XNAS:DYSL Dynasil Corp of America Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNAS:DYSL Fair Value Estimate
Premium
XNAS:DYSL Consider Buying
Premium
XNAS:DYSL Consider Selling
Premium
XNAS:DYSL Fair Value Uncertainty
Premium
XNAS:DYSL Economic Moat
Premium
XNAS:DYSL Stewardship
Premium
 

 

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

— ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

 

¨ 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 registrant as specified in its charter)

 

Delaware 22-1734088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
   
44 Hunt Street, Watertown, MA 02472
(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (617) 668-6855

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 x No¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

 

As of May 8, 2012 there were 14,802,165 shares of common stock, par value $.0005 per share, outstanding.

 

 
 

 

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, 2012  
AND SEPTEMBER 30, 2011 3
   
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE  
INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED  
MARCH 31, 2012 AND 2011 5
   
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’  
EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 2012 6
   
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX  
MONTHS ENDED MARCH 31, 2012 AND 2011 7
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
   
Item 4.  Controls and Procedures 28
   
PART II.  OTHER INFORMATION 28
   
Item 6. Exhibits 28
   
Signatures 29

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   March 31,   September 30, 
   2012   2011 
   (unaudited)     
ASSETS          
Current Assets          
Cash and cash equivalents  $1,869,736   $4,479,840 
Accounts receivable, net of allowance for doubtful accounts of $174,726 and $182,634 and sales returns allowance of $31,038 and $18,356 for March 31, 2012 and September 30, 2011, respectively.   8,275,879    5,837,139 
Inventories, net of reserves   3,066,696    3,250,539 
Costs in excess of billings   21,446    408,240 
Deferred tax asset   1,225,446    1,119,800 
Prepaid expenses and other current assets   588,180    771,564 
Total current assets   15,047,383    15,867,122 
           
Property, Plant and Equipment, net   5,128,566    4,860,328 
           
Other Assets          
Intangibles, net   6,048,724    6,374,329 
Goodwill   13,353,572    13,330,182 
Deferred financing costs, net   130,700    150,656 
Total other assets   19,532,996    19,855,167 
           
Total Assets  $39,708,945   $40,582,617 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities          
Current portion of long-term debt  $9,885,831   $1,859,728 
Accounts payable   2,051,381    2,088,395 
Accrued expenses and other liabilities   1,946,761    2,298,460 
Obligation to repurchase stock - current portion   461,630    -0- 
Contingent consideration   166,977    183,713 
Total current liabilities   14,512,580    6,430,296 
           
Long-term Liabilities          
Long-term debt, net of current portion   10,337    8,985,442 
Obligation to repurchase stock, net of current portion   1,395,916    -0- 
Deferred tax liability   811,705    924,837 
Total long-term liabilities   2,217,958    9,910,279 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

3
 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED) (Continued)

 

   March 31,   September 30, 
   2012   2011 
   (unaudited)     
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)          
Temporary Equity          
Redeemable common stock, at redemption value of  $2 per share; put option on 71,227 shares and 1,000,000 issued and outstanding at March 31, 2012 and September 30, 2011, respectively.  $142,454   $2,000,000 
           
Stockholders' Equity          
Preferred stock, $.001 par value, 15,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2012 and September 30, 2011, respectively, 10% cumulative, convertible.   -0-    -0- 
           
Common stock, $0.0005 par value, 40,000,000 shares authorized, 15,541,098 and 14,730,938 shares issued, 14,802,165 and and 14,582,893 shares outstanding at March 31, 2012 and September 30, 2011, respectively.   7,771    7,696 
Additional paid in capital   16,506,910    15,896,755 
Accumulated other comprehensive income   375,758    297,566 
Retained earnings   6,931,856    7,026,367 
    23,822,295    23,228,384 
           
Less 810,160 and 810,160 shares of treasury stock - at cost at March 31, 2012 and September 30, 2011, respectively   (986,342)   (986,342)
Total stockholders' equity   22,835,953    22,242,042 
           
Total Liabilities and Stockholders' Equity  $39,708,945   $40,582,617 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4
 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

   Three Months Ended   Six Months Ended 
   March 31,   March 31, 
   2012   2011   2012   2011 
Net revenue  $12,465,781   $12,116,349   $24,864,036   $23,742,856 
Cost of revenue   7,280,801    7,400,518    14,381,994    14,120,300 
Gross profit   5,184,980    4,715,831    10,482,042    9,622,556 
Selling, general and administrative expenses   5,529,642    3,898,973    10,580,827    8,069,983 
Income (loss) from operations   (344,662)   816,858    (98,785)   1,552,573 
Interest expense, net   122,474    155,157    246,637    313,352 
Income before income tax provision (benefit)   (467,136)   661,701    (345,422)   1,239,221 
Income tax provision (benefit)   (127,585)   265,485    (250,911)   467,823 
Net income (loss)  $(339,551)  $396,216   $(94,511)  $771,398 
                     
Net income (loss)  $(339,551)  $396,216   $(94,511)  $771,398 
Other comprehensive income (loss):                    
Foreign currency translation   (138,552    96,913    78,192    138,594 
Total comprehensive income (loss)  $(200,999)  $493,129   $(16,319)  $909,992 
                     
