UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______.
Commission file number 000-27503
____________________
DYNASIL CORPORATION OF AMERICA
- -------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New Jersey 22-1734088
-------------- -------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
385 Cooper Road, West Berlin, New Jersey, 08091
----------------------------------------------------------
(Address of principal executive offices)
(856) 767-4600
--------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days)
Yes XX No
---- ----
The Company had 6,114,718 shares of common stock, par value
$.0005 per share, outstanding as of May 7, 2007.
1
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
INDEX
PAGE
PART 1. FINANCIAL INFORMATION
- ----
ITEM 1. FINANCIAL STATEMENTS
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2007
AND SEPTEMBER 30, 2006 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED MARCH 31, 2007 AND 2006 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS ENDED MARCH 31, 2007 AND 2006 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 11
ITEM 3. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION 15
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS ON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31 September 30
2007 2006
(Unaudited)
---------- ----------
Current assets
Cash and cash equivalents $ 259,559 $ 352,139
Accounts receivable, net of allowance for doubtful
accounts of $34,167 and $12,530 for March 31,
2007 and September 30, 2006, respectively 1,474,833 1,086,394
Inventories 1,417,054 1,131,648
Deferred tax asset 87,400 61,500
Prepaid expenses and other current assets 187,180 128,957
---------- ----------
Total current assets 3,426,026 2,760,638
Property, Plant and Equipment, net 2,374,227 626,790
Other Assets 87,687 78,812
---------- ----------
Total Assets $5,887,940 $3,466,240
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to bank- Line of credit $407,251 $190,000
Current portion - long term debt 98,906 72,482
Accounts payable 436,590 390,110
Accrued expenses 551,451 368,977
---------- ----------
Total current liabilities 1,494,198 1,021,569
Long-term Debt, net 1,594,095 593,889
Stockholders' Equity
Common Stock, $.0005 par value, 25,000,000 shares
authorized, 6,923,183 and 4,698,453 shares issued,
6,113,023 and 3,888,293 shares outstanding 3,462 2,350
Preferred Stock, $.001 par value, 10,000,000 Shares 710 700
authorized, -0- and 700,000 Series A shares and
710,000 and -0- shares Series B shares issued and
outstanding for March 31, 2007 and September 30,
2006 respectively, 10% cumulative, convertible
Additional paid in capital 2,978,802 2,100,098
Retained earnings 803,015 733,976
---------- ----------
3,785,989 2,837,124
Less 810,160 shares in treasury - at cost (986,342) (986,342)
---------- ----------
Total stockholders' equity 2,799,647 1,850,782
---------- ----------
Total Liabilities and Stockholders' Equity $5,887,940 $3,466,240
========== ==========
3
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
March 31 March 31
2007 2006 2007 2006
---------- --------- ---------- ---------
Sales $3,003,216 $1,665,496 $5,539,512 $3,213,536
Cost of Sales 2,144,767 1,072,295 4,028,630 2,142,192
---------- --------- ---------- ---------
858,449 593,201 1,510,882 1,071,344
Selling, general and administrative 715,962 486,640 1,321,429 913,298
---------- --------- ---------- ---------
Income from Operations 142,487 106,561 189,453 158,046
Interest expense - net (18,672) (18,709) (33,670) (39,244)
---------- --------- ---------- ---------
Income before Income Taxes 123,815 87,852 155,783 118,802
Income Tax (11,586) (5,971) (20,655) (11,496)
---------- --------- ---------- ---------
Net income $112,229 $81,881 $135,128 $107,306
========== ========= ========== =========
Net income per share
Basic $0.02 $0.02 $0.02 $0.02
Diluted $0.02 $0.01 $0.01 $0.01
Weighted average shares outstanding 4,943,093 3,846,542 4,599,067 3,807,660
4
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months Ended
March 31,
2007 2006
----------- -----------
Cash flows from operating activities:
Net income $ 135,128 $ 107,306
Adjustments to reconcile net income
to net cash provided by (used in)operating activities:
Depreciation 165,392 102,000
Amortization expense 7,806 13,602
Gain on disposal of assets -0- (2,000)
Stock based compensation 11,366 -0-
Allowance for doubtful accounts 21,637 10,998
(Increase) decrease in:
