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 March 31, 2017, the consolidated statements of operations and comprehensive income (loss) for the three and six months ended
March 31, 2017 and 2016, changes in stockholders’ equity for the six months ended March 31, 2017 and cash flows for the six
months ended March 31, 2017 and 2016 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 March 31, 2017, Dynasil Biomedical owned 60% 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 60% ownership includes preferred stock with
a liquidation preference, and as a result, for reporting purposes only, common stock ownership is used in the allocation of noncontrolling
interest. Dynasil’s common stock ownership is 83% and the remaining 17% of Xcede’s common stock is owned by others
and 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, 2016 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 March 31, 2017, 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
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” (“ASU 2014-09”). ASU 2014-09 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. 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 be entitled
in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes 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. 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. The Company is evaluating the recently issued guidance on practical expedients
in order to select a transition method. The Company is also assessing the impact that ASU 2014-09 will have on its consolidated
financial statements and disclosures. 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 evaluating potential changes to our
business processes, systems, and controls to support the recognition and disclosure under the new standard.
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’s annual
reporting for fiscal 2017, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company is assessing
the impact of this ASU on its consolidated financial statements and plans to adopt it in the fourth quarter of fiscal year 2017.
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 beginning October 1, 2018. The Company is currently in the process of assessing the impact of this ASU
on its consolidated financial statements.
Intangibles – Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment:
In January 2017, the FASB issued ASU 2017-04, which simplifies the
test for goodwill impairment. This new guidance is effective for the Company beginning in fiscal year 2021. The Company is currently
in the process of assessing the impact of this ASU on its consolidated financial statements.
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 convertible notes bearing interest at
5% (“the Notes”) pursuant to a note purchase agreement dated October 2013 and most recently amended in November 2016
that provided for the issuance of up to $5.2 million in the aggregate principal amount of 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 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. 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, the value of which is eliminated in consolidation.
Each share of Series A Preferred and Series
B Preferred (together “the Preferred Stock”) shall be 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 have 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 March 31, 2017, the liquidation value of
the Series B Preferred would be approximately $0.5 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 March 31, 2017, DBM owned approximately
60% 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 will no longer be included in the Dynasil consolidated federal tax return and the Company will no longer be 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 January 2016,
Xcede announced that it had signed three agreements with Cook Biotech Inc. of West Lafayette, Indiana (“Cook”), 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 (“Xcede’s 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 Cook committed to fund 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, in exchange for the services performed by Cook, Xcede has committed to a multiple draw credit
facility in the aggregate amount not to exceed $1.5 million. Three draws of principal 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 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 $167,000 of research and development expense recognized
during the three months ended March 31, 2017 and approximately $205,000 recognized during the six months ended March 31, 2017.
Note 4 - Inventories
Inventories, net of reserves, consists of the following:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Raw Materials
|
|
$
|
2,129,000
|
|
|
$
|
1,938,000
|
|
Work-in-Process
|
|
|
665,000
|
|
|
|
834,000
|
|
Finished Goods
|
|
|
1,171,000
|
|
|
|
954,000
|
|
|
|
$
|
3,965,000
|
|
|
$
|
3,726,000
|
|
Note 5 – Intangible Assets
Intangible assets at March 31, 2017 and September 30, 2016 consist
of the following:
|
|
Useful
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
March 31, 2017
|
|
Life (years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Acquired Customer Base
|
|
5 to 15
|
|
$
|
691,000
|
|
|
$
|
487,000
|
|
|
$
|
204,000
|
|
Know How
|
|
15
|
|
|
512,000
|
|
|
|
299,000
|
|
|
|
213,000
|
|
Trade Names
|
|
Indefinite
|
|
|
261,000
|
|
|
|
-
|
|
|
|
261,000
|
|
Patents
|
|
20
|
|
|
389,000
|
|
|
|
10,000
|
|
|
|
379,000
|
|
Biomedical Technologies
|
|
5
|
|
|
260,000
|
|
|
|
260,000
|
|
|
|
-
|
|
|
|
|
|
$
|
2,113,000
|
|
|
$
|
1,056,000
|
|
|
$
|
1,057,000
|
|
|
|
Useful
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
September 30, 2016
|
|
Life (years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Acquired Customer Base
|
|
5 to 15
|
|
$
|
718,000
|
|
|
$
|
473,000
|
|
|
$
|
245,000
|
|
Know How
|
|
15
|
|
|
512,000
|
|
|
|
282,000
|
|
|
|
230,000
|
|
Trade Names
|
|
Indefinite
|
|
|
272,000
|
|
|
|
-
|
|
|
|
272,000
|
|
Patents
|
|
20
|
|
|
326,000
|
|
|
|
6,000
|
|
|
|
320,000
|
|
Biomedical Technologies
|
|
5
|
|
|
260,000
|
|
|
|
260,000
|
|
|
|
-
|
|
|
|
|
|
$
|
2,088,000
|
|
|
$
|
1,021,000
|
|
|
$
|
1,067,000
|
|
Amortization expense for the three months
ended March 31, 2017 and 2016 was $26,000 and $43,000, respectively. Amortization expense for the six months ended March 31, 2017
and 2016 was $52,000 and $86,000, respectively.