Net income (loss)  $(339,551)  $396,216   $(94,511)  $771,398 
Dividends on preferred stock   -0-    -0-    -0-    116,646 
Net income (loss) attributable to common stockholders   (339,551)   396,216    (94,511)   654,752 
Dividend add back due to preferred stock conversion   -0-    -0-    -0-    116,646 
Net income (loss)  for diluted income per common share  $(339,551)  $396,216   $(94,511)  $771,398 
                     
Basic net income (loss) per common share  $(0.02)  $0.03   $(0.01)  $0.06 
Diluted net income (loss) per common share  $(0.02)  $0.03   $(0.01)  $0.05 
                     
Weighted average shares outstanding                    
Basic   15,002,818    15,245,850    15,091,356    13,955,273 
Diluted   15,002,818    15,781,469    15,091,356    14,490,892 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

5
 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

                       Accumulated                 
                   Additional   Other               Total 
   Preferred   Preferred   Common   Common   Paid-in   Comprehensive   Retained   Treasury Stock   Stockholders' 
   Shares   Amount   Shares   Amount   Capital   Income   Earnings   Shares   Amount   Equity 
Balance, September 30, 2011   -0-   $0    15,393,053   $7,696   $15,896,755   $297,566   $7,026,367    (810,160)  $(986,342)  $22,242,042 
Issuance of shares of common stock under employee stock purchase plan   -0-    -0-    21,692    11    31,691    -0-    -0-    -0-    -0-    31,702 
                                                   
Stock-based compensation costs   -0-    -0-    85,148    44    578,485    -0-    -0-    -0-    -0-    578,529 
Exercise of options by director to purchase common stock   -0-    -0-    41,205    21    (21)   -0-    -0-    -0-    -0-    -0- 
                                                   
Foreign currency translation adjustment   -0-    -0-    -0-    -0-    -0-    78,192    -0-    -0-    -0-    78,192 
                                                   
Net loss   -0-    -0-    -0-    -0-    -0-    -0-    (94,511)   -0-    -0-    (94,511)
Balance, March 31, 2012   -0-   $-    15,541,098   $7,771   $16,506,910   $375,758   $6,931,856    (810,160)  $(986,342)  $22,835,953 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

6
 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Six Months Ended 
   March 31, 
   2012   2011 
Cash flows from operating activities:          
Net income (loss)  $(94,511)  $771,398 
Adjustments to reconcile net income (loss) to net cash provided by (used) in operating activities:          
Stock compensation expense   578,529    306,965 
Foreign exchange gain/loss   20,767    13,532 
Contingent consideration adjustment   (17,755)   -0- 
Depreciation and amortization   713,669    622,412 
Noncash interest expense   19,956    19,956 
Provision for doubtful accounts and sales returns   5,118    22,488 
Deferred income taxes   (218,778)   100 
(Increase) decrease in:          
Accounts receivable, net   (2,464,287)   (1,068,861)
Inventories, net   159,199    (268,192)
Costs in excess of billings   386,794    693,267 
Prepaid expenses and other current assets   4,855    (27,760)
Increase (decrease) in:          
Accounts payable   (27,081)   233,180 
Accrued expenses and other liabilities   (174,114)   186,293 
Net cash provided by (used in) operating activities   (1,107,639)   1,504,778 
           
Cash flows from investing activities:          
Purchases of property, plant and equipment   (687,328)   (698,104)
Net cash used in investing activities   (687,328)   (698,104)
           
Cash flows from financing activities:          
Proceeds from issuance of common stock   31,701    110,505 
Repayment of long-term debt   (949,002)   (930,071)
Preferred stock dividends paid   -0-    (79,770)
Net cash used in financing activities   (917,301)   (899,336)
           
Effect of exchange rates on cash and cash equivalents   102,164    310,357 
           
Net change in cash and cash equivalents   (2,610,104)   217,695 
           
Cash and cash equivalents, beginning   4,479,840    4,111,966 
Cash and cash equivalents, ending  $1,869,736   $4,329,661 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

7
 

 

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - Basis of Presentation and Liquidity

 

The accompanying consolidated balance sheet as of March 31, 2012, the consolidated statements of operations for the three and six months ended March 31, 2012 and 2011, changes in stockholders’ equity for the six months ended March 31, 2012 and cash flows for the six months ended March 31, 2012 and 2011 of Dynasil Corporation of America and subsidiaries, and the related information contained in these notes have been prepared by management and are unaudited. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the 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. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 2011 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission.

 

Certain amounts as previously reported have been reclassified to conform to the current year financial statement preparation.

