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, 2018, the consolidated statements of operations and comprehensive income (loss) for the three and six months ended
March 31, 2018 and 2017, changes in stockholders’ equity for the six months ended March 31, 2018 and cash flows for the six
months ended March 31, 2018 and 2017 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, 2018, Dynasil Biomedical owned 63% of Xcede’s stock and, as a result, Xcede is included in the
Company’s consolidated balance sheets, results of operations and cash flows. The remaining 37% of Xcede’s stock is
owned by others and is accounted for under the rules applicable to non-controlling interest. Certain prior year balances have been
reclassified to conform to the current year presentation. These reclassifications did not affect previously reported net income
or stockholders’ equity. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items)
necessary to present fairly the Company’s financial position, results of operations and cash flows in conformity with generally
accepted accounting principles for the periods presented have been made. Interim operating results are not necessarily indicative
of operating results for a full year.
The preparation of our unaudited consolidated
financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. Certain information and note disclosures normally included
in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed
or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto
included in the Company's September 30, 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 March 31, 2018, 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 was 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 six month period ended March 31, 2018, 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 Financial Accounting Standards Board (“FASB”)
issued ASU 2014-09,
Revenue from Contracts with Customers
, as a new Topic, Accounting Standards Codification (“ASC”)
Topic 606. The new revenue recognition standard relates to revenue from contracts with customers, which, along with
amendments issued in 2015 and 2016, will supersede nearly all current U.S. GAAP guidance on this topic and eliminate industry-specific
guidance. The underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods
or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those
goods or services. 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.
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 and 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 will 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, all of which has been invested as of March 31, 2018, 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 March 31, 2018, the liquidation value of
the Series B Preferred would be approximately $1.4 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, 2018, DBM owned approximately
63% of Xcede’s outstanding Common Stock and Preferred Stock and, as a result, Xcede is included in the Company’s consolidated
balance sheets, results of operations and cash flows. Due to the Series A Preferred having a liquidation preference and therefore
not representing a residual interest, cumulative net losses of Xcede are attributed only to common stockholders in accordance with
common stock ownership. Noncontrolling interest represents the value of the Series A Preferred and common stock not owned by DBM
plus 17% of cumulative losses of Xcede based on the 17% common stock ownership held by noncontrolling interests.
Due to the issuance of Preferred Stock, DBM’s
ownership percentage in Xcede decreased to less than 80%. Based on this ownership percentage, beginning in fiscal year 2017, Xcede
is no longer included in the Dynasil consolidated federal tax return and the Company is no longer able to offset taxable income
or benefit from net operating losses and other tax attributes related to Xcede. (See Note 11 – Income Taxes.)
As previously disclosed, in 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 trial 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 $37,000 and $167,000 of research and development expense recognized during the three months ended
March 31, 2018 and 2017, respectively. There was approximately $200,000 and $205,000 recognized during the six months ended March
31, 2018 and 2017, respectively.
Note 4 - Inventories
Inventories, net of reserves, consists of the following:
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Raw Materials
|
|
$
|
2,607,000
|
|
|
$
|
2,540,000
|
|
Work-in-Process
|
|
|
1,080,000
|
|
|
|
798,000
|
|
Finished Goods
|
|
|
951,000
|
|
|
|
988,000
|
|
|
|
$
|
4,638,000
|
|
|
$
|
4,326,000
|
|
Note 5 – Intangible Assets
Intangible assets at March 31, 2018 and September 30, 2017 consist
of the following:
|
|
Useful
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
March 31, 2018
|
|
Life (years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Acquired Customer Base
|
|
5 to 15
|
|
$
|
768,000
|
|
|
$
|
607,000
|
|
|
$
|
161,000
|
|
Know How
|
|
15
|
|
|
512,000
|
|
|
|
333,000
|
|
|
|
179,000
|
|
Trade Names
|
|
Indefinite
|
|
|
293,000
|
|
|
|
-
|
|
|
|
293,000
|
|
Patents
|
|
20
|
|
|
378,000
|
|
|
|
14,000
|
|
|
|
364,000
|
|
Biomedical Technologies
|
|
5
|
|
|
260,000
|
|
|
|
260,000
|
|
|
|
-
|
|
|
|
|
|
$
|
2,211,000
|
|
|
$
|
1,214,000
|
|
|
$
|
997,000
|
|
|
|
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
March 31, 2018 and 2017 was $28,000 and $26,000, respectively. Amortization expense for the six months ended March 31, 2018 and
2017 was $56,000 and $52,000, respectively.