Estimated amortization expense for each of the next five fiscal
years and thereafter is as follows:
|
|
2017 (6 months)
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
Acquired Customer Base
|
|
$
|
40,000
|
|
|
$
|
80,000
|
|
|
$
|
84,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
204,000
|
|
Know How
|
|
|
17,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
60,000
|
|
|
|
213,000
|
|
Patents
|
|
|
4,000
|
|
|
|
9,000
|
|
|
|
9,000
|
|
|
|
9,000
|
|
|
|
9,000
|
|
|
|
80,000
|
|
|
|
120,000
|
|
|
|
$
|
61,000
|
|
|
$
|
123,000
|
|
|
$
|
127,000
|
|
|
$
|
43,000
|
|
|
$
|
43,000
|
|
|
$
|
140,000
|
|
|
$
|
537,000
|
|
As of March 31, 2017, Xcede had $259,000
in patents that have not been granted, therefore, the amortization related to these patents is not included in the five-year amortization
table above.
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 in the carrying
value of the long-lived assets, aside from current additions and foreign exchange rate fluctuations, during the six months ended
March 31, 2017.
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 holding goodwill;
|
|
·
|
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 six months ended March 31, 2017.
Note 7 – Debt
Senior Debt
On May 1, 2017, the Company received a
commitment letter from Middlesex Savings Bank to extend the existing Bank Loan Agreement between the Company and Middlesex Savings
Bank through May 2020. This agreement is expected to be finalized in May 2017. Additionally, the new agreement between the two
organizations will include an annual $1.0 million equipment line of credit in which the outstanding balance will be converted into
a five year term note on the one year anniversary. The existing loan agreement was also amended on December 2, 2016 to permit the
Company to invest up to $1.2 million in its Xcede Technologies subsidiary during the period from the quarter ended December 31,
2016 through the quarter ending September 30, 2018.
Subordinated Debt
On December 15, 2016, 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, 2017. Such amendment also extended the maturity date from July
31, 2018 to July 31, 2019.
Subsidiary Debt
In November 2016, the Xcede convertible
notes along with related accrued interest were converted into 5,394,120 shares of Xcede’s Series A preferred stock. See Note
3 – Xcede Technologies, Inc. Joint Venture.
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 purposes of computing diluted earnings
per share for the six months ended March 31, 2017 and 2016, no common stock options were included in the calculation of dilutive
shares as all of the 196,769 and 123,147 common stock options outstanding, respectively, had exercise prices above the applicable
quarterly average market price per share and their inclusion would be anti-dilutive. For the six months ended March 31, 2017, 70,000
shares of restricted common stock were excluded from the calculation of dilutive shares, as the effect of their inclusion would
be anti-dilutive. For the six months ended March 31, 2016, 56,532 shares of common stock related to restricted stock were included
in the denominator used to calculate diluted earnings per share. Additionally, for the three months ended March 31, 2017 and 2016,
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 March 31, 2017 and 2016 is as follows:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,886,628
|
|
|
|
16,636,950
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
Restricted Stock
|
|
|
-
|
|
|
|
-
|
|
Dilutive Average Shares Outstanding
|
|
|
16,886,628
|
|
|
|
16,636,950
|
|
The computation of the weighted shares outstanding for the six
months ended March 31, 2017 and 2016 is as follows:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,847,679
|
|
|
|
16,594,074
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
Restricted Stock
|
|
|
-
|
|
|
|
56,532
|
|
Dilutive Average Shares Outstanding
|
|
|
16,847,679
|
|
|
|
16,650,606
|
|
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.