 

The Company has experienced an increase in accounts receivable due to delayed collections and a decrease in borrowing capacity due to high selling, general and administrative (“SG&A”) expenses for commercialization and research and development (“R&D”) activities for product improvements. This, added with an obligation to repurchase stock no later than May 29, 2012, has caused the Company to believe that it will not satisfy its financial covenants under the Sovereign Bank Loan Agreement as of June 30, 2012. Accordingly, the Company has reclassified the $8,028,688 of debt to Sovereign Bank as a short-term liability.  The Company is pursuing alternatives, including amending their bank covenant requirements to obtain short-term waivers and/or obtaining third-party financing. Management has begun discussions with relevant parties to each of the potential actions.  In addition, the Company plans to take internal steps to cut costs and reduce capital expenditures and to return its collection processes to their historical levels.  However, there can be no assurances that the Company will be successful in implementing any of these actions, or if the Company is successful, whether the terms will be favorable to the Company.

 

We consider events or transactions that have occurred after the unaudited consolidated balance sheet date of March 31, 2012, but prior to the filing of the unaudited consolidated financial statements with the SEC on this 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 - 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 of raw materials, work-in-process and finished goods. The Company evaluates inventory levels and expected usage on a periodic basis and records, as a charge to cost of revenue, any amounts required to reduce the carrying value to net realizable value.

 

8
 

 

Inventories, net of reserves, consisted of the following:

 

   March 31,   September 30, 
   2012   2011 
Raw Materials  $1,984,163   $2,149,401 
Work-in-Process   479,948    757,709 
Finished Goods   602,585    343,429 
   $3,066,696   $3,250,539 

 

Note 3 – Costs in Excess of Billings

 

Costs in excess of billings relates to research and development contracts and consists of actual costs incurred plus fees in excess of billings at provisional contract rates.

 

Note 4 – Intangible Assets

 

Intangible assets at March 31, 2012 and September 30, 2011 consist of the following:

  

   Useful   Gross   Accumulated 
March 31, 2012  Life (years)   Amount   Amortization 
Acquired Customer Base   5-15   $7,063,962   $1,851,921 
Know How   15    513,217    128,000 
Trade Names   15    219,000    55,967 
Backlog   4    182,000    163,567 
Biomedical Technologies   5    300,000    30,000 
        $8,278,179   $2,229,455 

 

   Useful   Gross   Accumulated 
September 30, 2011  Life (years)   Amount   Amortization 
Acquired Customer Base   5-15   $7,063,962   $1,617,550 
Know How   15    513,217    112,150 
Trade Names   15    219,000    47,450 
Backlog   4    182,000    126,700 
Biomedical Technologies   5    300,000    -0- 
        $8,278,179   $1,903,850 

 

Amortization expense for the three months ended March 31, 2012 and 2011 was $162,802 and $149,205 respectively. Amortization expense for the six months ended March 31, 2012 and 2011 was $325,605 and $298,410, respectively. Estimated amortization expense for each of the next five fiscal years is as follows:

 

   2012 (6 Months)   2013   2014   2015   2016   Thereafter   Total 
Acquired Customer Base  $233,357   $463,133   $463,133   $463,133   $463,133   $3,126,153   $5,212,041 
Know How   36,867    73,733    73,733    73,733    73,733    53,417    385,217 
Trade Names   7,300    14,600    14,600    14,600    14,600    97,333    163,033 
Backlog   18,433    -0-    -0-    -0-    -0-    -0-    18,433 
Biomedical Technologies   30,000    60,000    60,000    60,000    60,000    -0-    270,000 
   $325,957   $611,466   $611,466   $611,466   $611,466   $3,276,903   $6,048,724 

 

Note 5 – Goodwill

 

There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of goodwill during the six months ended March 31, 2012.

 

9
 

 

Note 6 – Earnings (Loss) Per Common Share

 

Basic earnings (loss) per common share is computed by dividing the net income applicable or loss attributable to common shares after preferred dividends paid, if applicable, by the weighted average number of common shares outstanding during each period. 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, 535,619 common share equivalents related to stock options were assumed to be outstanding for the three and six months ended March 31, 2011. For the three and six months ended March 31, 2012, 20,485 shares of potential common stock related to stock options were excluded from the calculation of dilutive shares since we experienced a loss from continuing operations and the inclusion of potential shares would be anti-dilutive. In addition, as of March 31, 2012 and 2011, common stock options for 1,059,583 and 69,802 shares, respectively, with exercise prices above current quarterly average market price per share have been excluded from the calculation of earnings per share since their effect is anti-dilutive.

 

The computation of the weighted shares outstanding for the three months ended March 31 is as follows:

 

   Three Months Ended 
   March 31, 
   2012   2011 
Weighted average shares outstanding          
Common stock   15,002,818    15,245,850 
Effect of dilutive securities          
Stock Options   -0-    535,619 
Dilutive Average Shares Outstanding   15,002,818    15,781,469 

 

The computation of the weighted shares outstanding for the six months ended March 31 is as follows:

 

   Six Months Ended 
   March 31, 
   2012   2011 
Weighted average shares outstanding          
Common stock   15,091,356    13,955,273 
Effect of dilutive securities          
Stock Options   -0-    535,619 
Dilutive Average Shares Outstanding   15,091,356    14,490,892 

 

Note 7 - 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 weighted average assumptions for grants during the six months ended March 31, 2012 and 2011 used in the Black-Scholes option pricing model were as follows:

 

   Six Months Ended   Six Months Ended 
   March 31, 2012   March 31, 2011 
Expected term in years   5 years    3 years 
Risk-free interest rate   2.64%   3.95%
Expected volatility   93.62%   85.21%
Expected dividend yield   0.00%   0.00%

 

10
 

 

The expected volatility was determined with reference to the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that the options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant. The dividend yield is expected to be 0.00% because historically the Company has not paid dividends on common stock.