Accounts receivable (127,501) 36,576
Inventories (210,195) (166,334)
Prepaid expenses and other current asset (19,065) (14,772)
Increase (decrease) in:
Accounts payable and accrued expenses (250,803) 82,789
--------- ----------
Net cash provided by (used in) operating activities (266,235) 170,165
--------- ----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (123,206) (56,968)
Proceeds from sale of assets -0- 2,000
Cash paid for acquisition of EMF (674,890) -0-
--------- ----------
Net cash used in investing activities (798,096) (54,968)
--------- ----------
Cash flows from financing activities:
Issuance of common stock 168,461 41,270
Issuance of preferred stock 700,000 -0-
Payments on long-term debt (47,778) (68,562)
Proceeds from refinanced long-term debt 174,816 457
Payments on short-term debt (227,278) -0-
Proceeds from short-term debt 251,870 -0-
Deferred financing costs incurred -0- (41,464)
Preferred stock dividends paid (48,340) (35,000)
--------- ----------
Net cash provided by (used in) financing activities 971,751 (103,299)
--------- ----------
Net increase (decrease) in cash (92,580) 11,898
Cash - beginning of period 352,139 308,210
--------- ----------
Cash - end of period $ 259,559 $ 320,108
========== ===========
Supplemental Disclosure of cash flow information:
Non-cash investing and financing activities:
Acquisition of EMF Corporation on October 2, 2006
Fair market value of current assets acquired $ 468,300
Property, plant and equipment 1,789,621
Fair market value of liabilities assumed (1,063,031)
Total cost of acquisition 1,194,890
Debt incurred to pay seller (520,000)
----------
Net Cash paid for EMF Corporation $ 674,890
5
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)(Continued)
2007 2006
Reconciliation of debt refinancing activities:
Proceeds of new loans for New Jersey operations $ -0- $449,346
Repayment of old New Jersey Term Loan -0- 448,889
------ -------
Net Proceeds of refinancing activity $ -0- $ 457
Preferred stock dividends declared $66,090 $35,000
Less dividends payable at March 31 (17,750) $ -0-
------ -------
Net cash paid for dividends $48,340 $35,000
To partially fund the acquisition of Evaporated Metal Films
Corporation ("EMF"), the Company issued 710,000 shares of
preferred stock, valued at $1.00 per share, incurred stock
issuance costs of $10,000 and received net proceeds of $700,000.
On October 2, 2006, concurrently with the acquisition of EMF
Corporation, EMF borrowed $1,050,000, which amount was
guaranteed by the Company. The proceeds were used as follows:
1) repayment of assumed liabilities of $338,161 at closing, 2)
payment of the balance due the seller of $520,000 directly by
the bank at closing, 3) payment of transaction costs of $17,023
at closing, and 4) the remaining balance of $174,816 was used
for working capital purposes.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The consolidated balance sheet as of September 30, 2006 was
audited and appears in the Form 10-KSB previously filed by the
Company. The consolidated balance sheet as of March 31, 2007
and the consolidated statements of operations and cash flows for
the three and six months ended March 31, 2007 and 2006, and the
related information contained in these notes have been prepared
by management without audit. In the opinion of management, all
adjustments (which include only normal recurring items)
necessary to present fairly the financial position, results of
operations and cash flows in conformity with generally accepted
accounting principles as of March 31, 2007 and for all periods
presented have been made. Interim operating results are not
necessarily indicative of operating results for a full year.
On October 2, 2006, Dynasil acquired 100% of the stock of
Evaporated Metal Films Corporation ("EMF") of Ithaca, NY. EMF
provides optical thin-film coatings for a broad range of
application markets including display systems, optical
instruments, satellite communications and lighting. EMF
provides products and services to optics markets which are
related to those served by Dynasil. Dynasil's financial
statements at March 31, 2007 include the EMF results of
operations since October 2, 2006.
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. It is suggested that these condensed
consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in the
Company's September 30, 2006 Annual Report on Form 10-KSB
previously filed by the Company with the Securities and Exchange
Commission.
