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 December 31, 2017, the consolidated statements of operations and comprehensive income (loss) for the three months
ended December 31, 2017 and 2016, changes in stockholders’ equity for the three months ended December 31, 2017 and cash
flows for the three months ended December 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 December 31, 2017, Dynasil Biomedical
owned 62% 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% 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, 2017 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 December 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
Effective October 1, 2017,
the Company adopted 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 several amendments
that will simplify the accounting for employee share-based payment transactions, including 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 and the Company will
recognize forfeitures of awards as they occur. The adoption of the ASU had no impact on the retained earnings, other components
of equity or net assets 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.
Effective October 1, 2017, the Company
adopted 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 maker of a VIE should treat indirect interests in the entity held through related parties that are under common control
with the reporting entity when determining whether it is the primary beneficiary of that VIE. The adoption of this ASU did not
have an 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 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 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. 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:
|
•
|
Identify the contract(s) with a customer;
|
|
•
|
Identify each performance obligation in the contract;
|
|
•
|
Determine the transaction price;
|
|
•
|
Allocate the transaction price to each performance obligation; and
|
|
•
|
Recognize revenue when or as each performance obligation is satisfied.
|
The Company is currently evaluating how
the adoption 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.
In May 2017, the FASB issued ASU No. 2017-09 which was issued to clarify
and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, “Compensation
– Stock Compensation” to changes in the terms and conditions of a share-based payment award. 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 beginning October 1, 2018. The Company is currently in the process of assessing the impact of this ASU
on its consolidated financial statements.
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
adoption of this standard is not expected to have a material impact on the Company’s financial statements.
Service Concession Arrangements (Topic
853): Determining the Customer of the Operation Services.
In May 2017, the FASB issued ASU 2017-10 which provides guidance
for operating entities when they enter into a service concession arrangement with a public-sector grantor. The ASU becomes effective
for the Company at 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). The Company is currently in the process of assessing the impact of this
ASU on its consolidated financial statements.
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 with the intention to adopt this ASU in fiscal year 2020.
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.
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 issued
Staff
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.
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, 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, 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 December 31, 2017, the liquidation value
of the Series B Preferred would be approximately $1.1 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 December 31, 2017, DBM owned approximately
62% 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 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 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 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.
Note 4 – Inventories
Inventories, net of reserves, consists of the following:
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2017
|
|
Raw Materials
|
|
$
|
2,647,000
|
|
|
$
|
2,540,000
|
|
Work-in-Process
|
|
|
806,000
|
|
|
|
798,000
|
|
Finished Goods
|
|
|
1,038,000
|
|
|
|
988,000
|
|
|
|
$
|
4,491,000
|
|
|
$
|
4,326,000
|
|
Note 5 – Intangible Assets
Intangible assets at December 31, 2017 and September 30, 2017
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
|
|
Amortization expense for the three months ended December 31,
2017 and 2016 was $28,000 and $26,000, respectively.
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.
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 three months ended December 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;
|
|
·
|
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 months ended December 31, 2017.
Note 7 – Debt
Subordinated Debt
On January 3, 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. Such amendment also increased the interest rate of the
note from six percent (6%) to seven percent (7%) per annum.
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 months ended December 31,
2017, 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 123,147 common stock options outstanding had exercise prices above the applicable quarterly average market price
per share and their inclusion would be anti-dilutive.
For the three months ended December 31,
2016, 90,000 shares of restricted common stock were excluded from the calculation of dilutive shares, as the effect of their inclusion
would be anti-dilutive.
The computation of the weighted shares outstanding for the three
months ended December 31, 2017 and 2016 is as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,047,690
|
|
|
|
16,808,729
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
-
|
|
|
|
-
|
|
Restricted stock
|
|
|
-
|
|
|
|
-
|
|
Dilutive average shares outstanding
|
|
|
17,047,690
|
|
|
|
16,808,729
|
|
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 months ended December
31, 2017 and 2016 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
|
|
At December 31, 2017, there was approximately
$75,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period
of approximately eight months.
Restricted Stock Grants
A summary of restricted stock activity
for the three months ended December 31, 2017 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
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
Vested
|
|
|
(10,000
|
)
|
|
$
|
1.70
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Nonvested and expected to vest at December 31, 2017
|
|
|
60,000
|
|
|
$
|
1.73
|
|
Stock Option Grants
During the three months ended December
31, 2017, no Dynasil stock options were granted. A summary of stock option activity for the three months ended December 31, 2017
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
|
|
Subsidiary Stock Option Grants
During the three months ended December
31, 2017, no Xcede stock options were granted. A summary of Xcede stock option activity for the three months ended December 31,
2017 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
|
|
At December 31, 2017, the Company’s
Xcede joint venture had approximately $125,000 of unrecognized stock compensation expense associated with stock options expected
to be recognized over a weighted average period of nine 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
(“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 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 December 31, 2017 and 2016 is summarized below:
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
|
|
Customer Financial Information
For both the three months ended December
31, 2017 and 2016, no customer in the Optics segment represented more than 10% of the total segment revenue.
For the three months ended December 31,
2017, 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 December 31, 2016, 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.
Geographic Financial Information
Revenue by geographic location in total
and as a percentage of total revenue, for the three months ended December 31, 2017 and 2016 are as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Geographic Location
|
|
Revenue
|
|
|
% of Total
|
|
|
Revenue
|
|
|
% of Total
|
|
United States
|
|
$
|
7,353,000
|
|
|
|
80
|
%
|
|
$
|
7,189,000
|
|
|
|
79
|
%
|
Europe
|
|
|
1,268,000
|
|
|
|
14
|
%
|
|
|
1,086,000
|
|
|
|
12
|
%
|
Other
|
|
|
568,000
|
|
|
|
6
|
%
|
|
|
868,000
|
|
|
|
9
|
%
|
|
|
$
|
9,189,000
|
|
|
|
100
|
%
|
|
$
|
9,143,000
|
|
|
|
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 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.
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 December 31, 2017 and September 30, 2017, 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 December 31, 2017 and September 30, 2017, 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 Tax Cuts and
Jobs Act (the “Tax Act”) was signed into law. The Tax Act, which is effective on December 22, 2017, significantly
revises 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, the Company has not completed its accounting for the
tax effects of the 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.
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 million related to such re-measurement in the first quarter of fiscal 2018.
It is still analyzing certain aspects of the Tax Act and refining its calculations during the measurement period.
The one-time transition tax is based on
the total unremitted earnings of the Company’s foreign subsidiary, Hilger, that has previously been deferred from U.S. income
taxes. The Company recorded a provisional amount for its one-time transition liability of its foreign subsidiary resulting
in additional income tax expense of $0.1 million in the first quarter of fiscal 2018. The Company has not yet completed its
calculation of 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 when the Company finalizes the calculation of Hilger’s
total unremitted earnings previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified
assets.
The effective tax rates were
(309%) and 679% for the three months ended December 31, 2017 and 2016, respectively. The results for both three month
periods ended December 31, 2017 and 2016 had significant events which resulted in an extreme variation in tax rates. The
effective tax rate for the three months ended, December 31, 2017 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. The effective tax rate
excluding the impact of the 2017 Tax Act was (16%) for the three months ended December 31, 2017. The effective tax rate
excluding the impact of the valuation allowance was (25%) for the three months ended December 31, 2016.
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
On January 3, 2018, the Company amended
the Note Purchase Agreement with Massachusetts Capital Resource Company. (See Note 7 – Debt.)
The Company has evaluated subsequent events
through the date the financial statements were released.