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 JUNE 30, 2008
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)
Delaware 22-1734088
-------------- -------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
385 Cooper Road, West Berlin, New Jersey, 08091
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(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 11,332,689 shares of common stock, par value
$.0005 per share, outstanding as of August 1, 2008.
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 JUNE 30, 2008
AND SEPTEMBER 30, 2007 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED JUNE 30, 2008 AND 2007 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED JUNE 30, 2008 AND 2007 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
ITEM 3. CONTROLS AND PROCEDURES 14
PART II. OTHER INFORMATION 14
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS ON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30 September 30
2008 2007
(Unaudited)
---------- ----------
Current assets
Cash and cash equivalents $ 371,904 $ 496,948
Accounts receivable, net of
allowance for doubtful
accounts of $76,290 and
$98,863 and sales returns of
$27,903 and $30,790 for
June 30, 2008 and
September 30, 2007, respectively 1,317,830 1,284,844
Inventories 2,036,849 1,832,720
Deferred tax asset 216,100 216,100
Prepaid expenses and other
current assets 207,409 130,548
---------- ----------
Total current assets 4,150,092 3,961,160
Property, Plant and Equipment, net 2,603,608 2,436,517
Other Assets 232,374 88,698
---------- ----------
Total Assets $6,986,074 $6,486,375
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to bank -
Line of credit $560,070 $311,870
Current portion - long term debt 167,119 99,237
Accounts payable 496,109 684,208
Accrued expenses 571,260 587,872
---------- ----------
Total current liabilities 1,794,558 1,683,187
Long-term Debt, net 1,463,362 1,626,980
Stockholders' Equity
Common Stock, $.0005 par value,
25,000,000 shares authorized,
7,558,667 and 6,926,683 shares
issued, 6,748,507 and 6,116,523
shares outstanding 3,779 3,464
Preferred Stock, $.001 par value,
10,000,000 shares authorized,
710,000 and 710,000 shares Series B
shares issued and outstanding
for June 30, 2008 and September 30,
2007 respectively, 10% cumulative,
convertible 710 710
Additional paid in capital 3,199,682 2,983,980
Retained earnings 1,510,325 1,174,396
---------- ----------
4,714,496 4,162,550
Less 810,160 shares in treasury -
at cost (986,342) (986,342)
---------- ----------
Total stockholders' equity 3,728,154 3,176,208
---------- ----------
Total Liabilities and
Stockholders' Equity $6,986,074 $6,486,375
========== ==========
3
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30 June 30
2008 2007 2008 2007
---------- --------- ---------- ----------
Net sales $2,676,263 $2,584,519 $8,537,144 $8,124,031
Cost of sales 1,891,753 1,776,432 5,867,317 5,785,706
---------- --------- ---------- ----------
Gross profit 784,510 808,087 2,669,827 2,338,325
Selling, general and administrative 678,736 660,459 2,131,366 1,960,250
expenses
---------- --------- ---------- ----------
Income from operations 105,774 147,628 538,461 378,075
Interest expense - net 39,191 39,551 114,774 114,215
---------- --------- ---------- ----------
Income before income taxes 66,583 108,077 423,687 263,860
Income taxes 13,581 9,973 34,421 30,629
---------- --------- ---------- ----------
Net income $ 53,002 $ 98,104 $ 389,266 $ 233,231
========== ========= ========== ==========
Net income per share
Basic $0.01 $0.02 $0.05 $0.03
Diluted $0.00 $0.01 $0.05 $0.03
Weighted average shares outstanding 6,743,853 6,114,679 6,559,629 5,104,271
4
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30
2008 2007
---------- -----------
Cash flows from operating activities:
Net income $ 389,266 $ 233,231
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 275,814 253,656
Amortization expense 12,222 12,222
Allowance for doubtful accounts and sales returns (25,461) 7,463
Stock based compensation 42,420 11,366
(Increase) decrease in:
Accounts receivable (2,993) 98,366
Inventories (204,129) (386,033)
Prepaid expenses and other
current assets (72,342) (56,670)
Decrease in:
Accounts payable and accrued expenses (204,705) (159,107)
---------- -----------
Net cash from operating activities 210,092 14,494
---------- -----------
Cash flows from investing activities:
Acquisition of property, plant and equipment (192,904) (293,773)
Cash paid for acquisition of EMF -0- (674,890)
Cash paid for acquisition of POC (250,000) -0-
Acquisition costs (164,953) -0-
---------- -----------
Net cash used in investing activities (607,857) (968,663)
---------- -----------
Cash flows from financing activities:
Issuance of common stock 173,507 170,590
Issuance of preferred stock -0- 700,000
Payments on long-term debt (95,736) (72,361)
Proceeds from refinanced long term-debt -0- 174,816
Proceeds from short-term debt 250,000 212,910
Payments on short-term debt (1,800) (227,277)
Preferred stock dividends paid (53,250) (66,092)
---------- -----------
Net cash provided by financing activities 272,721 892,586
---------- -----------
Net decrease in cash (125,044) (61,583)
Cash - beginning of period 496,948 352,139
---------- -----------
Cash - end of period $ 371,904 $ 290,556