 

During the three months ended March 31, 2012, 43,960 stock options were granted at the exercise price of $3.03 per share. These options were granted as Directors’ Compensation for the twelve months ending January 31, 2013 and were fully exercisable when granted, and expire five years from the grant date. The stock-based compensation expense of $58,876 will be recognized over the requisite service period. During the three months ended March 31, 2012, 138,373 options were exercised at an exercise price of $1.58 per share in a cashless exercise, resulting in 41,205 common shares issued. During the three months ended March 31, 2012, 20,000 stock options were cancelled with an exercise price of $1.66.

 

During the three months ended March 31, 2012 and 2011, 500 and 0 shares of restricted stock vested with the value of $2,430 and $0, respectively. During the six months ended March 31, 2012 and 2011, 38,000 and 2,500 shares of restricted stock vested with the value of $152,505 and $9,375, respectively.

 

Stock Compensation Expense for the three months ended March 31, 2012 and 2011 is as follows:

 

   Three Months Ended   Three Months Ended 
Stock Compensation Expense  March 31, 2012   March 31, 2011 
Stock Grants   48,760    70,862 
Restricted Stock Grants   157,426    -0- 
Option Grants   66,866    14,529 
Employee Stock Purchase Plan   32,268    -0- 
Total  $305,320   $85,391 

 

During the six months ended March 31, 2012, 43,960 stock options were granted at an exercise price of $3.03 per share. These options were granted as Directors’ Compensation for the twelve months ending January 31, 2013 and were fully exercisable when granted, and expire five years from the grant date. The stock-based compensation expense of $58,876 will be recognized over the requisite service period. During the six months ended March 31, 2012, 138,373 options were exercised at an exercise price of $1.58 per share in a cashless exercise, resulting in 41,205 common shares issued. During the six months ended March 31, 2012, 10,000 unvested stock options were cancelled with an exercise price of $5.65 and 20,000 vested stock options were cancelled with an exercise price of $1.66.

 

Stock Compensation Expense for the six months ended March 31, 2012 and 2011 is as follows:

 

   Six Months Ended   Six Months Ended 
Stock Compensation Expense  March 31, 2012   March 31, 2011 
Stock Grants   109,041    132,251 
Restricted Stock Grants   305,751    7,625 
Option Grants   131,469    167,089 
Employee Stock Purchase Plan   32,268    -0- 
Total  $578,529   $306,965 

 

At March 31, 2012, there was $232,710 in unrecognized stock compensation expense based on 396,213 unvested options to purchase common stock and $1,310,259 in unrecognized stock compensation expense based on 326,138 shares of unvested restricted stock. At March 31, 2011, there was $300,603 in unrecognized stock compensation expense based on 579,861 unvested options to purchase common stock and $28,211 in unrecognized stock compensation expense based on 6,708 shares of unvested restricted stock.

 

11
 

 

A summary of restricted stock activity for the six months ended March 31, 2012 and 2011 is presented below:

 

Restricted Stock Activity for the  Six
Months ended March 31, 2012
  Shares   Weighted-Average
Grant-Date Fair Value
 
Nonvested at September 30, 2011   403,000   $4.02 
           
Granted   -0-    -0- 
Vested   38,000   $4.01 
Cancelled   -0-    -0- 
Nonvested at March 31, 2012   365,000   $4.02 

 

Restricted Stock Activity for the Six
Months ended March 31, 2011
  Shares   Weighted-Average
Grant-Date Fair Value
 
Nonvested at September 30, 2010   7,500   $3.75 
           
Granted   3,000   $4.95 
Vested   2,500   $3.75 
Cancelled   -0-    -0- 
Nonvested at March 31, 2011   8,000   $4.20 

 

Note 8 – Segment, Customer and Geographical Reporting

 

Segment Financial Information

 

Dynasil’s business breaks down into two segments: products and technology (“Products and Technology”) and contract research (“Contract Research”). Within these segments, there is a segregation of reportable units 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 Products and Technology segment manufactures optical materials, components, coatings and specialized instruments used in various applications in the medical, industrial, and homeland security/defense sectors. The Company’s most recent new business venture, Dynasil Biomedical Corp. (“Dynasil Biomedical”) is reported within this segment. It has been determined that this new business venture will primarily pursue product commercialization of technologies and technology licensing opportunities, though there can be no assurances that any of these opportunities will become successfully commercialized. Dynasil’s Contract Research segment is one of the largest small business participants in U.S. government-funded research.