6
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 2 - Business Acquisition
On October 2, 2006, the Company completed its acquisition
of all of the outstanding capital stock of EMF in a transaction
accounted for as a purchase. Total cost of the acquisition was
$1,194,890 of which $1.1 million was paid to the seller, and
$94,890 represented acquisition costs incurred. From the
proceeds of the issuance of 710,000 shares of Preferred Stock,
Dynasil paid $580,000 in cash to the seller, incurred stock
issuance costs of $10,000 and incurred acquisition related costs
of approximately $94,890. Also on October 2, 2006, in a
concurrent bank transaction, EMF borrowed $1,050,000 of which
$338,161 was used to retire assumed EMF debt, $520,000 was paid
directly to the seller at settlement, $17,023 was used to pay
transaction costs and the remaining funds of $174,816 were used
for working capital purposes. The total purchase price of
approximately $1,194,890 has been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed
on the basis of their estimated fair values. The results of
operations of EMF have been included in the consolidated
financial statements from October 2, 2006, the effective date of
acquisition. The allocation of purchase price is summarized
below:
Purchase price:
Total consideration to seller $1,100,000
Acquisition costs incurred $ 94,890
---------
Total purchase price $1,194,890
=========
Purchase price allocation:
Cash and cash equivalents $ 45,457
Accounts receivable 282,575
Inventories 75,211
Prepaid expenses and other current assets 65,057
Property and equipment 1,789,621
Current liabilities assumed ( 443,158)
Other liabilities assumed ( 74,227)
Debt assumed ( 545,646)
---------
Net fair value of assets acquired $1,194,890
=========
The following is the proforma financial information of the
Company for the six months ended March 31, 2006 assuming the
transaction had been consummated at the beginning of the fiscal
year ended September 30, 2006:
For the six
Months ended
March 31, 2006
(Unaudited)
Statement of Operations:
Revenues $4,638,960
Cost of Sales 3,137,224
---------
Gross Profit 1,501,736
Operating Expenses 1,293,609
---------
Income from Operations 208,127
Interest Expense 54,033
---------
Income before taxes 154,094
Provision for income taxes 11,496
---------
Net Income $142,598
=========
7
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Earnings per Share:
Basic $ 0.02
Diluted $ 0.02
Note 3 - Debt
On October 2, 2006, in conjunction with the EMF acquisition, EMF
entered into Mortgage Note and Line of Credit Note Agreements
with Tompkins Trust Company ("TTC") which were guaranteed by
Dynasil. The guaranteed loans include (a) a $1,050,000
principal amount commercial mortgage (the "mortgage") and (b) a
$215,000 principal amount line of credit facility (the "line of
credit"). Proceeds of the mortgage were used to repay certain
EMF debts, to pay for part of the acquisition of EMF and for
working capital purposes. Proceeds of the line of credit will be
used for general corporate purposes. The applicable borrowing
documents were entered into at arms-length between EMF and
Dynasil, on the one hand, and TTC, on the other hand, on
commercial lending terms and conditions, including acceleration
rights, events of default, TTC's rights and remedies and similar
provisions that Dynasil believes are customary for commercial
loans of this sort. In connection with the loan transactions,
EMF and Dynasil executed and delivered to TTC customary forms of
notes, mortgage, security agreement, assignment of leases and
rents, and similar documents. The mortgage provides for
repayment over a 20 year period at a fixed annual interest rate
of 7.80% for the first 5 years, reset to a fixed annual interest
rate of 2.80 percentage points over
the Federal Home Loan Bank of New York Advance Rate for five-
year maturities at five year intervals. The term loan is
secured by a first mortgage on EMF's real estate, equipment, and
fixtures, as well as Dynasil's guarantee. The line of credit
has a term running until December 22, 2010 and carries an annual
interest rate of one-half percent over The Wall Street Journal
Prime Rate of interest, which is adjusted monthly. It is secured
by EMF's real estate, equipment and fixtures, as well as
Dynasil's guarantee.
Note 4 - Convertible Preferred Stock
On October 2, 2006, the Company sold 710,000 shares of a Series
B 10% Cumulative Convertible Preferred Stock in a private
placement. The stock was sold at a price of $1.00 per share.