Stock compensation expense for the three and six months ended
March 31, 2017 and 2016 is as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
Stock Compensation Expense
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Stock Grants
|
|
$
|
84,000
|
|
|
$
|
102,000
|
|
Restricted Stock Grants
|
|
|
13,000
|
|
|
|
11,000
|
|
Option Grants
|
|
|
13,000
|
|
|
|
10,000
|
|
Employee Stock Purchase Plan
|
|
|
1,000
|
|
|
|
1,000
|
|
Subsidiary Option Grants
|
|
|
28,000
|
|
|
|
19,000
|
|
Total
|
|
$
|
139,000
|
|
|
$
|
143,000
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
Stock Compensation Expense
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Stock Grants
|
|
$
|
123,000
|
|
|
$
|
185,000
|
|
Restricted Stock Grants
|
|
|
26,000
|
|
|
|
19,000
|
|
Option Grants
|
|
|
25,000
|
|
|
|
17,000
|
|
Employee Stock Purchase Plan
|
|
|
1,000
|
|
|
|
1,000
|
|
Subsidiary Option Grants
|
|
|
52,000
|
|
|
|
40,000
|
|
Total
|
|
$
|
227,000
|
|
|
$
|
262,000
|
|
At March 31, 2017, there was approximately
$160,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period
of fourteen months.
Restricted Stock Grants
A summary of restricted stock activity
for the six months ended March 31, 2017 is presented below:
Restricted Stock Activity for the Six Months ended
March 31, 2017
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Nonvested at September 30, 2016
|
|
|
100,000
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(30,000
|
)
|
|
|
1.73
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Nonvested and expected to vest at March 31, 2017
|
|
|
70,000
|
|
|
$
|
1.73
|
|
Stock Option Grants
The weighted average assumptions used in
the Black-Scholes option pricing model for the stock option grant during the six months ended March 31, 2017 were as follows:
|
|
Six Months
Ended March 31,
2017
|
|
Expected term in years
|
|
|
3 years
|
|
Risk-free interest rate
|
|
|
1.48
|
%
|
Expected volatility
|
|
|
69.57
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
A summary of stock option activity for
the six months ended March 31, 2017 is presented below:
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price per
Share
|
|
|
Weighted Average
Remain Contractual
Term (in Years)
|
|
Balance at September 30, 2016
|
|
|
123,147
|
|
|
$
|
2.30
|
|
|
|
1.69
|
|
Outstanding and exercisable at September 30, 2016
|
|
|
123,147
|
|
|
$
|
2.30
|
|
|
|
1.69
|
|
Granted
|
|
|
95,602
|
|
|
|
1.80
|
|
|
|
2.84
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
(21,980
|
)
|
|
|
3.03
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
196,769
|
|
|
$
|
1.98
|
|
|
|
2.14
|
|
Outstanding and exercisable at March 31, 2017
|
|
|
196,769
|
|
|
$
|
1.98
|
|
|
|
2.14
|
|
Subsidiary Stock Option Grants
During the six months ended March 31, 2017,
810,500 Xcede stock options were granted at an exercise price of $1.00 per share. Of the stock options granted, 228,000 options
were given to satisfy deferred compensation in the amount of $75,000 and vested immediately. The remaining 582,500 stock options
granted during the six months ended March 31, 2017 vest over the next three years and expire ten years from the grant date. These
options were valued using the Black-Scholes option pricing model and the assumptions for that were as follows:
Expected term in years
|
|
|
10 years
|
|
Risk-free interest rate
|
|
|
2.42
|
%
|
Expected volatility
|
|
|
83.11
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
A summary of Xcede stock option activity
for the six months ended March 31, 2017 is presented below:
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price per
Share
|
|
|
Weighted Average
Remain Contractual
Term (in Years)
|
|
Balance at September 30, 2016
|
|
|
613,653
|
|
|
$
|
1.00
|
|
|
|
8.35
|
|
Outstanding and exercisable at September 30, 2016
|
|
|
320,586
|
|
|
|
1.00
|
|
|
|
8.01
|
|
Granted
|
|
|
810,500
|
|
|
|
1.00
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
(48,197
|
)
|
|
|
1.00
|
|
|
|
|
|
Balance at March 31, 2017
|
|
|
1,375,956
|
|
|
|
1.00
|
|
|
|
9.22
|
|
Outstanding and exercisable at March 31, 2017
|
|
|
730,694
|
|
|
$
|
1.00
|
|
|
|
8.62
|
|
At March 31, 2017, the Company’s
Xcede joint venture had $202,000 of unrecognized stock compensation expense associated with stock options expected to be recognized
over a weighted average period of twelve months.
Note 10 – Segment, Customer and
Geographical Reporting
Segment Financial Information
Dynasil reports three reportable segments:
contract research (“Contract Research”), 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,
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 Research 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.
