stockholders will no longer be subject to the recovery of enactment. We continueshort-swing profits provision of the Exchange Act, and persons acquiring 5% of the Common Stock will no longer be required to examinereport their beneficial ownership under the impact this tax reform legislation may have on our business. The impactExchange Act. In addition, following the effective time of this tax reform is uncertain and could be adverse. We urge our stockholdersthe reverse/forward stock split, the Company plans to consult with their legal and tax advisors with respect to such legislation anddelist its common stock from the potential tax consequences of investingNasdaq Stock Market. Any trading in our common stock.stock after the deregistration and delisting would only occur in privately negotiated sales or potentially on the OTC Pink Market, if one or more brokers chooses to make a market for our common stock there and complies with applicable regulatory requirements; however, there can be no assurances regarding any such trading. The lack of public information and increased illiquidity will make trading in our shares of common stock more difficult, which may cause the value of our common stock to decrease.
The Company will file a preliminary proxy statement that includes important information regarding the proposed reverse/forward stock split. A definitive proxy statement will be filed with the Securities and Exchange Commission and mailed to stockholders at least 20 calendar days prior to the special stockholders meeting at which the proposed transaction will be voted on. Stockholders are urged to read the definitive proxy statement carefully.
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101 | The following materials from Dynasil Corporation of America’s Quarterly Report on Form 10-Q for the quarter ended |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DYNASIL CORPORATION OF AMERICA
BY: | /s/ Peter Sulick | DATED: | May 14, 2019 | ||
Peter Sulick, | |||||
Chief Executive Officer and President | |||||
/s/ Robert J. Bowdring | DATED: | May 14, 2019 | |||
Robert J. Bowdring, | |||||
Chief Financial Officer |