Total expenses for the stock placement were $10,000. No
underwriting discounts or commissions were paid in connection
with the sale. Each share of preferred stock carries a 10% per
annum dividend and is convertible to 1.33 shares of common stock
at any time by the holders and is callable after two years by
Dynasil at a redemption price of $1.00 per share. Proceeds of
the preferred stock sale were primarily used to acquire the
capital stock of EMF and for related acquisition costs.
On March 9, 2007, the company issued an aggregate of 1,555,540
shares of its
Common Stock, $.0005 par value per share, as a result of the
exercise of the conversion rights by holders of 700,000 shares
of Dynasil's Series A 10% Cumulative Convertible Preferred Stock
(the "Series A Preferred Shares"). Dynasil had previously called
all of the Series A Preferred Shares for redemption on March 9,
2007. All of the shares of the Series A Preferred Shares that
were called for redemption were converted to shares of common
stock.
Note 5 - Inventories
Inventories are stated at the lower of average cost or
market. Cost is determined using the first-in, first-out (FIFO)
method. Inventories consist primarily of raw materials, work-in-
process and finished goods. The Company evaluates inventory
levels and expected usage on a periodic basis and records
adjustments for impairments as required.
8
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventories consisted of the following:
March 31, 2006 September 30, 2006
----------------- ------------------
Raw Materials $852,620 $600,451
Work-in-Process 298,636 259,425
Finished Goods 265,798 271,772
------- -------
$1,417,054 $1,131,648
======= =======
Note 6 - Net Income Per Share
Basic net income per share is computed using the weighted
average number of common shares outstanding. The dilutive
effects of potential common shares outstanding are included in
diluted net earnings per share.
Note 7 - Stock Based Compensation
Prior to October 1, 2006, the Company accounted for stock
options issued under the Plan under the recognition and
measurements provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, as
permitted by FASB Statement No. 123, Accounting FOR stock Based
Compensation ("SFAS No. 123").
Effective October 1, 2006, the Company adopted the fair
value recognition provisions of FASB Statement No. 123 (revised
2004), "Share-Based Payment", ("SFAS 123(R)") which requires the
measurement and recognition of compensation expense for all
stock-based payments awards made to employees and directors,
including employee stock options, based on estimated fair
values. We had previously applied Accounting Principles Board
Opinion No. 25, "Account for Stock Issued Employees," ("APB 25")
and related Interpretations and provided the required pro forma
disclosures of State of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation ("SFAS 123") which was
superceded by SFAS 123(R). The Company has also applied the
provisions of Staff Accounting Bulletin No. 107 ("SAB 107") in
the adoption of SFAS 123(R).
We elected to adopt the modified prospective application
transition method as provided by SFAS 123(R). In accordance
with the modified prospective transition method, consolidated
financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R). Under
that transition method, compensation cost recognized in the six
months ended March 31, 2007 includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as
of March 31, 2007, based on the grant date fair value estimated
in accordance with the original provisions of Statement 123, and
(b) compensation cost for all share-based payments granted
subsequent to October 1, 2005, based on the grant-dated fair
value estimated in accordance with the provisions of Statement
123(R).
The fair value of stock options granted was estimated at
the date of grant using the Black-Scholes options pricing model.
The Company used the following assumptions for determining the
fair value of options granted under Black-Scholes option pricing
model:
March 31
2007 2006
Expected term in years 3 years 5 years
Risk-free interest rate 4.82% 4.60%
Expected volatility 20.42% 16.00%
Expected dividend yield 0.00% 0.00%
9
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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.
During the six months ended March 31, 2007, 100,000 stock
options were granted at prices ranging from $1.66 to $2.00 per
share and 80,000 options were exercised. 20,000 of the granted
stock options can not be exercised until 1/2/08 and therefore
the stock-based compensation expense will be recognized at that
time if they become exercisable. The 80,000 options exercised
had an exercise price of $0.40 per share with $32,000 paid in
cash.
For six months ended March 31, 2007, total stock-based
compensation charged to operations for option-based arrangements
amounted to $11,366. At March 31, 2007, there was approximately
$9,620 of total unrecognized compensation expense related to non-
exercisable option-based compensation arrangements under the
Plan.