The Company’s segment information
for the three months ended March 31, 2017 and 2016 is summarized below:
Results of Operations for the Three Months Ended March 31,
|
2017
|
|
|
|
Optics
|
|
|
Contract
Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
5,281,000
|
|
|
$
|
4,804,000
|
|
|
$
|
-
|
|
|
$
|
10,085,000
|
|
Gross profit
|
|
|
1,913,000
|
|
|
|
1,875,000
|
|
|
|
-
|
|
|
|
3,788,000
|
|
GM %
|
|
|
36
|
%
|
|
|
39
|
%
|
|
|
-
|
|
|
|
38
|
%
|
SG&A
|
|
|
1,597,000
|
|
|
|
1,802,000
|
|
|
|
392,000
|
|
|
|
3,791,000
|
|
Operating income (loss)
|
|
|
316,000
|
|
|
|
73,000
|
|
|
|
(392,000
|
)
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
237,000
|
|
|
|
73,000
|
|
|
|
3,000
|
|
|
|
313,000
|
|
Capital expenditures
|
|
|
103,000
|
|
|
|
34,000
|
|
|
|
44,000
|
|
|
|
181,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
465,000
|
|
|
|
213,000
|
|
|
|
379,000
|
|
|
|
1,057,000
|
|
Goodwill
|
|
|
899,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
5,838,000
|
|
Total assets
|
|
$
|
19,705,000
|
|
|
$
|
7,477,000
|
|
|
$
|
794,000
|
|
|
$
|
27,976,000
|
|
Results of Operations for the Three Months Ended March 31,
|
2016
|
|
|
|
Optics
|
|
|
Contract
Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
6,428,000
|
|
|
$
|
4,868,000
|
|
|
$
|
-
|
|
|
$
|
11,296,000
|
|
Gross profit
|
|
|
2,208,000
|
|
|
|
1,870,000
|
|
|
|
-
|
|
|
|
4,078,000
|
|
GM %
|
|
|
34
|
%
|
|
|
38
|
%
|
|
|
-
|
|
|
|
36
|
%
|
SG&A
|
|
|
1,882,000
|
|
|
|
1,800,000
|
|
|
|
355,000
|
|
|
|
4,037,000
|
|
Operating income (loss)
|
|
|
326,000
|
|
|
|
70,000
|
|
|
|
(355,000
|
)
|
|
|
41,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
225,000
|
|
|
|
85,000
|
|
|
|
17,000
|
|
|
|
327,000
|
|
Capital expenditures
|
|
|
329,000
|
|
|
|
30,000
|
|
|
|
20,000
|
|
|
|
379,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
608,000
|
|
|
|
247,000
|
|
|
|
301,000
|
|
|
|
1,156,000
|
|
Goodwill
|
|
|
1,109,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
6,048,000
|
|
Total assets
|
|
$
|
17,653,000
|
|
|
$
|
8,502,000
|
|
|
$
|
571,000
|
|
|
$
|
26,726,000
|
|
The Company’s segment information
for the six months ended March 31, 2017 and 2016 is summarized below:
Results of Operations for the Six Months Ended March 31,
|
2017
|
|
|
|
Optics
|
|
|
Contract
Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
9,686,000
|
|
|
$
|
9,542,000
|
|
|
$
|
-
|
|
|
$
|
19,228,000
|
|
Gross profit
|
|
|
3,487,000
|
|
|
|
3,826,000
|
|
|
|
-
|
|
|
|
7,313,000
|
|
GM %
|
|
|
36
|
%
|
|
|
40
|
%
|
|
|
-
|
|
|
|
38
|
%
|
SG&A
|
|
|
2,924,000
|
|
|
|
3,542,000
|
|
|
|
773,000
|
|
|
|
7,239,000
|
|
Gain on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating income (loss)
|
|
|
563,000
|
|
|
|
284,000
|
|
|
|
(773,000
|
)
|
|
|
74,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
471,000
|
|
|
|
147,000
|
|
|
|
6,000
|
|
|
|
624,000
|
|
Capital expenditures
|
|
|
194,000
|
|
|
|
34,000
|
|
|
|
64,000
|
|
|
|
292,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
465,000
|
|
|
|
213,000
|
|
|
|
379,000
|
|
|
|
1,057,000
|
|
Goodwill
|
|
|
899,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
5,838,000
|
|
Total assets
|
|
$
|
19,705,000
|
|
|
$
|
7,477,000
|
|
|
$
|
794,000
|
|
|
$
|
27,976,000
|
|
Results of Operations for the Six Months Ended March 31,
|
2016
|
|
|
|
Optics
|
|
|
Contract
Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
12,635,000
|
|
|
$
|
9,858,000
|
|
|
$
|
-
|
|
|
$
|
22,493,000
|
|
Gross profit
|
|
|
4,318,000
|
|
|
|
3,724,000
|
|
|
|
-
|
|
|
|
8,042,000
|
|
GM %
|
|
|
34
|
%
|
|
|
38
|
%
|
|
|
-
|
|
|
|
36
|
%
|
SG&A
|
|
|
3,634,000
|
|
|
|
3,506,000
|
|
|
|
703,000
|
|
|
|
7,843,000
|
|
Gain on sale of assets
|
|
|
4,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000
|
|
Operating income (loss)
|
|
|
688,000
|
|
|
|
218,000
|
|
|