 

The Company’s segment information for the three months ended March 31, 2012 is summarized below:

 

12
 

 

   Three Months Ended 
   March 31, 
Segment  2012   2011 
Contract Research          
Revenue  $6,948,634   $6,388,804 
Income from Operations   378,429    234,162 
Income as a percent of revenue   5.4%   3.7%
Products and Technology          
Revenue  $5,517,147   $5,727,545 
Income (loss) from Operations   (723,091)   582,697 
Income (loss) as a percent of revenue   -13.1%   10.2%
Total          
Revenue  $12,465,781   $12,116,349 
Income (loss) from Operations   (344,662)   816,858 
Income (loss) as a percent of revenue   -2.8%   6.7%

 

The Company’s segment information for the six months ended March 31, 2012 is summarized below:

 

   Six Months Ended 
   March 31, 
Segment  2012   2011 
Contract Research          
Revenue  $13,164,434   $12,455,923 
Income from Operations   447,383    427,108 
Income as a percent of revenue   3.4%   3.4%
Products and Technology          
Revenue  $11,699,602   $11,286,933 
Income (loss) from Operations   (546,168)   1,125,465 
Income (loss) as a percent of revenue   -4.7%   10.0%
Total          
Revenue  $24,864,036   $23,742,856 
Income (loss) from Operations   (98,785)  $1,552,573 
Income (loss) as a percent of revenue   -0.4%   6.5%

 

Customer Financial Information

 

For the three and six months ended March 31, 2012 and 2011, the top three customers for the Contract Research segment were each various agencies of the U.S. Government. For the three months ended March 31, 2012 and 2011, these customers made up 72% and 77%, respectively, of Contract Research revenue. For the six months ended March 31, 2012 and 2011, these customers made up 76% and 77%, respectively, of Contract Research revenue.

 

For the Products and Technology segment, there was no customer whose revenue represented more than 10% of the total segment revenue for the three months or the six months ended March 31, 2012 and 2011.

 

Geographic Financial Information

 

Revenue by geographic location in total and as a percentage of total revenue, for the three months ended March 31, 2012 and 2011 are as follows:

 

13
 

 

   Three Months Ended   Three Months Ended 
   March 31, 2012   March 31, 2011 
Geographic Location  Revenue   % of Total   Revenue   % of Total 
United States   10,454,168    83.9%  $10,152,116    83.8%
Europe   1,103,021    8.8%   1,114,272    9.2%
Other   908,592    7.3%   849,961    7.0%
   $12,465,781    100.0%  $12,116,349    100.0%

 

Revenue by geographic location in total and as a percentage of total revenue, for the six months ended March 31, 2012 and 2011 are as follows:

 

   Six Months Ended   Six Months Ended 
   March 31, 2012   March 31, 2011 
Geographic Location  Revenue   % of Total   Revenue   % of Total 
United States   20,482,647    82.4%  $19,557,753    82.4%
Europe   2,495,332    10.0%   2,628,558    11.1%
Other   1,886,056    7.6%   1,556,545    6.6%
   $24,864,036    100.0%  $23,742,856    100.0%

 

Note 9 – Business Acquisition – Dynasil Biomedical

 

On April 14, 2011, Dynasil announced the incorporation of Dynasil Biomedical Corp. as a new business unit to pursue opportunities in the medical field. Through a purchase of assets, Dynasil Biomedical completed the purchase of specific rights to six biomedical technologies invented or co-invented by Dr. Daniel Ericson for $300,000 in cash. Dr. Ericson has joined Dynasil Biomedical as Scientific Lead for research and development. The asset purchase had no impact on the comparative unaudited financial information as reported.

 

Note 10 - Income Taxes

 

Dynasil Corporation of America and its wholly-owned subsidiaries file a consolidated federal income tax return.

 

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 carryforwards. 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. Valuation allowances are provided if it is more likely than not that some or all of the deferred tax assets will not be realized. The provision for income taxes includes taxes currently payable, if any, plus the net change during the year in deferred tax assets and liabilities recorded by the Company.

 

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 realized upon ultimate settlement with the relevant tax authority. The Company has applied these provisions to all tax positions for which the statute of limitations remained open. There was no impact on the Company’s unaudited consolidated financial position, results of operations, or cash flows as of March 31, 2012 and 2011. As of March 31, 2012 and 2011, the Company had no unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in interest and income tax expense. The Company currently has no federal or state tax examinations in progress.

 

14
 

 

The Company has Research and Experimentation tax credits available at both the state and local levels designed to encourage and reward companies for efforts in the areas of research and experimentation. As of March 31, 2012, the Company has federal and state tax credit carryovers totaling approximately $1,300,000, expiring through 2031. The Company’s income tax provision includes a tax benefit of an estimated $40,000 and $153,000 for Research and Experimentation credits attributable to the three and six months ended March 31, 2012, respectively.

 

The Company has approximately $490,000 in net operating loss carryforwards to offset certain future state income taxes expiring through 2026.

 

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 from 2009 to 2011 are still subject to examination.