During the six months ended March 31, 2006, 130,000 stock
options were granted at prices ranging from $0.85 to $1.50 per
share and 80,000 options were exercised. The 80,000 options
exercised had an exercise price of $0.40 per share with $23,857
paid in cash and $8,143 relating to Mr. Dunham's 2005 fiscal
year bonus.
The company cancelled -0- and 90,000 options during the
six months ended March 31, 2007 and 2006, respectively.
Compensation expense relating to non-employee stock options
granted during the six months ended March 31, 2007 and 2006 were
$-0-.
The pro forma disclosures of net income and net income per
share for the six months ended March 31, 2006, as permitted by
SFAS 123(R), are presented below:
Six months ended
March 31, 2006
-----------
Net income, as reported $107,306
Add: Stock-based employee
compensation expense included
in reported net income -0-
Less: Total stock-based employee
compensation expense determined
under fair value based method
for all options (4,636)
-----------
Pro forma net profit (loss) $102,670
===========
Actual net profit (loss)
per common share $ 0.02
Pro forma net profit (loss)
per common share $ 0.02
10
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Overview
This is the second quarter of results after Dynasil
Corporation of America ("Dynasil", the "Company" or "we")
acquired 100% of the stock of Evaporated Metal Films Corporation
("EMF") in Ithaca, NY on October 2, 2006. EMF provides optical
thin-film coatings for a broad range of application markets
including display systems, optical instruments, satellite
communications and lighting. EMF provides products and services
to optics markets which are related to those served by Dynasil's
historical operations. The Dynasil financial statements include
the EMF results from October 2, 2006 through March 31, 2007.
The results from time periods previous to October 2, 2006 do not
include EMF except for pro forma financial information for the
six months ended March 31, 2006.
Revenues for the second quarter of fiscal year 2007 which
ended March 31, 2007 were $3,003,216, an increase of 80.3% over
revenues of $1,665,496 for the quarter ended March 31, 2006.
Revenues for the six months ended March 31, 2007 were
$5,539,512, an increase of 72% over revenues of $3,213,536 for
the six months ended March 31, 2006. Net income for the quarter
ended March 31, 2007 was $112,229 or $0.02 per share, compared
with a net income of $81,881,or $0.02 per share, for the quarter
ended March 31, 2006. Net income for the six months ended March
31, 2007 was $135,128 or $0.02 per share, compared with a net
income of $107,306 or $0.02 per share for the six months ended
March 31, 2006. Excluding the impact of the EMF acquisition and
$11,366 of stock option expense, for the three months ended
March 31, 2007 revenues for our historical businesses were up
39% and net income was up 208%, from $81,881 to $251,941,
compared to the three months ended March 31, 2006. Excluding the
impact of the EMF acquisition and $11,366 of stock option
expense, for the six months ended March 31, 2007 revenues for
our historical businesses were up 31% and net income was up 256%
compared to the six months ended March 31, 2006. Strong revenue
growth combined with continued process improvements drove those
significant gains. As anticipated, transitional and process
improvement costs resulted in a loss at EMF for its second
quarter with Dynasil. The EMF loss offset the outstanding
improvements in our historical businesses. Management is
clearly focused on the EMF improvements required to show
continued improvement in 2007 and to deliver profitable results
for fiscal year 2008. During quarter 2, we significantly
improved manufacturing yields and reduced production downtime as
we develop the disciplined processes required for EMF to
consistently execute with excellent quality, service, and cost
performance. March 2007 profitability results for EMF were
slightly better than break-even.
Results of Operations
Revenues for the three months ended March 31, 2007 were
$3,003,216, an increase of 80.3% over revenues of $1,665,496 for
the quarter ended March 31, 2006. The revenue increase came
from 39% organic growth in our historical businesses as well as
the addition of EMF. Revenues for the six months ended March 31,
2007 were $5,539,512, an increase of 72% over revenues of
$3,213,536 for the six months ended March 31, 2006.
Cost of sales for the three months ended March 31, 2007 was
$2,144,767 or 71.4% of sales, an increase of 7.1 percentage
points from the three months ended March 31, 2006 of $1,072,295,
or 64.3% of sales. Cost of sales for the six months ended March
31, 2007 was $4,028,630 or 72.7% of sales, an increase of 6.1
percentage points from the six months ended March 31, 2006 of
$2,142,192, or 66.6% of sales. The higher cost of sales
resulted primarily from EMF costs.
