The accompanying notes are an integral part of these unaudited
consolidated financial statements.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying consolidated balance
sheet as of June 30, 2016, the consolidated statements of operations and comprehensive income (loss) for the three and nine months
ended June 30, 2016 and 2015, changes in stockholders’ equity for the nine months ended June 30, 2016 and cash flows for
the nine months ended June 30, 2016 and 2015 of Dynasil Corporation of America and subsidiaries (the “Company”), and
the related information contained in these notes have been prepared by management and are unaudited. In the opinion of management,
all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the financial position, results
of operations and cash flows in conformity with generally accepted accounting principles for the periods presented have been made.
Interim operating results are not necessarily indicative of operating results for a full year.
The preparation of our unaudited consolidated
financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Certain information and note disclosures normally included
in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed
or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto
included in the Company's September 30, 2015 Annual Report on Form 10-K previously filed by the Company with the Securities and
Exchange Commission.
Certain prior year balances have been
reclassified to conform to the current year presentation. These reclassifications did not affect previously reported net loss
or stockholders’ deficit.
The Company considers events or transactions
that have occurred after the unaudited consolidated balance sheet date of June 30, 2016, but prior to the filing of the unaudited
consolidated financial statements with the SEC on this Form 10-Q, to provide additional evidence relative to certain estimates
or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date
of the filing of this Quarterly Report on Form 10-Q with the SEC.
Note 2 – Recent Accounting Pronouncements
Effective October 1, 2015, the Company
early adopted the guidance issued in Accounting Standards Update 2015-03,
Interest – Imputation of Interest (Topic 835)
(“ASU 2015-03”) to simplify the presentation of debt issuance costs. This standard requires that debt issuance
costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount
of that debt liability, consistent with debt discounts. The Company adopted this guidance on a retrospective basis, wherein the
balance sheet of each individual period presented was adjusted to reflect the period-specific effects of applying the new guidance.
As a result of the adoption of ASU 2015-03, $12,000 of debt issuance costs at September 30, 2015 were reclassified from deferred
financing costs, net to long-term debt in the consolidated balance sheets.
Effective for the reporting period beginning
October 1, 2015, the Company early adopted the guidance issued in Accounting Standards Update 2015-17,
Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”) which simplifies the presentation of deferred
income taxes. ASU 2015-17 concludes that deferred tax liabilities and assets should be classified as noncurrent in a classified
statement of financial position. The Company adopted this guidance on a retrospective basis, wherein the balance sheet of each
individual period presented was adjusted to reflect the period-specific effects of applying the new guidance. The adoption of
this ASU did not have a material impact on the Company’s financial statements.
Revenue from Contracts with Customers
(Topic 606) Section A—Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets
and Deferred Costs—Contracts with Customers (Subtopic 340-40).
In May 2014, the FASB issued ASU 2014-09, “Revenue
from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic
605),” and requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In
March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations
(Reporting revenue gross versus net),” which clarifies gross versus net revenue reporting when another party is involved
in the transaction. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,”
which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. There
are two transition methods available under the new standard, either cumulative effect or retrospective. The new guidance is effective
for the Company beginning in fiscal 2018. In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers
(Topic 606): Narrow-Scope Improvements and Practical Expedients,” which clarifies the revenue guidance. The Company is currently
in the process of assessing the impact of these ASUs on its consolidated financial statements.
Compensation—Stock Compensation
(Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved
after the Requisite Service Period.
In June 2014, the FASB issued ASU No. 2014-12, which clarifies the proper method of accounting
for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service
period. Under the new guidance, a performance target that affects vesting and could be achieved after completion of the service
period should be treated as a performance condition under FASB Accounting Standards Codification (ASC) 718 and, as a result, should
not be included in the estimation of the grant-date fair value of the award. An entity should recognize compensation cost for
the award when it becomes probable that the performance target will be achieved. In the event that an entity determines that it
is probable that a performance target will be achieved before the end of the service period, the compensation cost of the award
should be recognized prospectively over the remaining service period. The new guidance is effective for the Company beginning
in fiscal 2017. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
Preparation of Financial Statements
– Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.
In August 2014, the FASB issued ASU No. 2014-15, which states that under GAAP, continuation of a reporting entity as a going
concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent.