Estimated amortization expense for each of the next five fiscal
years and thereafter is as follows:
|
|
2018 (6 months)
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Thereafter
|
|
|
Total
|
|
Acquired Customer Base
|
|
$
|
40,000
|
|
|
$
|
80,000
|
|
|
$
|
41,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
161,000
|
|
Know How
|
|
|
17,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
26,000
|
|
|
|
179,000
|
|
Patents
|
|
|
6,000
|
|
|
|
11,000
|
|
|
|
11,000
|
|
|
|
11,000
|
|
|
|
11,000
|
|
|
|
162,000
|
|
|
|
212,000
|
|
|
|
$
|
63,000
|
|
|
$
|
125,000
|
|
|
$
|
86,000
|
|
|
$
|
45,000
|
|
|
$
|
45,000
|
|
|
$
|
188,000
|
|
|
$
|
552,000
|
|
As of March 31, 2018, Xcede had $152,000 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 six months ended March 31, 2018.
Note 6 – Goodwill
Goodwill is subject to an annual impairment
test. The Company considers many factors which may indicate the requirement to perform additional, interim impairment tests. These
include:
|
·
|
A
significant adverse long term outlook for any of its industries;
|
|
·
|
An adverse finding or rejection from a
regulatory body involved in new product regulatory approvals;
|
|
·
|
Failure of an anticipated commercialization
of a product or product line;
|
|
·
|
Unanticipated competition or the introduction
of a disruptive technology;
|
|
·
|
The testing for recoverability under the Impairment or Disposal of
Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit;
|
|
·
|
A loss of key personnel; and
|
|
·
|
An expectation that a reporting unit carrying goodwill, or a significant
portion of a reporting unit, will be sold or otherwise disposed of.
|
There were no changes, aside from foreign exchange
rate fluctuations, in the carrying value of goodwill, during the six months ended March 31, 2018.
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 purposes of computing diluted earnings
per share for the three and six months ended March 31, 2018 and 2017, no common stock options were included in the calculation
of dilutive shares as all of the 160,537 and 196,769 common stock options outstanding, respectively, had exercise prices above
the applicable period’s average market price per share and their inclusion would be anti-dilutive. For the three and six
months ended March 31, 2018 and 2017, 40,000 and 70,000 shares of restricted common stock, respectively, were excluded from the
calculation of dilutive shares, as the effect of their inclusion would be anti-dilutive. Additionally, for the three months ended
March 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.
The computation of the weighted shares outstanding for the three
months ended March 31, 2018 and 2017 is as follows:
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,133,468
|
|
|
|
16,886,628
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
Restricted Stock
|
|
|
-
|
|
|
|
-
|
|
Dilutive Average Shares Outstanding
|
|
|
17,133,468
|
|
|
|
16,886,628
|
|
The computation of the weighted shares outstanding for the six months
ended March 31, 2018 and 2017 is as follows:
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,090,530
|
|
|
|
16,847,679
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
Restricted Stock
|
|
|
-
|
|
|
|
-
|
|
Dilutive Average Shares Outstanding
|
|
|
17,090,530
|
|
|
|
16,847,679
|
|
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 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, 2018 and 2017 is as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Stock Grants
|
|
$
|
92,000
|
|
|
$
|
84,000
|
|
Restricted Stock Grants
|
|
|
13,000
|
|
|
|
13,000
|
|
Option Grants
|
|
|
4,000
|
|
|
|
13,000
|
|
Employee Stock Purchase Plan
|
|
|
1,000
|
|
|
|
1,000
|
|
Subsidiary Option Grants
|
|
|
28,000
|
|
|
|
28,000
|
|
Total
|
|
$
|
138,000
|
|
|
$
|
139,000
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Stock Grants
|
|
$
|
130,000
|
|
|
$
|
123,000
|
|
Restricted Stock Grants
|
|
|
26,000
|
|
|
|
26,000
|
|
Option Grants
|
|
|
17,000
|
|
|
|
25,000
|
|
Employee Stock Purchase Plan
|
|
|
1,000
|
|
|
|
1,000
|
|
Subsidiary Option Grants
|
|
|
56,000
|
|
|
|
52,000
|
|
Total
|
|
$
|
230,000
|
|
|
$
|
227,000
|
|
At March 31, 2018, there was approximately
$58,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period
of approximately seven months.