11
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The cost of sales for our historical businesses actually
improved by 0.8 percentage points. The Company continues to
implement cost reductions such as manufacturing yield
improvements.
Gross profit for the three months ended March 31, 2007 was
$858,449, or 28.5% of sales, an increase of $265,248 over the
three months ended March 31, 2006 of $593,201, or 35.6% of
sales. Gross profit for the six months ended March 31, 2007 was
$1,510,882, or 28.6% of sales, an increase of $439,538 over the
six months ended March 31, 2006 of $1,071,344 or 33.4% of sales.
Operational improvements at EMF are key to increasing our gross
profit in the future.
Selling, general and administrative ("SG&A") expenses for
the three months ended March 31, 2007 were $715,962 or 23.8% of
sales, a decrease of 5.4 percentage points from the three months
ended March 31, 2006 of $486,640 or 29.2% of sales. SG&A
expenses for the six months ended March 31, 2007 were $1,321,429
or 23.9% of sales, a decrease of 4.6 percentage points from the
six months ended March 31, 2006 of $913,298 or 28.4% of sales.
The changes in SG&A expenses and percentages resulted primarily
from the impact of the acquisition of EMF.
Net interest expense for the three months ended March 31,
2007 was $18,672, compared to $18,709 for the three months ended
March 31, 2006. Net interest expense for the six months ended
March 31, 2007 was $33,670 compared to $39,244 for the six
months ended March 31, 2006. There is additional EMF interest
expense of $40,994 that is allocated to cost of goods sold and
SG&A expense so in total, net interest expense was $74,664 which
is an increase of $35,420 for the six month period. The increase
in combined interest expense is primarily related to the
additional interest payments resulting from the indebtedness
incurred in connection with the EMF acquisition.
Net income for the three months ended March 31, 2007 was
$112,229 or $0.02 in basic earnings per share, which is up
$30,348 versus net income for the three months ended March 31,
2006 of $81,881 or $.02 in basic profit per share. Net income
for the six months ended March 31, 2007 was $135,128 or $0.02
per share, compared with a net income of $107,306 or $0.02 per
share for the six months ended March 31, 2006. Organic revenue
growth of 39% in our historical businesses along with continued
process improvements drove a 208% net income increase for our
historical businesses in quarter 2. Losses at EMF offset this
improvement and we have a strong focus at EMF to improve our
processes and deliver profitability.
The Company had a $11,586 provision for Massachusetts
income taxes for the quarter ended March 31, 2007 and a $5,971
provision for the quarter ended March 31, 2006. The Company had
a $20,136 provision for Massachusetts income taxes for the six
months ended March 31, 2007 and a $11,496 provision for the six
months ended March 31, 2006. As of September 30, 2006, the
Company had approximately $900,000 of net operating loss carry
forwards to offset future income for federal tax purposes
expiring in various years through 2021. In addition, the Company
had approximately $550,000 of net operating loss carryforwards
to offset certain future New Jersey taxable income, expiring in
various years through 2013.
Liquidity and Capital Resources
Cash decreased by $92,580 for the six months ended March
31, 2007. The primary sources of cash were net income of
$135,128, depreciation and amortization expenses that aggregated
$173,198, net borrowings of $221,613, the issuance of common
stock of $168,461 and issuance of preferred stock of $700,000.
The primary uses of cash were acquisition of property, plant and
12
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
equipment of $123,206, accounts receivable increase of $127,501,
an inventory increase of $210,195, reductions in accounts
payable and accrued expenses of $250,803, dividend payments of
$48,340 on Preferred Stock and the acquisition of EMF of
$674,890. The increase in inventory was a result of purchasing
fused silica raw material that was previously provided as
consignment inventory by our primary supplier as well. The
reduction in accounts payable and accrued expense came from the
timing of accounts payable expenses as well as a reduction in
accrued expenses and accounts payable at EMF.
The Company believes that its current cash and cash
equivalent balances, along with the net cash generated by
operations and credit lines, are sufficient to meet its
anticipated cash needs for working capital for at least the next
12 months. There are currently no plans for any major capital
expenditures in the next six to nine months. Any major business
expansions or acquisitions likely will require the Company to
seek additional debt and/or equity financing.