If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis
of accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial
doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue
to be prepared under the going concern basis of accounting, but the amendments in this ASU should be followed to determine whether
to disclose information about the relevant conditions and events. The new guidance is effective for the Company beginning in fiscal
2017, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company will evaluate the going
concern considerations in this ASU; however, management does not currently believe that the Company will meet the conditions that
would subject its financial statements to additional disclosure.
Income Statement - Extraordinary and
Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.
In January 2015, the FASB issued ASU No. 2015-01, which eliminates the concept of extraordinary items in an entity’s
income statement. Extraordinary classification outside of income from continuing operations was previously considered only when
evidence clearly supported its classification as an extraordinary item. Extraordinary items were events and transactions that
were distinguished by their unusual nature and by the infrequency of their occurrence. The ASU eliminates the need to separately
classify, present and disclose extraordinary events. The disclosure of events or transactions that are unusual or infrequent in
nature will be included in other guidance. This new guidance is effective for the Company beginning in fiscal 2017. Early adoption
is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
Inventory (Topic 330), Simplifying
the Measurement of Inventory.
In July 2015, the FASB issued ASU No. 2015-11, which requires that an entity should measure
inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling
prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Substantial
and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. This
new guidance is effective for the Company beginning in fiscal 2018. The adoption of this ASU is not expected to have a material
impact on the Company’s consolidated financial position, results of operations or cash flows.
Business Combinations (Topic 805),
Simplifying the Accounting for Measurement-Period Adjustments.
In September 2015, the FASB issued ASU No. 2015-16, which requires
that an acquirer recognize adjustment to provisional amounts that are identified during the measurement period in the reporting
period in which the adjustment amounts are determined. The acquirer needs to record, in the same period’s financial statements,
the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to
the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is
required to present, separately on the face of the income statement or disclose in the notes, the portion of the amount recorded
in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional
amounts had been recognized as of the acquisition date. This new guidance is effective for the Company beginning in fiscal 2017.
The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results
of operations or cash flows.
Leases (Topic 842).
In February
2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to put most leases on their balance sheets by
recognizing a lessee’s rights and obligations, while expenses will continue to be recognized in a similar manner to today’s
legacy lease accounting guidance. This ASU could also significantly affect the financial ratios used for external reporting and
other purposes, such as debt covenant compliance. This new guidance is effective for the Company beginning in fiscal 2020, with
early adoption permitted. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial
statements.
Note 3 – Acquisitions and Divestitures
In the nine months ended June 30, 2015,
the Company recorded a gain of $0.2 million in connection with the sale of a product line in its Optics segment.
Note 4 – Xcede Technologies,
Inc. Joint Venture
In October, 2013, the Company formed Xcede
Technologies, Inc. (“Xcede”), a joint venture with Mayo Clinic, in order to spin out and separately fund the development
of its tissue sealant technology, which formerly comprised the majority of its biomedical segment. As of June 30, 2016, Xcede
has raised approximately $3.0 million in the form of Convertible Notes (the “Notes”), of which $2.4 million was from
external funding to outside investors and to certain officers and directors of the Company and $0.6 million was from the Company.
The Notes accrue interest at 5%. The total interest accrued at June 30, 2016 was approximately $0.2 million. On July 15, 2016,
Xcede amended the Note Purchase Agreement for such Notes to extend the Notes’ maturity date from June 30, 2016 to June 30,
2017 and to increase the principal amount of Notes authorized to be issued thereunder from $3.0 million to up to $5.2 million.
Upon the closing of a capital stock financing
raising of at least $3.0 million, inclusive of the Notes and interest, the outstanding principal amount of the Notes plus all
accrued interest will be converted into shares of the same capital stock sold in the financing at a 20% discount to the price
per share of that capital stock. Alternatively, at any time prior to a capital stock financing the Note holders can convert, at
their option, the principal amount of the Notes plus accrued interest into common stock based on a $5 million valuation.
Ninety percent of Xcede’s common
stock is owned by Dynasil Biomedical and, as a result, is included in the Company’s consolidated balance sheets, results
of operations and cash flows. The Company expects Xcede to require significant additional funding prior to commencing human trials.
On January 6, 2016, Xcede announced that
it had signed three agreements with Cook Biotech Inc. of West Lafayette, IN including a Development Agreement, a License Agreement
and a Supply Agreement in connection with the development, regulatory approval and production of Xcede’s resorbable hemostatic
patch.