Restricted Stock Grants
A summary of restricted stock activity for
the six months ended March 31, 2018 is presented below:
Restricted Stock Activity for the Six Months ended
March 31, 2018
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Nonvested at September 30, 2017
|
|
|
70,000
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(30,000
|
)
|
|
|
1.73
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Nonvested and expected to vest at March 31, 2018
|
|
|
40,000
|
|
|
$
|
1.73
|
|
Stock Option Grants
During the six months ended March 31, 2018,
no Dynasil stock options were granted. A summary of stock option activity for the six months ended March 31, 2018 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
|
|
|
(36,232
|
)
|
|
|
1.82
|
|
|
|
|
|
Balance at March 31, 2018
|
|
|
160,537
|
|
|
$
|
2.01
|
|
|
|
1.43
|
|
Outstanding and exercisable at March 31, 2018
|
|
|
160,537
|
|
|
$
|
2.01
|
|
|
|
1.43
|
|
Subsidiary Stock Option Grants
During the three months ended March 31, 2018,
no Xcede stock options were granted. A summary of Xcede stock option activity for the six months ended March 31, 2018 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 March 31, 2018
|
|
|
1,375,956
|
|
|
|
1.00
|
|
|
|
8.18
|
|
Outstanding and exercisable at March 31, 2018
|
|
|
1,116,036
|
|
|
$
|
1.00
|
|
|
|
7.91
|
|
At March 31, 2018, the Company’s Xcede
joint venture had approximately $97,000 of unrecognized stock compensation expense associated with stock options expected to be
recognized over a weighted average period of eight 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 March 31, 2018 and 2017 is summarized below:
Results of Operations for the
Three Months Ended March 31,
2018
|
|
Optics
|
|
|
Contract
Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
5,910,000
|
|
|
$
|
4,345,000
|
|
|
$
|
-
|
|
|
$
|
10,255,000
|
|
Gross profit
|
|
|
2,050,000
|
|
|
|
1,895,000
|
|
|
|
-
|
|
|
|
3,945,000
|
|
GM %
|
|
|
35
|
%
|
|
|
44
|
%
|
|
|
-
|
|
|
|
38
|
%
|
Operating expenses
|
|
|
1,858,000
|
|
|
|
1,813,000
|
|
|
|
194,000
|
|
|
|
3,865,000
|
|
Operating income (loss)
|
|
|
192,000
|
|
|
|
82,000
|
|
|
|
(194,000
|
)
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
247,000
|
|
|
|
61,000
|
|
|
|
3,000
|
|
|
|
311,000
|
|
Capital expenditures
|
|
|
339,000
|
|
|
|
58,000
|
|
|
|
29,000
|
|
|
|
426,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
455,000
|
|
|
|
179,000
|
|
|
|
363,000
|
|
|
|
997,000
|
|
Goodwill
|
|
|
1,070,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
6,009,000
|
|
Total assets
|
|
$
|
20,903,000
|
|
|
$
|
8,028,000
|
|
|
$
|
586,000
|
|
|
$
|
29,517,000
|
|
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
|
%
|
Operating expenses
|
|
|
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
|
|
The Company’s segment information
for the six months ended March 31, 2018 and 2017 is summarized below:
Results of Operations for the Six Months Ended March 31,
|
2018
|
|
|
Optics
|
|
|
Contract
Research
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
10,853,000
|
|
|
$
|
8,590,000
|
|
|
$
|
-
|
|
|
$
|
19,443,000
|
|
Gross profit
|
|
|
3,740,000
|
|
|
|
3,745,000
|
|
|
|
-
|
|
|
|
7,485,000
|
|
GM %
|
|
|
34
|
%
|
|
|
44
|
%
|
|
|
-
|
|
|
|
38
|
%
|
Operating expenses
|
|
|
3,433,000
|
|
|
|
3,537,000
|
|
|
|
639,000
|
|
|
|
7,609,000
|
|
Operating income (loss)
|
|
|
307,000
|
|
|
|
208,000
|
|
|
|
(639,000
|
)
|
|
|
(124,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
477,000
|
|
|
|
126,000
|
|
|
|
7,000
|
|
|
|
610,000
|
|
Capital expenditures
|
|
|
928,000
|
|
|
|
77,000
|
|
|
|
45,000
|
|
|
|
1,050,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
455,000
|
|
|
|
179,000
|
|
|
|
363,000
|
|
|
|
997,000
|
|
Goodwill
|
|
|
1,070,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
6,009,000
|
|
Total assets
|
|
$
|
20,903,000
|
|
|
$
|
8,028,000
|
|
|
$
|
586,000
|
|
|
$
|
29,517,000
|
|
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
|
%
|
Operating expenses
|
|
|
2,924,000
|
|
|
|
3,542,000
|
|
|
|
773,000
|
|
|
|
7,239,000
|
|
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
|
|