Critical Accounting Policies and Estimates
There have been no material changes in our critical
accounting policies or critical accounting estimates since
September 30, 2006. Except for the adoption of SFAS 123(R), we
have not adopted an accounting policy that has or will have a
material impact on our consolidated financial statements. For
further discussion of our accounting policies see Footnote 1
"Summary of Significant Accounting Policies" in the Notes to
Consolidated Financial Statements in our Annual Report on Form
10-KSB for the fiscal year ended September 30, 2006.
The accounting policies that reflect our more significant
estimates, judgments and assumptions and which we believe are
the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
Revenue Recognition
Revenue from sales of products is recognized at the time
title and the risks and rewards of ownership pass. This is when
the products are shipped per customers' instructions, the sales
price is fixed and determinable, and collections are reasonably
assured.
Valuation of Long-Lived Assets
We assess the recoverability of long-lived assets whenever
we determine that events or changes in circumstances indicate
that their carrying amount may not be recoverable. Our
assessment is primarily based upon our estimate of future cash
flows associated with these assets. These valuations contain
certain assumptions concerning estimated future revenues and
future expenses. We have determined that there is no indication
of impairment of any of our assets. However, should our
operating results deteriorate, we may determine that a portion
of our long-lived assets is impaired. Such a determination could
result in non-cash charges to income that could materially and
adversely affect the Company's financial position or results of
operations for that period.
Estimating Allowances for Doubtful Accounts Receivable
We perform ongoing credit evaluations of our customers and
adjust credit limits based upon payment history and the
customer's current credit worthiness, as determined by our
review of their current credit information. We continuously
monitor collections and payments from our customers and maintain
a provision for estimated credit losses based upon our
historical experience and any specific customer collection
issues that we have identified. While such credit losses have
historically been minimal, within our expectations and the
provisions
13
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
established, we cannot guarantee that we will continue to
experience the same credit loss rates that we have in the past.
A significant change in the liquidity or financial position of
any of our significant customers could have a material adverse
effect on the collectibility of our accounts receivable and our
future operating results.
Valuation of Deferred Tax Assets
We regularly evaluate our ability to recover the reported
amount of our deferred income taxes considering several factors,
including our estimate of the likelihood of the Company
generating sufficient taxable income in future years during the
period over which temporary differences reverse. Based on the
Company's history of significant fluctuations in net earnings,
the Company established a full valuation allowance as of
September 30, 2004 and prior due to the uncertainty as to the
realization of certain net operating loss carryforwards. With
the asset acquisition from Optometrics LLC in March 2005, the
Company now believes that some of these carryforwards will be
realized, and has adjusted the valuation allowance accordingly
as outlined in the Company's Annual Report on Form 10-KSB for
the fiscal year ended September 30, 2006.
Stock-Based Compensation
Effective October 1, 2006, we adopted SFAS 123(R),
"Accounting for Stock Based Compensation." As a result,
compensation costs are now recognized for stock options granted
to employees and directors. Options and warrants granted to
employees and non-employees are recorded as an expense at the
date of grant based on the then estimated fair value of the
security in question, determined using the Black Scholes option
pricing model.
Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115" (SFAS
159). SFAS No. 159 permits entities to choose to measure
eligible items at fair value at specified election dates and
report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent
reporting date. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes
for similar types of assets and liabilities. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007.
We are currently evaluating the impact of the provisions of
SFAS 159 on our results of operations and financial position.
Forward-Looking Statements
The statements contained in this Quarterly Report on Form
10-QSB which
are not historical facts, including, but not limited to, certain
statements found under the captions "Overview", "Results of
Operations" and "Liquidity and Capital Resources" above, are
forward-looking statements that involve a number of risks and
uncertainties. The actual results of the future events described
in such forward-looking statements could differ materially from
those stated in
14
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
such forward-looking statements. Among the factors that could
cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report on Form 10-QSB,
including, without limitation, the portions of such reports
under the captions referenced above, and the uncertainties set
forth from time to time described in this and the Company's
other filings with the Securities and Exchange Commission, and
other public statements. Such risks and uncertainties include,
without limitation, seasonality, interest in the Company's
products, customer acceptance of new products, general economic
conditions, market trends, costs and availability of raw
materials and management information systems, competition,
litigation, need for additional financing, the effect of
governmental regulation and other matters. The Company disclaims
any intention or obligation to update any forward-looking
statements, whether as a result of new information, future
events or otherwise.