On June 2, 2016, Xcede issued 239,000
shares of its Common Stock to the Mayo Foundation for Medical Education and Research (“Mayo”) as the final anti-dilution
adjustment in satisfaction of the anti-dilution clause in the existing licensing agreement between Xcede and Mayo. As a result,
a charge of $0.2 million was recorded in stock compensation expense during the third quarter 2016.
On July 19, 2016, Xcede issued an additional
$0.5 million in principal amount of Notes pursuant to the Note Purchase Agreement, allowing Xcede to continue to fund the development
of its tissue sealant product.
Note 5 - Inventories
Inventories, net of reserves, consists of the following:
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Raw Materials
|
|
$
|
2,263,000
|
|
|
$
|
1,828,000
|
|
Work-in-Process
|
|
|
1,089,000
|
|
|
|
862,000
|
|
Finished Goods
|
|
|
574,000
|
|
|
|
376,000
|
|
|
|
$
|
3,926,000
|
|
|
$
|
3,066,000
|
|
Note 6 – Intangible Assets
Intangible assets at June 30, 2016 and September 30, 2015 consist
of the following:
|
|
Useful
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
June 30, 2016
|
|
Life (years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Acquired Customer Base
|
|
5 to 15
|
|
$
|
737,000
|
|
|
$
|
468,000
|
|
|
$
|
269,000
|
|
Know How
|
|
15
|
|
|
512,000
|
|
|
|
273,000
|
|
|
|
239,000
|
|
Trade Names
|
|
Indefinite
|
|
|
280,000
|
|
|
|
-
|
|
|
|
280,000
|
|
Patents
|
|
20
|
|
|
298,000
|
|
|
|
5,000
|
|
|
|
293,000
|
|
Biomedical Technologies
|
|
5
|
|
|
260,000
|
|
|
|
245,000
|
|
|
|
15,000
|
|
|
|
|
|
$
|
2,087,000
|
|
|
$
|
991,000
|
|
|
$
|
1,096,000
|
|
|
|
Useful
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
September 30, 2015
|
|
Life (years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Acquired Customer Base
|
|
5 to 15
|
|
$
|
824,000
|
|
|
$
|
464,000
|
|
|
$
|
360,000
|
|
Know How
|
|
15
|
|
|
512,000
|
|
|
|
248,000
|
|
|
|
264,000
|
|
Trade Names
|
|
Indefinite
|
|
|
318,000
|
|
|
|
-
|
|
|
|
318,000
|
|
Patents
|
|
20
|
|
|
223,000
|
|
|
|
-
|
|
|
|
223,000
|
|
Biomedical Technologies
|
|
5
|
|
|
260,000
|
|
|
|
200,000
|
|
|
|
60,000
|
|
|
|
|
|
$
|
2,137,000
|
|
|
$
|
912,000
|
|
|
$
|
1,225,000
|
|
Amortization expense for the three months
ended June 30, 2016 and 2015 was $43,000 and $43,000, respectively. Amortization expense for the nine months ended June 30, 2016
and 2015 was $129,000 and $128,000, respectively.
Estimated amortization expense for each of the next five fiscal
years and thereafter is as follows:
|
|
2016 (3 months)
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
|
Total
|
|
Acquired Customer Base
|
|
$
|
20,000
|
|
|
$
|
80,000
|
|
|
$
|
80,000
|
|
|
$
|
80,000
|
|
|
$
|
9,000
|
|
|
$
|
-
|
|
|
$
|
269,000
|
|
Know How
|
|
|
9,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
94,000
|
|
|
|
239,000
|
|
Patents
|
|
|
2,000
|
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
61,000
|
|
|
|
87,000
|
|
Biomedical Technologies
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
$
|
46,000
|
|
|
$
|
120,000
|
|
|
$
|
120,000
|
|
|
$
|
120,000
|
|
|
$
|
49,000
|
|
|
$
|
155,000
|
|
|
$
|
610,000
|
|
As of June 30, 2016, Xcede has $206,000 in patents that have
not been granted, therefore, the amortization related to these patents is not included in the five-year amortization table above.