 

Note 11 – Obligation to Repurchase Stock

 

The former owners of RMD Instruments, LLC, which the Company acquired in 2008 for a combination of cash and shares of Dynasil common stock, have the right to require the Company to repurchase up to 1,000,000 shares of Dynasil common stock issued to them as partial consideration for the transaction at a repurchase price of $2.00 per share (the "Put Right"). As previously disclosed, on February 27, 2012, Dr. Gerald Entine, a former owner of RMD Instruments, LLC, exercised this Put Right to require the repurchase of a total of 928,773 shares of Dynasil common stock held by Dr. Entine and certain affiliates (“Entine”). By no later than May 29, 2012, the Company must pay Entine an aggregate purchase price of $1,857,546 for these shares. To the extent that the Company does not pay cash for these shares, it must issue to Entine a promissory note in payment of the remaining purchase price not paid in cash. According to the terms of the Put Right, any amount of purchase price evidenced by a promissory note would be amortized over a 3-year period to maturity and shall bear interest at the greater of (x) 10% or (y) the prime interest rate published by the Wall Street Journal on the closing date, plus 5%. In addition, any such promissory note shall be secured by the shares purchased with the promissory note.

 

Dr. Entine was previously a member of the Company’s board of directors until his retirement from the board effective as of the Company’s 2012 Annual Meeting of Stockholders.

 

There are an additional 71,227 shares of common stock outstanding that are subject to the Put Right, which could require additional payments by the Company if exercised, at the same $2 per share purchase price. The Put Right with respect to these additional shares will expire on July 1, 2012.

 

Note 12 – Financial Instruments

 

The fair value of financial instruments is determined by reference to observable market data and other valuation techniques as appropriate.  The Company has established a fair value hierarchy that priorities the inputs to valuation techniques used to measure fair value. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values identified by Level 2 inputs utilize observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. Fair values identified by Level 3 inputs are unobservable data points and are used to measure fair value to the extent that observable inputs are not available. Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use at pricing the asset or liability.

 

The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments. The only category of financial instruments where the difference between fair value and recorded book value could be notable is long-term debt. The fair value of long-term debt is determined using Level 2 inputs.  At March 31, 2012 and September 30, 2011, the carrying value of long-term debt approximates fair value because the underlying instruments are primarily at current market rates.

 

Note 13 – Debt

 

Long-term debt associated with the Sovereign Bank Loan Agreement has been reclassified to a current liability in the amount of $8,028,688 as the Company believes that it will not satisfy its financial covenants under the Sovereign Bank Loan Agreement as of June 30, 2012.

 

In addition, based on the exercise of the Put Right in February 2012, the Company has reflected its obligation to pay the aggregate purchase price of $1,857,546 assuming it will satisfy such obligation with the payment of a promissory note. Specifically, regarding such obligation, the Company has reflected $1,395,916 as long-term debt and the balance as the current of such long-term debt obligation.

 

15
 

 

Note 14 – Subsequent Events

 

On April 12, 2012, Dynasil Corporation of America (the “Company”) entered into Amendment No. 2 to Loan and Security Agreement (“Amendment No. 2”) with Sovereign Bank, N.A. (the “Lender”) which amends the Loan and Security Agreement, dated July 7, 2010, as amended by Amendment No. 1 to Loan and Security Agreement, dated April 1, 2011 (the “Original Loan Agreement”).

 

Amendment No. 2 extends the Scheduled Termination Date for the Revolving Line of Credit from July 7, 2012 to July 7, 2013 or such other later date as may be agreed to in writing by Lender, and makes certain adjustments to the required financial covenants, as described below.

 

Amendment No. 2 adjusts the consolidated maximum leverage ratio required by the Original Loan Agreement to equal to or less than (i) 3.00 to 1.00 for any period ended on or before December 31, 2011 or on or after December 31, 2012, (ii) 3.75 to 1.00 for the rolling four quarter period ended on March 31, 2012, (iii) 3.25 to 1.00 for the rolling four quarter period ending on June 30, 2012, and (iv) 3.25 to 1.00 for the rolling four quarter period ending on September 30, 2012. The required fixed charge coverage ratio for each of those periods had previously been equal to or less than 3.0 to 1.0.

 

Additionally, Amendment No. 2 adjusts the consolidated fixed charge coverage ratio required by the Original Loan Agreement to not less than (i) 1.20 to 1.00 for any period ended on or before December 31, 2011 or on or after December 31, 2012, (ii) 0.90 to 1.00 for the rolling four quarter period ended on March 31, 2012, (iii) 1.05 to 1.00 for the rolling four quarter period ending on June 30, 2012, and (iv) 1.10 to 1.00 for the rolling four quarter period ending on September 30, 2012. The consolidated fixed charge coverage ratio for each of those periods had previously been not less than 1.20 to 1.00.

 

Amendment No. 2 also adjusts the limit on Unfunded Capital Expenditures (as defined in the Original Loan Agreement) by the Company to $3,250,000.00 in the aggregate (tested as of the last day of each fiscal quarter ended after September 30, 2011 on a year-to-date basis). During each Fiscal Year of the Company ending after September 30, 2012, the Company shall not incur Unfunded Capital Expenditures in excess of $2,000,000.00 in the aggregate (tested as of the last day of each fiscal quarter ended after September 30, 2012 on a year-to-date basis). The limit on Unfunded Capital Expenditures had previously been $1,700,000 (tested as of the last day of each fiscal quarter ended after September 30, 2011 on a year-to-date basis).