ITEM 3 CONTROLS AND PROCEDURES
As required by Rule 13a-15(e) under the Exchange Act, our
Chief Executive Officer and Chief Financial Officer have
evaluated our disclosure controls and procedures as of the end
of the period covered by the report and have determined that
such disclosure controls and procedures are effective.
There has been no change in our internal control over
financial reporting in connection with this evaluation that
occurred during our last fiscal quarter that materially
affected, or it is reasonably likely to materially affect, our
internal control over financial reporting.
PART II
OTHER INFORMATION
- ------------------
ITEM 1 LEGAL PROCEEDINGS
On April 24, 2007, the Company was dismissed as a
defendant from a previously reported wrongful death and loss of
consortium action entitled Torrero v. Alcoa, Inc., et al in the
Los Angeles (CA) Superior Court. The dismissal did not require
the expenditure of any funds by the Company. On August 30,
2004, the Company had been served with a Summons and Complaint
in that action which had been filed on August 19, 2004. In the
case, the plaintiffs, Lucy Torrero and Juan Pedrosa Torrero,
alleged that glass blanks manufactured and sold by the Company,
along with the products or tools made and sold by approximately
twenty other defendants including General Electric, ALCOA,
Corning Incorporated and Raytheon, caused plaintiff Lucy Torrero
to develop lung cancer and other injuries during her employment
as an optical lens grinder and laborer by companies that
purchased or used those products or tools. The plaintiffs sought
compensatory and punitive damages aggregating approximately
$31,500,000. The lawsuit was refiled as a wrongful death suit
following the death of Lucy Torrero on April 11, 2006. As
previously reported, the Company referred the matter to its
commercial general liability insurance carriers which defended
the Company under reservations of rights.
The Company has no other pending legal proceedings.
15
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
ITEM 2 CHANGES IN SECURITIES
On March 9, 2007, the company issued an aggregate of
1,555,540 shares of its Common Stock, $.0005 par value per
share, as a result of the exercise of the conversion rights by
holders of 700,000 shares of Dynasil's Series A 10% Cumulative
Convertible Preferred Stock (the "Series A Preferred Shares").
Dynasil had previously called all of the Series A Preferred
Shares for redemption on March 9, 2007. All of the Series A
Preferred Shares that had been called for redemption were
converted to common stock.
ITEM 3 DEFAULTS ON SENIOR SECURITIES
NONE
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 OTHER INFORMATION
The information presented in Items 1 and 2 of Part I of this
Report is incorporated herein by reference. On May 14, 2007, the
Company issued a press release announcing its financial results
for its second quarter ending March 31, 2007. A copy of this
press release is attached as Exhibit 99 to this Report on Form
10-QSB. This information is being furnished pursuant to Item 5
of Part II of Form 10-QSB and shall not be deemed to be "filed"
for the purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or otherwise subject to
the liabilities of that Section, nor shall it be deemed
incorporated by reference in any filing under the Securities Act
of 1933, as amended, or the Exchange Act, except as shall be
expressly set forth by specific reference in such a filing.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and index of Exhibits
31.1(a) and (b) Rule 13a-14(a)/15d-14(a) Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Section 1350 Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished but not filed for
purposes of the Securities Exchange Act of 1934)
99.1 Press release, dated May 14, 2007, issued by Dynasil
Corporation of America announcing its financial results for
the second quarter ending March 31, 2007.
(b) Reports on Form 8-K
- On 3/12/07, a current report on Form 8-K Items 3.02 and
8.01 for the conversion of the Series A Convertible Preferred
Stock to common stock.
16
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DYNASIL CORPORATION OF AMERICA
BY: /s/ Craig T. Dunham DATED: May 14, 2007
--------------------------------- --------------------
Craig T. Dunham,
President and CEO
/s/ Laura Lunardo DATED: May 14, 2007
----------------------------- --------------------
Laura Lunardo
Chief Financial Officer
17