Note 7 – Goodwill
Goodwill is subject to an annual impairment
test. The Company considers many factors which may indicate the requirement to perform additional, interim impairment tests. These
include:
|
·
|
A
significant adverse long term outlook for any of its industries;
|
|
·
|
An
adverse finding or rejection from a regulatory body involved in new product regulatory
approvals;
|
|
·
|
Failure
of an anticipated commercialization of a product or product line;
|
|
·
|
Unanticipated
competition or the introduction of a disruptive technology;
|
|
·
|
The
testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections
of Subtopic 360-10 of a significant asset group within a reporting unit;
|
|
·
|
A
loss of key personnel; and
|
|
·
|
An
expectation that a reporting unit carrying goodwill, or a significant portion of a reporting
unit, will be sold or otherwise disposed of.
|
There were no changes, aside from foreign
exchange rate fluctuations, in the carrying value of goodwill during the three and nine months ended June 30, 2016.
Note 8 –Debt
On February 1, 2016, the Company entered
into a $2,000,000 Term Note with Middlesex Savings Bank, as per the terms of the Loan Document Modification Agreement, dated September
29, 2015, as detailed in the Company’s Annual Report on Form 10-K, filed on December 17, 2015. The Company converted $2,000,000
of outstanding advances under the Company’s Middlesex Bank Line of Credit Note to a new five-year term note bearing interest
at the fixed annual rate of 4.5%. Immediately following this conversion, the total availability under the Company’s line
of credit increased by $2,000,000 to $3,819,000. As a result of a clause in the Middlesex Term Note, all outstanding debt is classified
as short-term. As of June 30, 2016, the total availability under the Company’s line of credit was $3,896,000 and the balance
on the term note was $1,880,000.
Note 9 – 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.
Diluted earnings per common share adjusts basic earnings per share for the effects of common stock options, common stock warrants,
convertible preferred stock and other potential dilutive common shares outstanding during the periods.
For purposes of computing diluted earnings
per share for the three and nine months ended June 30, 2016 and 2015, no common stock options were included in the calculation
of dilutive shares as all of the 123,147 and 58,212 common stock options outstanding, respectively, had exercise prices above
the current quarterly average market price per share and their inclusion would be anti-dilutive.
For the three months ended June 30, 2016
and 2015, 3,532 and 7,451 shares of common stock related to restricted stock, respectively, were included in the denominator used
to calculate diluted earnings per share. For the nine months ended June 30, 2016, 42,737 shares of common stock related to restricted
stock were included in the denominator used to calculate diluted earnings per share. For the nine months ended June 30, 2015,
no common share equivalents related to stock options or unvested restricted stock were included in the calculation of dilutive
shares, since there was a loss attributable to common shareholders and the inclusion of common share equivalents would be anti-dilutive.
The computation of the weighted shares outstanding for the
three months ended June 30, 2016 and 2015 is as follows:
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,698,205
|
|
|
|
16,439,637
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
Restricted Stock
|
|
|
3,532
|
|
|
|
7,451
|
|
Dilutive Average Shares Outstanding
|
|
|
16,701,737
|
|
|
|
16,447,088
|
|
The computation of the weighted shares outstanding for the
nine months ended June 30, 2016 and 2015 is as follows:
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,628,279
|
|
|
|
16,368,313
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
Restricted Stock
|
|
|
42,737
|
|
|
|
-
|
|
Dilutive Average Shares Outstanding
|
|
|
16,671,016
|
|
|
|
16,368,313
|
|
Note 10 - 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 to officers, directors, employees
and consultants options to purchase shares in Xcede’s common stock. The options granted vest over a range from immediately
to a period of five years. 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 the Company’s stock options. Because Xcede
is not publicly traded, the expected volatility is estimated with reference to the average historical volatility of a group of
publicly traded companies that are believed to have similar characteristics to Xcede.