 

The foregoing summary of the terms and conditions of Amendment No. 2 does not purport to be complete and is qualified in its entirety by reference to the full text of Amendment No. 2 to Loan and Security Agreement, which is filed as Exhibit 10.1 to this Current Report on Form 10-Q.

 

All debt under the Sovereign Bank Loan and Security Agreement has been recorded as a current liability as the Company believes that it will not satisfy its financial covenants under the Sovereign Bank Loan Agreement as of June 30, 2012.

 

The Company has evaluated subsequent events through the date that the financial statements were released.

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto in the Dynasil Corporation of America ("Dynasil", the "Company" or "we") Form 10-K for the fiscal year ended September 30, 2011.

 

16
 

 

General Business Overview

 

Revenue for the second quarter of fiscal year 2012, which ended March 31, 2012, was $12.5 million, an increase of 2.9% compared with revenue of $12.1 million for the quarter ended March 31, 2011. Loss from Operations for the quarter was ($344,662) compared with Income from Operations of $816,858 for the quarter ended March 31, 2011. Loss before Taxes for the quarter was ($467,136) compared with Income before Taxes of $661,701 for the quarter ended March 31, 2011.  Net Loss was ($339,551) or ($0.02) per share for the quarter ended March 31, 2012, compared with Net Income of $396,216, or $0.03 per share, for the quarter ended March 31, 2011. Included in our business unit costs were expenses to support our growth initiatives with organic product development of specific product lines within Dynasil Products (previously referred to as RMD Instruments), our dual mode detector commercialization effort and development of Dynasil Biomedical Corp (“Dynasil Biomedical”) technologies, all within our Products and Technology segment. These investments include technology development activities, capital equipment depreciation, development of intellectual property, and staff additions in support of organic products, dual mode detector technology and our longer term product/technology pipeline which includes our biomedical portfolio. We anticipate the dual mode detector business will produce revenue beginning this fiscal year. Commercialization of technology from our extensive research and development portfolio and strategic acquisitions are expected to be the key drivers of our future growth and we plan to continue to invest in these growth opportunities, depending upon the availability of capital to fund these endeavors. At the current time, the Company is actively exploring commercialization opportunities in thin film digital x-rays, sensors for nondestructive testing and radiation dosimeters based on technologies developed at Radiation Monitoring Devices, Inc. (“RMD”). We are developing three specific technologies within Dynasil Biomedical with the goal to commercialize or license the most promising opportunities. These include tissue sealant, hypothermia induction and blood storage technology which is being jointly developed with Mayo Clinic. Provisional patents have been filed for certain technologies. No determination has been made as to the Company’s entry into these market segments; however, we anticipate decisions will be made on these opportunities within fiscal year 2012. 

 

Results of Operations

 

   Results of Operations for the Three Months Ended March 31, 
   2012   2011 
   Contract
Research
   Products &
Technology
   Total   Contract
Research
   Products &
Technology
   Total 
Revenue   6,948,634    5,517,147    12,465,781    6,388,804    5,727,545    12,116,349 
Gross Profit   2,625,649    2,559,331    5,184,980    2,291,936    2,423,896    4,715,832 
SG&A   2,247,221    3,282,421    5,529,642    2,057,774    1,841,199    3,898,973 
Operating Income (Loss)   378,429    (723,091)   (344,662)   234,162    582,697    816,858 

 

Revenue for the three months ended March 31, 2012 was $12,465,781, a 2.9% increase from $12,116,349 for the three months ended March 31, 2011. Revenue from our Contract Research segment (“Contract Research”) increased by 8.8%. Revenue from our Products and Technology segment (“Products and Technology”) decreased 3.7%. The Contract Research segment revenue growth was significant in light of current pressures on government research funding. The research backlog remains robust at nearly 18 months. The Products and Technology segment was essentially unchanged.

 

Gross Profit for the three months ended March 31, 2012 was $5,184,980, or 41.6% of sales, a 9.9% increase from $4,715,831, or 38.9% of sales, for the three months ended March 31, 2011. Gross profit as a percent of sales improved for the Contract Research segment to 37.8% at March 31, 2012 from 35.9% at March 31, 2011, as a result of a more favorable cost mix. Gross profit for the Products and Technology segment improved to 46.4% as a percent of sales at March 31, 2012 from 42.3% as a percent of sales for the quarter ended March 31, 2011 as a result of favorable sales mix.

 

Selling, general, and administrative (“SG&A”) expenses for the three months ended March 31, 2012 were $5,529,642, or 44.4% of sales. This was an increase from SG&A expenses of $3,898,973, or 32.2% of sales, for the three months ended March 31, 2011. Included in the three months ended March 31, 2012, was $305,000 in stock compensation expense. This was an increase of $220,000 over the prior year. The Contract Research segment had a $189,447, or 9.2% increase in SG&A, which is commensurate with the increase in revenue over the prior period. The Products & Technology SG&A grew to 59.5% of sales for the three months ended March 31, 2012 compared to 32.1% for the three months ended March 31, 2011. Included in these costs is Dynasil Products’ initiative to revitalize all product lines with the goal of gaining market share through new product launches. Dynasil Products spent $524,800 on research and development efforts in the three months ended March 31, 2012 for new product development and $174,000 on Sales and Marketing toward those efforts. There was an increase of $72,000 in expenses for commercialization of our dual mode detector business for the three months ended March 31, 2012 over the same period in 2011. Also, there was $249,968 in SG&A expenses during the three months ended March 31, 2012 for continuing development of the Dynasil Biomedical technologies purchased in April 2011.