|
(703,000
|
)
|
|
|
203,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
454,000
|
|
|
|
164,000
|
|
|
|
34,000
|
|
|
|
652,000
|
|
Capital expenditures
|
|
|
894,000
|
|
|
|
37,000
|
|
|
|
51,000
|
|
|
|
982,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
608,000
|
|
|
|
247,000
|
|
|
|
301,000
|
|
|
|
1,156,000
|
|
Goodwill
|
|
|
1,109,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
6,048,000
|
|
Total assets
|
|
$
|
17,653,000
|
|
|
$
|
8,502,000
|
|
|
$
|
571,000
|
|
|
$
|
26,726,000
|
|
Customer Financial Information
For the three and six months ended March
31, 2017, no customer in the Optics segment represented more than 10% of the total segment revenue. For the three and six months
ended March 31, 2016, one customer in the Optics segment represented more than 10% of the total segment revenue.
For the three and six months ended March
31, 2017, three 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 and six months ended March 31, 2016, three 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 months ended March 31, 2017 and 2016, these customers made up 59% and 57%, respectively, of Contract Research
revenue. For the six months ended March 31, 2017 and 2016, these customers made up 60% and 77%, 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 March 31, 2017 and 2016 are as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Geographic Location
|
|
Revenue
|
|
|
% of Total
|
|
|
Revenue
|
|
|
% of Total
|
|
United States
|
|
$
|
7,931,000
|
|
|
|
79
|
%
|
|
$
|
8,226,000
|
|
|
|
73
|
%
|
Europe
|
|
|
1,212,000
|
|
|
|
12
|
%
|
|
|
2,452,000
|
|
|
|
22
|
%
|
Other
|
|
|
942,000
|
|
|
|
9
|
%
|
|
|
618,000
|
|
|
|
5
|
%
|
|
|
$
|
10,085,000
|
|
|
|
100
|
%
|
|
$
|
11,296,000
|
|
|
|
100
|
%
|
Revenue by geographic location in total
and as a percentage of total revenue, for the six months ended March 31, 2016 and 2015 are as follows:
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
Geographic Location
|
|
Revenue
|
|
|
% of Total
|
|
|
Revenue
|
|
|
% of Total
|
|
United States
|
|
$
|
15,120,000
|
|
|
|
79
|
%
|
|
$
|
16,455,000
|
|
|
|
73
|
%
|
Europe
|
|
|
2,299,000
|
|
|
|
12
|
%
|
|
|
4,493,000
|
|
|
|
20
|
%
|
Other
|
|
|
1,809,000
|
|
|
|
9
|
%
|
|
|
1,545,000
|
|
|
|
7
|
%
|
|
|
$
|
19,228,000
|
|
|
|
100
|
%
|
|
$
|
22,493,000
|
|
|
|
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 will no longer be included in Dynasil’s federal consolidated tax return and will file a
separate federal return. Xcede will continue 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 will 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 been reversed resulting in an income tax benefit
in the amount of $2.7 million during the six months ended March 31, 2017. 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.
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 March 31, 2017 and September 30, 2016, 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 March 31, 2017 and September 30, 2016, 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 (148%) and
(92%) for the three months ended March 31, 2017 and 2016, respectively. The results for the six months ended March 31, 2017
resulted in an overall effective rate of 6,995% mainly driven by the tax benefit of $2.7 million recorded for the release of the
valuation allowance. The effective tax rates excluding the impact of the valuation allowance were (437%) and 101% for the six months
ended March 31, 2017 and 2016, respectively. The rates differ from the U.S. federal statutory income tax rate of 34% primarily
due to a full valuation allowance against certain U.S. deferred tax assets of the Company.
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.
Note 12 – Subsequent Events
The Company has evaluated subsequent events
through the date the financial statements were released.