Stock compensation expense for the three and nine months ended
June 30, 2016 and 2015 is as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
Stock Compensation Expense
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Stock Grants
|
|
$
|
74,000
|
|
|
$
|
106,000
|
|
Restricted Stock Grants
|
|
|
13,000
|
|
|
|
7,000
|
|
Option Grants
|
|
|
12,000
|
|
|
|
6,000
|
|
Employee Stock Purchase Plan
|
|
|
1,000
|
|
|
|
1,000
|
|
Subsidiary Stock Grants
|
|
|
210,000
|
|
|
|
-
|
|
Subsidiary Option Grants
|
|
|
19,000
|
|
|
|
21,000
|
|
Total
|
|
$
|
329,000
|
|
|
$
|
141,000
|
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
Stock Compensation Expense
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Stock Grants
|
|
$
|
259,000
|
|
|
$
|
243,000
|
|
Restricted Stock Grants
|
|
|
33,000
|
|
|
|
21,000
|
|
Option Grants
|
|
|
29,000
|
|
|
|
10,000
|
|
Employee Stock Purchase Plan
|
|
|
2,000
|
|
|
|
3,000
|
|
Subsidiary Stock Grants
|
|
|
210,000
|
|
|
|
-
|
|
Subsidiary Option Grants
|
|
|
59,000
|
|
|
|
21,000
|
|
Total
|
|
$
|
592,000
|
|
|
$
|
298,000
|
|
At June 30, 2016 there was approximately
$200,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period
of fifteen months.
In June 2016, Xcede issued 239,000 shares
of Xcede Common Stock to the Mayo Foundation for Medical Education and Research (“Mayo”) per the anti-dilution clause
in the existing licensing agreement between Xcede and Mayo on the first $3.0 million dollars of financing raised by Xcede. In
doing so, Xcede incurred a charge of $0.2 million in stock compensation expense for the third quarter 2016.
Restricted Stock Grants
A summary of restricted stock activity
for the nine months ended June 30, 2016 is presented below:
Restricted Stock Activity for the
Nine Months ended
June 30, 2016
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Nonvested at September 30, 2015
|
|
|
27,000
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
100,000
|
|
|
|
1.73
|
|
Vested
|
|
|
(27,000
|
)
|
|
|
1.04
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Nonvested at June 30, 2016
|
|
|
100,000
|
|
|
$
|
1.73
|
|
Stock Option Grants
The weighted average assumptions used
in the Black-Scholes option pricing model for the stock option grant during the nine months ended June 30, 2016 were as follows:
|
|
Nine Months Ended
June 30, 2016
|
|
Expected term in years
|
|
|
3
years
|
|
Risk-free interest rate
|
|
|
1.05
|
%
|
Expected volatility
|
|
|
78.53
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
A summary of stock option activity for
the nine months ended June 30, 2016 is presented below:
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price per
Share
|
|
|
Weighted Average
Remain Contractual
Term (in Years)
|
|
Balance at September 30, 2015
|
|
|
58,212
|
|
|
$
|
2.28
|
|
|
|
1.96
|
|
Outstanding and exercisable at September 30, 2015
|
|
|
58,212
|
|
|
|
2.28
|
|
|
|
1.96
|
|
Granted
|
|
|
64,935
|
|
|
|
2.33
|
|
|
|
2.59
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance at June 30, 2016
|
|
|
123,147
|
|
|
|
2.30
|
|
|
|
1.94
|
|
Outstanding and exercisable at June 30, 2016
|
|
|
123,147
|
|
|
$
|
2.30
|
|
|
|
1.94
|
|
Subsidiary Stock Option Grants
During the nine months ended June 30,
2016, 136,961 Xcede stock options were granted at an exercise price of $1.00 per share. These options vest over the next three
years and expire ten years from the grant date. The weighted average assumptions for grants during the nine months ended June
30, 2016 used in the Black-Scholes option pricing model were as follows:
Expected term in years
|
|
|
10
years
|
|
Risk-free interest rate
|
|
|
1.94
|
%
|
Expected volatility
|
|
|
83.06
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
A summary of Xcede stock option activity
for the nine months ended June 30, 2016 is presented below:
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price per
Share
|
|
|
Weighted Average
Remain Contractual
Term (in Years)
|
|
Balance at September 30, 2015
|
|
|
780,258
|
|
|
$
|
1.00
|
|
|
|
8.85
|
|
Outstanding and exercisable at September 30, 2015
|
|
|
180,293
|
|
|
|
1.00
|
|
|
|
8.50
|
|
Granted
|
|
|
136,961
|
|
|
|
1.00
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
(315,024
|
)
|
|
|
1.00
|
|
|
|
|
|
Balance at June 30, 2016
|
|
|
602,195
|
|
|
|
1.00
|
|
|
|
8.57
|
|
Outstanding and exercisable at June 30, 2016
|
|
|
268,450
|
|
|
$
|
1.00
|
|
|
|
8.09
|
|
At June 30, 2016, the Company’s
Xcede joint venture had $160,000 of unrecognized stock compensation expense associated with stock options expected to be recognized
over a weighted average period of eighteen months and $13,500 of unrecognized stock compensation expense that begin to vest upon
the attainment of specific capital raising targets.