========== ===========
Supplemental Disclosure of cash flow information
Non-cash investing and financing activities:
Preferred stock dividends declared $53,250 $83,842
Less dividends payable at June 30 -0- (17,750)
Net cash paid for dividends $53,250 $66,092
========== ===========
Acquisition of EMF Corporation
Fair market value of current assets acquired - $468,300
Property, plant & 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The consolidated balance sheet as of September 30, 2007 was
audited and appears in the Form 10-KSB previously filed by the
Company. The consolidated balance sheet as of June 30, 2008 and
the consolidated statements of operations for the three and nine
months ended June 30, 2008 and 2007 and cash flows for the nine
months ended June 30, 2008 and 2007, 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 June 30, 2008 and for all periods presented
have been made. Interim operating results are not necessarily
indicative of operating results for a full year.
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, 2007 Annual Report on Form 10-KSB
previously filed by the Company with the Securities and Exchange
Commission.
Certain items in the 2007 statement of operations have been
restated to conform with the 2008 financial statement
presentation.
Note 2 - Business Acquisition
On January 18, 2008, the company, through its wholly owned
subsidiary Optometrics Corporation, entered into an Asset
Purchase Agreement with Precision Optics Corporation, Inc., a
Massachusetts corporation and manufacturer of optical products.
Pursuant to the agreement, the Company acquired certain
equipment used to create optical filters, certain inventory,
intellectual property and a customer list for a cash purchase
price of $250,000. The asset purchase was recorded under the
purchase method of accounting which requires the total
consideration be allocated to the assets acquired and
liabilities assumed based on their fair values. The total
purchase price of $250,000 was allocated to fair value of the
equipment. In addition, for a period of three years after the
closing, the Company agreed to pay Precision Optics Corporation,
Inc. a royalty of 25% of revenues from products sold to those
customers on the customer list to the extent such revenues
exceed $300,000 during a calendar year. The financial
statements in this report include the results of operations from
the asset purchase from January 18, 2008 through June 30, 2008,
but do not reflect the results of operations from or the other
effects of the transaction reported under Note 7 - Subsequent
Event below.
Note 3 - Debt
On December 13, 2007, Dynasil's available line of credit
with Susquehanna Bank was increased from $200,000 to $475,000.
The interest rate was reduced to Susquehanna Bank's prime rate.
All other terms remained unchanged. However, this information
does not reflect the transaction reported under Note 7 -
Subsequent Event below.
6
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4 - 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.
Inventories consisted of the following:
June 30, 2008 September 30, 2007
----------------- ------------------
Raw Materials $1,203,361 $1,145,249
Work-in-Process 314,087 336,203
Finished Goods 519,401 351,268
------- ---------
$2,036,849 $1,832,720
========= =========
Note 5 - 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 6 - Stock Based Compensation
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 the most recent
grant for determining the fair value of options granted under
the Black-Scholes option pricing model:
Expected term in years 5 years
Risk-free interest rate 4.76%
Expected volatility 29.61%
Expected dividend yield 0.00%
The expected volatility was determined with reference to
the historical volatility of the Company's stock. 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 three months ended June 30, 2008, 120,000 stock
options were granted at prices of $2.89 to $3.08 per share and -
0- options were exercised. For three months ended June 30, 2008,
total stock-based compensation charged to operations for option-
based arrangements amounted to $32,800 for options granted
during the quarter which are exercisable. During the nine
months ended June 30, 2008, 170,000 stock options were granted
at prices of $2.00 to $3.08 per share and -0- options were
exercised. For nine months ended June 30, 2008, total stock-
based compensation charged to operations for option-based
arrangements amounted to $42,420 for options granted during the
period which are exercisable or have become exercisable during
the period. 30,000 of the granted stock options in the quarter
ending June 30, 2008 cannot be exercised until 2010 and
therefore stock-based compensation expense totaling $9,702 will
be recognized at that time if they become exercisable. At June
30, 2008, there was approximately $11,120 of total unrecognized
compensation expense related to non-exercisable option-based
compensation arrangements
7
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
under the Plan. The Company cancelled -0- options during the
nine months ended June 30, 2008. Compensation expense relating
to non-employee or Director stock options granted during the
nine months ended June 30, 2008 was $32,800.