Customer Financial Information
For both the three and six months ended
March 31, 2018 and 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, 2018, 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 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 months
ended March 31, 2018 and 2017, these customers made up 72% and 59%, respectively, of Contract Research revenue. For the six months
ended March 31, 2018 and 2017, these customers made up 70% and 60%, 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, 2018 and 2017 are as follows:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Geographic Location
|
|
Revenue
|
|
|
% of Total
|
|
|
Revenue
|
|
|
% of Total
|
|
United States
|
|
$
|
8,129,000
|
|
|
|
79
|
%
|
|
$
|
7,931,000
|
|
|
|
79
|
%
|
Europe
|
|
|
1,365,000
|
|
|
|
13
|
%
|
|
|
1,212,000
|
|
|
|
12
|
%
|
Other
|
|
|
761,000
|
|
|
|
8
|
%
|
|
|
942,000
|
|
|
|
9
|
%
|
|
|
$
|
10,255,000
|
|
|
|
100
|
%
|
|
$
|
10,085,000
|
|
|
|
100
|
%
|
Revenue by geographic location in total
and as a percentage of total revenue, for the six months ended March 31, 2018 and 2017 are as follows:
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Geographic Location
|
|
Revenue
|
|
|
% of Total
|
|
|
Revenue
|
|
|
% of Total
|
|
United States
|
|
$
|
15,481,000
|
|
|
|
80
|
%
|
|
$
|
15,120,000
|
|
|
|
79
|
%
|
Europe
|
|
|
2,633,000
|
|
|
|
13
|
%
|
|
|
2,299,000
|
|
|
|
12
|
%
|
Other
|
|
|
1,329,000
|
|
|
|
7
|
%
|
|
|
1,809,000
|
|
|
|
9
|
%
|
|
|
$
|
19,443,000
|
|
|
|
100
|
%
|
|
$
|
19,228,000
|
|
|
|
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 was 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 March 31, 2018 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 March 31, 2018 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 March 31, 2018, 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 is reviewing and will continue to review its accounting of the tax effects
of the Tax Act through the end of the fiscal year.
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, which 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 $0.2 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.
There are Research and Experimentation tax credits available
at both the federal and state levels resulting from the PATH Act of 2015 (“PATH 2015 R&E Tax Credit”). These credits
are designed to encourage and reward companies for efforts in areas of research and experimentation. In March 2018, the Company
has reasonably completed a study encompassing all business activities and contracts in these areas for the years 2012 through 2016.
As a result, the Company is estimating it will have net tax credits of approximately $1.3 million on its federal income tax returns
for the years ended September 30, 2012, 2013, 2014, 2015 and 2016. The Company is in the process of reviewing its state tax credits
and will have those results completed and additional credits determined by year end for the same time periods.
The effective tax rates were (3,586%) and
(148%) for the three months ended March 31, 2018 and 2017, respectively. The effective tax rates were 281% and 6,995% for
the six months ended March 31, 2018 and 2017, respectively. The results for both six month periods ended March 31, 2018 and 2017
had significant events which resulted in an extreme variation in tax rates. The effective tax rate for the six months ended, March
31, 2018 was primarily driven by the recently signed 2017 Tax Act, as well as the R&E tax credit study completed in the second
quarter of fiscal year 2018. The effective tax rate for the six months ended March 31, 2017 was primarily 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 six months ended March 31, 2018.
The effective tax rates excluding the impact of the 2017 Tax Act, the R&E tax credit and the valuation allowance were (43%)
and (437%) for the six months ended March 31, 2018 and 2017, respectively.
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 2014 are still subject to examination.
Note 12 – Subsequent Events
The Company has evaluated subsequent events
through the date the financial statements were released.