Note 11 – Segment, Customer and
Geographical Reporting
Segment Financial Information
Dynasil’s business is comprised
of three segments: optics (“Optics”), contract research (“Contract Research”) and biomedical (“Biomedical”).
The Company’s Instruments segment was substantially disposed of in the first quarter of fiscal 2014, has had no subsequent
operations and had no remaining assets as of June 30, 2016. Consequently, it is no longer reported as a separate segment. At June
30, 2015, the Company had approximately $0.2 million of assets related to the businesses formerly comprising the Instruments segment.
Within these segments, there is a segregation
of reportable units based upon the organizational structure used to evaluate performance and make decisions on resource allocation,
as well as availability and materiality of separate financial results consistent with that structure. The Optics segment manufactures
optical materials, components and coatings. The Contract Research segment is one of the largest small business participants in
U.S. government-funded research. The Biomedical segment, through Xcede Technologies, Inc., a majority-owned joint venture, is
focused on developing a tissue sealant technology though no assurance can be given that this technology will become successfully
commercialized.
The Company’s segment information
for the three months ended June 30, 2016 and 2015 is summarized below:
Results
of Operations for the Three Months Ended June 30,
2016
|
|
|
|
Optics
|
|
|
Contract
Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
5,780,000
|
|
|
$
|
4,626,000
|
|
|
$
|
-
|
|
|
$
|
10,406,000
|
|
Gross Profit
|
|
|
2,012,000
|
|
|
|
1,915,000
|
|
|
|
-
|
|
|
|
3,927,000
|
|
GM %
|
|
|
35
|
%
|
|
|
41
|
%
|
|
|
-
|
|
|
|
38
|
%
|
SG&A
|
|
|
1,604,000
|
|
|
|
1,601,000
|
|
|
|
396,000
|
|
|
|
3,601,000
|
|
(Gain) loss on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating Income (Loss)
|
|
|
408,000
|
|
|
|
314,000
|
|
|
|
(396,000
|
)
|
|
|
326,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
247,000
|
|
|
|
24,000
|
|
|
|
17,000
|
|
|
|
288,000
|
|
Capital expenditures
|
|
|
330,000
|
|
|
|
-
|
|
|
|
6,000
|
|
|
|
336,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, Net
|
|
|
549,000
|
|
|
|
239,000
|
|
|
|
308,000
|
|
|
|
1,096,000
|
|
Goodwill
|
|
|
1,001,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
5,940,000
|
|
Total Assets
|
|
$
|
16,752,000
|
|
|
$
|
8,546,000
|
|
|
$
|
424,000
|
|
|
$
|
25,722,000
|
|
Results
of Operations for the Three Months Ended June 30,
2015
|
|
|
|
Optics
|
|
|
Contract Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
5,613,000
|
|
|
$
|
4,626,000
|
|
|
$
|
-
|
|
|
$
|
10,239,000
|
|
Gross Profit
|
|
|
2,006,000
|
|
|
|
2,027,000
|
|
|
|
-
|
|
|
|
4,033,000
|
|
GM %
|
|
|
36
|
%
|
|
|
44
|
%
|
|
|
-
|
|
|
|
39
|
%
|
SG&A
|
|
|
1,380,000
|
|
|
|
1,934,000
|
|
|
|
236,000
|
|
|
|
3,550,000
|
|
(Gain) loss on sale of assets
|
|
|
8,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,000
|
|
Operating Income (Loss)
|
|
|
618,000
|
|
|
|
93,000
|
|
|
|
(236,000
|
)
|
|
|
475,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
223,000
|
|
|
|
74,000
|
|
|
|
15,000
|
|
|
|
312,000
|
|
Capital expenditures
|
|
|
270,000
|
|
|
|
-
|
|
|
|
21,000
|
|
|
|
291,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, Net
|
|
|
722,000
|
|
|
|
273,000
|
|
|
|
257,000
|
|
|
|
1,252,000
|
|
Goodwill
|
|
|
1,252,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
6,191,000
|
|
Total Assets
|
|
$
|
16,665,000