Note 7 - Subsequent Event
On July 1, 2008, Dynasil acquired certain assets of RMD
Instruments, LLC and the outstanding stock of Radiation
Monitoring Devices, Inc. (together, "RMD"). In order to provide
financing for this acquisition, Dynasil completed a $10 million
bank financing with Susquehanna Bank DV, issued 4.6 million
shares of common stock and sold shares of Series C 10%
Cumulative Convertible Preferred Stock. In addition, Dynasil
entered into former owner work continuation agreements with two
former owners of the acquired businesses and entered into five
year leases for the space currently occupied by the businesses
being acquired. See the Management's Discussion and Analysis
section and Dynasil's report on form 8-K filed on July 7, 2008
for additional details.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
Overview
Dynasil Corporation of America ("Dynasil", the "Company" or
"we") revenues for the third quarter of fiscal year 2008 which
ended June 30, 2008, were $2,676,263, an increase of 3.5% over
revenues for the quarter ended June 30, 2007. Net income for
the quarter ended June 30, 2008 was $53,002 or $0.01 per share,
a decrease of 46% over net income of $98,104 or $0.02 per share,
for the quarter ended June 30, 2007. Through three quarters,
year to date performance shows a 5.1% increase in revenues to
approximately $8.5 million and a 67% increase in net profit to
$389,266 versus the prior year. Third quarter profits were
impacted by staffing costs and other expenses in support of the
large RMD acquisition. The Company also experienced weaker than
expected quarterly results in its optical materials business
unit. Consummation of the RMD acquisition, including obtaining
needed financing and recruiting additional personnel, consumed
the bulk of corporate management's attention during the quarter.
Improved execution and a turnaround in the Company's EMF optical
coatings unit is the largest contributor for the significant
year to date profitability improvement.
On July 1, 2008, Dynasil acquired the stock of Radiation
Monitoring Devices, Inc. and specific assets of RMD Instruments,
LLC (together, "RMD") which are advanced instruments companies
located in Watertown, MA. The purchase price totaled
approximately $20 million. RMD revenues for the twelve months
ended June 30, 2008 were approximately $22.5 million.
Preliminary, unaudited RMD profit for the twelve months ended
June 30, 2008 was approximately $3 million. Management expects
the addition of RMD to be a transformational event for Dynasil
as we expect to more than triple our revenues and profits while
our shares outstanding only approximately double, which would
make the acquisition immediately accretive to earnings. With the
addition of RMD, Dynasil has grown from an unprofitable $2
million of revenues for fiscal year 2004 to revenues expected to
exceed $35 million for fiscal year 2009 with strong
profitability. Over this period, Dynasil's stock price has
moved from $0.07 per share to around $2.30 to $2.50 per share.
RMD brings a track record of solid profitability and cash flow.
RMD also brings some exciting products as well as extensive
technological capability that are expected to drive our future
growth by providing commercial products in areas like medical
imaging and sensors for homeland security. We continue to
execute our strategy of profitable growth through organic growth
and acquisitions.
8
DYNASIL CORPORATION OF AMERICA
Results of Operations
Revenues for the three months ended June 30, 2008 were
$2,676,263, an increase of 3.5% over revenues of $2,584,519 for
the quarter ended June 30, 2007. Revenues for the nine months
ended June 30, 2008 were $8,537,144, an increase of 5.1% over
revenues of $8,124,031 for the nine months ended June 30, 2007.
The revenue increases came from organic growth and the Precision
Optics acquisition. Year to date revenues for our optical
coatings business are up 11% and our optical components business
is up 21%. We are managing our New Jersey optical materials
business to maximize cash and revenues are down 13% year to
date, with the largest impact coming from the loss of a high
volume, low margin business which was expected to occur as well
as a slowdown in that market.
Cost of sales for the three months ended June 30, 2008 was
$1,891,753 or 70.6% of sales, an increase of 1.9 percentage
points from the three months ended June 30, 2007 of $1,776,432,
or 68.7% of sales. The largest driver for the cost of sales
increase was the lower than expected sales volume and elevated
material costs for the optical materials business where we have
taken steps to reduce costs. Cost of sales for the nine months
ended June 30, 2008 was $5,867,317 or 68.7% of sales, a decrease
of 2.5 percentage points from the nine months ended June 30,
2007 of $5,785,706, or 71.2% of sales. The largest driver in
the cost of sales improvement year to date was productivity
improvements at EMF.
Gross profit for the three months ended June 30, 2008, was
$784,510 or 29.4% of sales, a decrease of $23,577 over the three
months ended June 30, 2007 of $808,087, or 31.3% of sales. Gross
profit for the nine months ended June 30, 2008, was $2,669,827,
or 31.3% of sales, an increase of $331,502 over the nine months
ended June 30, 2007 of $2,338,325, or 28.8% of sales.
Operational improvements at EMF were the largest driver of year
to date gross margin improvement.
Selling, general and administrative ("SG&A") expenses for
the three months ended June 30, 2008, were $678,736 or 25.3% of
sales, a decrease of 0.2 percentage points from the three months
ended June 30, 2007 of $660,459 or 25.5% of sales. SG&A expenses
for the nine months ended June 30, 2008, were $2,131,366 or
24.9% of sales, an increase of 0.8 percentage points from the
nine months ended June 30, 2007 of $1,960,250 or 24.1% of sales.
The changes in SG&A expenses resulted primarily from the
addition of staffing to prepare for the RMD acquisition and
Sarbanes Oxley section 404 implementation costs. In order to
prepare for the RMD acquisition, we hired Mr. Eugene Talerico
during June 2008 as Corporate Controller and welcomed Mr. Peter
Sulick as our fourth Director, Financial Expert, and Audit
Committee Chairman which resulted in $32,800 of associated stock
option expenses.
Net interest expense for the three months ended June 30,
2008, was $39,191, compared to $39,551 for the three months
ended June 30 2007. Net interest expense for the nine months
ended June 30, 2008, was $114,774, compared to $114,215 for the
three months ended June 30 2007.
Net income for the three months ended June 30, 2008, was
$53,002 or $0.01 in basic earnings per share, which is down 46%
from net income for the three months ended June 30, 2007, of
$98,104, or $0.02 in basic profit per share. Costs to add
staffing in preparation for the RMD acquisition as well as
weaker than expected results in our optical materials business
were the primary profit drivers. Net income for the nine months
ended June 30, 2008, was $389,266 or $0.05 in basic earnings per
share, which is up 67% from net income for the nine months ended
June 30, 2007, of $233,231, or $0.03 in basic profit per share.
The turn-around of EMF results was the largest factor for the
large net income increase.
9
DYNASIL CORPORATION OF AMERICA
The Company had a $13,581 provision for income taxes for
the quarter ended June 30, 2008, and a $9,973 provision for the
quarter ended June 30, 2007. The Company had a $34,421 provision
for income taxes for the nine months ended June 30, 2008, and a
$30,629 provision for the nine months ended June 30, 2007. The
income taxes were primarily for Massachusetts. As of September
30, 2007, the Company had approximately $674,200 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 $585,800 of net
operating loss carry forwards to offset certain future New
Jersey taxable income, expiring in various years through 2013.
Liquidity and Capital Resources
Cash decreased by $125,044 for the nine months ended June
30, 2008. The primary sources of cash were net income of
$389,266, depreciation and amortization expenses that aggregated
$288,036, net borrowings of $152,464, and the issuance of common
stock of $173,507. The primary uses of cash were acquisition of
property, plant and equipment of $192,904, acquisition of
Precision Optics assets of $250,000, increases in inventories of
$204,129, RMD acquisition costs of $164,953 and decreases in
accounts payable and accrued expenses of $204,705.
The Company is in the process of seeking to raise an
additional $700,000 or more of financing from the sale of series
C 10% cumulative convertible preferred stock for working capital
purposes. The Company believes that its current cash and cash
equivalent balances, along with the net cash generated by
operations and credit lines, will be 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, greater than $100,000, 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.