|
|
|
$
|
9,462,000
|
|
|
$
|
756,000
|
|
|
$
|
26,883,000
|
|
The Company’s segment information
for the nine months ended June 30, 2016 and 2015 is summarized below:
Results
of Operations for the Nine Months Ended June 30,
2016
|
|
|
|
Optics
|
|
|
Contract
Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
18,415,000
|
|
|
$
|
14,484,000
|
|
|
$
|
-
|
|
|
$
|
32,899,000
|
|
Gross Profit
|
|
|
6,330,000
|
|
|
|
5,639,000
|
|
|
|
-
|
|
|
|
11,969,000
|
|
GM %
|
|
|
34
|
%
|
|
|
39
|
%
|
|
|
-
|
|
|
|
36
|
%
|
SG&A
|
|
|
5,237,000
|
|
|
|
5,107,000
|
|
|
|
1,099,000
|
|
|
|
11,443,000
|
|
(Gain) loss on sale of assets
|
|
|
(4,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,000
|
)
|
Operating Income (Loss)
|
|
|
1,097,000
|
|
|
|
532,000
|
|
|
|
(1,099,000
|
)
|
|
|
530,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
700,000
|
|
|
|
187,000
|
|
|
|
52,000
|
|
|
|
939,000
|
|
Capital expenditures
|
|
|
1,224,000
|
|
|
|
37,000
|
|
|
|
81,000
|
|
|
|
1,342,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, Net
|
|
|
549,000
|
|
|
|
239,000
|
|
|
|
308,000
|
|
|
|
1,096,000
|
|
Goodwill
|
|
|
1,001,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
5,940,000
|
|
Total Assets
|
|
$
|
16,752,000
|
|
|
$
|
8,546,000
|
|
|
$
|
424,000
|
|
|
$
|
25,722,000
|
|
Results
of Operations for the Nine Months Ended June 30,
2015
|
|
|
|
Optics
|
|
|
Contract
Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
15,781,000
|
|
|
$
|
13,964,000
|
|
|
$
|
-
|
|
|
$
|
29,745,000
|
|
Gross Profit
|
|
|
5,222,000
|
|
|
|
6,077,000
|
|
|
|
-
|
|
|
|
11,299,000
|
|
GM %
|
|
|
33
|
%
|
|
|
44
|
%
|
|
|
-
|
|
|
|
38
|
%
|
SG&A
|
|
|
4,964,000
|
|
|
|
5,712,000
|
|
|
|
739,000
|
|
|
|
11,415,000
|
|
(Gain) loss on sale of assets
|
|
|
(178,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(178,000
|
)
|
Operating Income (Loss)
|
|
|
436,000
|
|
|
|
365,000
|
|
|
|
(739,000
|
)
|
|
|
62,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
631,000
|
|
|
|
222,000
|
|
|
|
45,000
|
|
|
|
898,000
|
|
Capital expenditures
|
|
|
666,000
|
|
|
|
4,000
|
|
|
|
77,000
|
|
|
|
747,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, Net
|
|
|
722,000
|
|
|
|
273,000
|
|
|
|
257,000
|
|
|
|
1,252,000
|
|
Goodwill
|
|
|
1,252,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
6,191,000
|
|
Total Assets
|
|
$
|
16,665,000
|
|
|
$
|
9,462,000
|
|
|
$
|
756,000
|
|
|
$
|
26,883,000
|
|
Customer Financial Information
For the three and nine months ended June
30, 2016, one customer in the Optics segment represented more than 10% of the total segment revenue. For the three months ended
June 30, 2015, two customers in the Optics segment each represented more than 10% of the total segment revenue. For the nine months
ended June 30, 2015, no customer made up more than 10% of the segment revenue.
For the three and nine months ended June
30, 2016, four and five customers, respectively, of the Contract Research segment, all various agencies of the U.S. Government,
each represented more than 10% of the total segment revenue. For the three and nine months ended June 30, 2015, four customers
of the Contract Research segment, all various agencies of the U.S. Government, each represented more than 10% of the total segment
revenue. For the three months ended June 30, 2016 and 2015, these customers made up 72% and 64%, respectively, of Contract Research
revenue. For the nine months ended June 30, 2016 and 2015, these customers made up 77% and 68%, respectively, of Contract Research
revenue.