Acquisitions
The acquisition of RMD on July 1, 2008 is expected to be
transformational for Dynasil. The purchase price totaled
approximately $20 million, comprised of cash payments of $12.5
million and the issuance of 4.6 million shares of Dynasil common
stock. In order to finance the acquisition, Dynasil completed a
$9 million bank term loan at a 6% annual interest rate and
issued approximately $5 million of 10% Cumulative Convertible
Preferred Stock that is convertible into Dynasil common stock at
a $2.50 per share price. Management has left the Preferred
Stock offering open to raise additional working capital and
current commitments are approximately $5.3 million versus a
target of at least $6 million. Management expects that RMD will
more than triple our revenues and profits while our shares
outstanding only approximately double, which would make the
acquisition immediately accretive to earnings. It also brings
us some exciting products and extensive technological capability
that we expect will drive our future growth.
RMD is comprised of two business entities, one of which
performs research under government contracts such as SBIRs while
the other manufactures and sells photonics related instruments
and components. RMD revenues for the twelve months ended June
30, 2008 were approximately $22.5 million. Preliminary,
unaudited RMD profit for the twelve months ended June 30, 2008
was approximately $3 million. RMD's commercial products, which
management believes to have high growth potential, are sold into
the medical imaging, environmental sensing and quality control
markets. These products include hand-held x-ray fluorescence
analyzers for lead paint and RoHS "green" compliance; medical
probes for cancer surgery that can dramatically reduce the
number of lymph nodes removed for biopsy; a camera that
integrates a visual picture with radioactive material
10
DYNASIL CORPORATION OF AMERICA
detection for Homeland Security and nuclear waste cleanup
applications; avalanche photodiodes for applications including
medical imaging; and very high performance scintilator imaging
screens for digital radiography. More than 30% of 2007
commercial revenues came from after-sales maintenance and
support of instruments which provides an ongoing, profitable
revenue stream from the installed base of RMD instruments.
RMD has a total staff of about 100 employees that includes
38 Ph.Ds as part of a significant research and development team
that contracts with the National Institute of Health, the
Department of Energy, the Department of Defense, NASA, NSF, the
Domestic Nuclear Detection Office and the Department of Homeland
Security. The current backlog for research contracts exceeds
last year's revenues.
Former RMD owners, Dr. Gerald Entine and Mr. Jack Paster
are now major Dynasil shareholders and plan to stay with the
company for at least one and a half years. RMD is developing
technology ranging from improved scintilators for nuclear
detectors directed towards homeland security and medical imaging
applications, high performance optical detectors for medical and
space requirements, and magnetic sensor arrays for non-
destructive testing. Management believes that these projects
provide high upside for faster growth and profitability.
Dynasil is a technology company focused in the Photonics
sector which is comprised of many rapidly growing markets such
as solar energy, medical instrumentation, lasers and display
technologies. RMD is expected to bring new capabilities to
Dynasil to drive our growth in the photonics market by solving
technical challenges such as the demands for smaller, more
sensitive, more efficient and more capable devices. RMD is
performing cutting edge research in the areas of sensor and
detector technology, laser optics and medical imaging.
Prior to the RMD acquisition, Dynasil had grown from an
unprofitable company with only $2 million of revenues in FY 2004
to a solidly profitable $11 million company in FY 2007 by
executing the growth and process improvement strategy initiated
by Mr. Craig T. Dunham, who joined Dynasil as President and CEO
in October 2004. Dynasil acquired two other companies and a
product line during the last three years and has delivered
significant performance improvements at all three of its
business units. Management views the addition of RMD as a major
step in executing Dynasil's profitable growth strategy and we
plan to apply our skills in effective execution to build on
their strong cash flow and accelerate the growth of their
current products as well as to commercialize new technology.
On January 18, 2008, Dynasil closed the acquisition of an
optical filter product line from Precision Optics Corporation,
Inc. ("POC") located in Gardner, MA. The purchase included the
intellectual property, customer base and equipment to produce a
variety of high performance optical filters that extend the
market offerings of our optical components business at
Optometrics in Ayer, MA. In addition to a $250,000 up-front
cash payment, there is a royalty agreement on existing business
for three years. This purchase fits our strategy of add-on
acquisitions to grow our existing businesses. We are in the
process of fully integrating the additional optical filter
business into our Ayer, MA location and anticipate incremental
revenues of at least $500,000 per year. The intellectual
property and know-how adds a significant capability set to the
Company.
Critical Accounting Policies and Estimates
There have been no material changes in our critical
accounting policies or critical accounting estimates since
September 30, 2007. We have not adopted any
11
DYNASIL CORPORATION OF AMERICA
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, 2007.
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 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. The Company
believes that some of these carry forwards 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, 2007.
Stock-Based Compensation
Compensation costs are recognized for stock options granted
to employees and directors. Options and warrants granted to
employees and non-employees are
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DYNASIL CORPORATION OF AMERICA
recorded as an expense at the date that the grant becomes
exercisable based on the estimated fair value of the security in
question as of the grant date, determined using the Black
Scholes option pricing model.
Fair Value of Equity Instruments
The valuation of certain items, including valuation of
warrants, beneficial converse on feature related to convertible
debt and compensation expense related to stock options granted,
involve significant estimates with underlying assumptions
judgmentally determined. The valuation of warrants and stock
options are based upon a Black Scholes valuation model, which
involve estimates of stock volatility, expected life of the
instruments and other assumptions.
Recently Issued Accounting Standards
In December 2007, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 141 (revised 2007), Business Combinations, which
replaces SFAS No 141. The statement retains the
purchase method of accounting for acquisitions, but requires a
number of changes, including changes in the way assets and
liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the
capitalization of in-process research and development at fair
value, and requires the expensing of acquisition-related costs
as incurred. SFAS No. 141R is effective for us beginning
October 1, 2009 and will apply prospectively to business
combinations completed on or after that date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements--
An Amendment of ARB No. 51, or SFAS No. 160. SFAS No. 160
establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for
fiscal years beginning on or after December 15, 2008. We believe
that SFAS 160 should not have a material impact on our financial
position or results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures
about Derivative Instruments and Hedging Activities" ("SFAS No.
161"). SFAS 161 requires companies with derivative instruments
to disclose information that should enable financial-statement
users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items
are accounted for under FASB Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities" and how
derivative instruments and related hedged items affect a
company's financial position, financial performance and cash
flows. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15,
2008. The adoption of this statement is not expected to have a
material effect on the Company's future financial position or
results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of
Generally Accepted Accounting Principles ("SFAS No. 162"). This
statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities
that are presented in conformity with generally accepted
accounting principles (GAAP) in the United States. This
Statement shall be effective sixty days following the SEC's
approval of the Public Company Accounting Oversight Board
(PCAOB) amendments to AU Section 411, The
13
DYNASIL CORPORATION OF AMERICA
Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. The Company does not believe the adoption
of SFAS No. 162 will have a material impact on its financial
condition, results of operations or cash flows.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the American
Institute of Certified Public Accountants ("AICPA") and the
Securities and Exchange Commission ("SEC") did not have, or are
not believed by management to have, a material impact on the
Company's present or future financial statements.
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", "Liquidity and Capital Resources" and
"Acquisitions" 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 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
NONE
ITEM 2 CHANGES IN SECURITIES
NONE
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DYNASIL CORPORATION OF AMERICA
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 August 13, 2008,
the Company issued a press release announcing its financial
results for its third quarter ending June 30, 2008. 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 ("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 August 13, 2008 issued by Dynasil
Corporation of America announcing its financial results for
the third quarter ending June 30, 2008.
(b) Reports on Form 8-K
On June 16, 2008, an 8-K report for Items 5.02 and 9.01
reporting that Dynasil had named Mr. Peter Sulick, of
Naples, FL as a Dynasil director. The Dynasil Board of
Directors passed resolutions to increase the number of
Directors from three to four and voted to appoint Mr.
Sulick to fill the newly created position. Mr. Sulick
became Chairperson of the Audit Committee for Dynasil's
Board of Directors' and its Financial Expert.
On June 26, 2008, an 8-K report for Item 5.02 reporting
the addition of Eugene Talerico as Corporate Controller.
On July 7, 2008, an 8-K report for Items 1.01, 2.01, 3.01,
3.02, 3.03, 5.01, 8.01, and 9.01 reporting the acquisition
of RMD and associated agreements and financing.
On July 15, 2008, an 8-K report for Item 5.02 reporting
modifications in Director's compensation.
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DYNASIL CORPORATION OF AMERICA
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: August 13, 2008
--------------------------------- --------------------
Craig T. Dunham,
President and CEO
/s/ Laura Lunardo DATED: August 13, 2008
----------------------------- --------------------
Laura Lunardo
Chief Financial Officer
16