Geographic Financial Information
Revenue by geographic location in total
and as a percentage of total revenue, for the three months ended June 30, 2016 and 2015 are as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Geographic Location
|
|
Revenue
|
|
|
% of Total
|
|
|
Revenue
|
|
|
% of Total
|
|
United States
|
|
$
|
7,908,000
|
|
|
|
76
|
%
|
|
$
|
8,228,000
|
|
|
|
80
|
%
|
Europe
|
|
|
1,868,000
|
|
|
|
18
|
%
|
|
|
1,140,000
|
|
|
|
11
|
%
|
Other
|
|
|
630,000
|
|
|
|
6
|
%
|
|
|
871,000
|
|
|
|
9
|
%
|
|
|
$
|
10,406,000
|
|
|
|
100
|
%
|
|
$
|
10,239,000
|
|
|
|
100
|
%
|
Revenue by geographic location in total
and as a percentage of total revenue, for the nine months ended June 30, 2016 and 2015 are as follows:
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
Geographic Location
|
|
Revenue
|
|
|
% of Total
|
|
|
Revenue
|
|
|
% of Total
|
|
United States
|
|
$
|
24,363,000
|
|
|
|
74
|
%
|
|
$
|
23,892,000
|
|
|
|
80
|
%
|
Europe
|
|
|
6,361,000
|
|
|
|
19
|
%
|
|
|
3,147,000
|
|
|
|
11
|
%
|
Other
|
|
|
2,175,000
|
|
|
|
7
|
%
|
|
|
2,706,000
|
|
|
|
9
|
%
|
|
|
$
|
32,899,000
|
|
|
|
100
|
%
|
|
$
|
29,745,000
|
|
|
|
100
|
%
|
Note 12 - Income Taxes
Dynasil Corporation of America and its
wholly-owned U.S. subsidiaries file a consolidated federal income tax return and various state returns. The Company’s U.K.
subsidiary files tax returns in the U.K.
The Company uses the asset and liability
approach to account for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes
and net operating loss and tax credit carry forwards. The amount of deferred taxes on these temporary differences is determined
using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable,
based on tax rates, and tax laws, in the respective tax jurisdiction then in effect. Due to the Company’s adoption of ASU
2015-17, the deferred taxes are all classified as long term.
In assessing the ability to realize the
net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of
existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether
it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based upon the Company’s
recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of
these assets is sufficient to warrant the need for a full valuation allowance against its U.S. net deferred tax assets.
The Company applies the authoritative
provisions related to accounting for uncertainty in income taxes. As required by these provisions, the Company recognizes the
financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not
sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50 percent likelihood of being reached upon ultimate settlement
with the relevant tax authority. As of June 30, 2016 and September 30, 2015, the Company has no unrecorded liabilities for uncertain
tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense
in the accompanying consolidated statement of operations. As of June 30, 2016 and September 30, 2015, the Company had no accrued
interest or penalties related to uncertain tax positions. The Company currently has no federal or state tax examinations in progress.
The effective tax rates were 13% and 32%
for the three and nine months ended June 30, 2016, respectively, and (4%) and (2%) for the three and nine months ended June 30,
2015, respectively. The rates differ from the U.S. federal statutory income tax rate of 34% primarily due to a full valuation
allowance against the Company’s U.S. deferred tax asset.
The Company files its tax returns as prescribed
by the tax laws of the jurisdictions in which it operates. The Company’s tax filings for federal and state jurisdictions
for the tax years beginning with 2012 are still subject to examination.
Note 13 – Settlement of Pension
Liability
On December 1, 2014, the Company terminated
and settled its pension liability with each of the remaining participants in the EMF Defined Benefit Plan (the “Plan”).
The Plan had been frozen since 2006. The total benefit payments made upon termination were $675,000 and the actual plan assets
at the date of termination were $320,000. The Company funded and expensed the $355,000 difference upon settlement of the Plan.
Note 14 – Subsequent Events
On July 15, 2016, Xcede amended the Note
Purchase Agreement for the Xcede convertible notes to outside investors and to certain officers and directors of the Company to
extend the notes’ maturity date from June 30, 2016 to June 30, 2017 and to increase the principal amount of notes authorized
to be issued thereunder from $3.0 million to up to $5.2 million. On July 19, 2016, Xcede issued an additional $0.5 million in
principal amount of notes pursuant to the Note Purchase Agreement, allowing Xcede to continue to fund the development of its tissue
sealant product.