 

17
 

 

Loss from Operations for the three months ended March 31, 2012 was ($344,662), a decrease of $1,161,520 from the prior year comparable period. As a percent of sales, the current period was (2.8%) compared with 6.7% in 2011. The Contract Research segment had lower gross margin and slightly lower SG&A costs resulting in Income from Operations of 5.4% of sales for the three months ended March 31, 2012 compared to 3.7% of sales for the period ended March 31, 2011. The Products and Technology segment had Loss from Operations of ($723,091) or (13.1%) of sales for the three months ended March 31, 2012, compared with Income from Operations of $582,697 or 10.2% of sales for the three months ended March 31, 2011.

 

Net interest expense for the three months ended March 31, 2012 was $122,474, compared with $155,157 for the three months ended March 31, 2011. Debt was reduced by ($1,877,874) to $9,896,168 at March 31, 2012 from $11,774,042 at March 31, 2011.

 

The Company recognized a tax benefit of $127,585 for the three months ended March 31, 2012 in recognition of specific federal and state tax losses and current period estimated Research and Experimentation tax credits.

 

Net Loss for the three months ended March 31, 2012 was ($339,551), or ($0.02) in basic earnings per share, compared with Net Income of $396,216, or $0.03 in basic earnings per share, for the quarter ended March 31, 2011.

 

Results of Operations – Year to Date

 

   Results of Operations for the Six Months Ended March 31, 
   2012   2011 
   Contract
Research
   Products &
Technology
   Total   Contract
Research
   Products &
Technology
   Total 
Revenue  $13,164,434   $11,699,602   $24,864,036   $12,455,923   $11,286,933   $23,742,856 
Gross Profit  $5,056,454   $5,425,588   $10,482,042   $4,824,145   $4,798,411   $9,622,556 
SG&A  $4,609,072   $5,971,755   $10,580,827   $4,397,037   $3,672,946   $8,069,983 
Operating Income (Loss)  $447,383   $(546,168)  $(98,785)  $427,108   $1,125,465   $1,552,573 

 

Revenue for the six months ended March 31, 2012 was $24,864,036, a 4.7% increase from $23,742,856 for the six months ended March 31, 2011. Revenue from our Contract Research segment (“Contract Research”) increased by 5.7% with continued high interest in our research capabilities from our largest governmental agency customers. Our Products and Technology segment (“Products and Technology”) had a revenue increase of 3.7%. Sales for the quarter ended December 31, 2011 were up 11.2% while sales for the quarter ended March 31, 2012 decreased 3.7%. We have noticed decreased sales in our optics businesses due to key customers working down inventories.

 

Gross Profit for the six months ended March 31, 2012 was $10,482,042, or 42.2% of sales, an 8.9% increase from $9,622,556, or 40.5% of sales, for the six months ended March 31, 2011.

 

Selling, general, and administrative (“SG&A”) expenses for the six months ended March 31, 2012 were $10,580,827, or 42.6% of sales. This was an increase from SG&A expenses of $8,069,983, or 34.0% of sales, for the six months ended March 31, 2011. Included in SG&A for the period, was $578,500 in stock compensation. The Contract Research segment had a 4.8% increase in SG&A commensurate with the increase in revenue for that segment over the prior period. The Products & Technology SG&A grew to 51.0% of sales for the six months ended March 31, 2012 compared to 32.5% for the six months ended March 31, 2011. Included in these costs is Dynasil Products’ initiative to revitalize all product lines with the goal of gaining market share through new product launches. Dynasil Products spent $713,000 on research and development efforts and $243,000 on sales and marketing in the six months ended March 31, 2012 toward the new product development effort. There was $149,000 spent on commercialization of dual mode detector business in the six months ended March 31, 2012. Finally, included in SG&A expenses during the six months ended March 31, 2012 was $453,000 for continuing development of the Dynasil Biomedical technologies purchased in April 2011.

 

18
 

 

Loss from Operations for the six months ended March 31, 2012 was ($98,785), a decrease of $1,651,358 from the prior year comparable period. As a percent of sales, the Loss from Operations for the six months ending March 31, 2012 was (0.4%) compared with Operating Income of 6.5% in 2011. The Contract Research segment had Income from Operations of 3.4% of sales for the six months ended March 31, 2012, which was essentially unchanged from the period ended March 31, 2011, which was also 3.4% of sales. The Products and Technology segment had Loss from Operations of ($546,168) or (4.7%) of sales for the six months ended March 31, 2012, compared with Income from Operations of $1,125,465 or 10.0% of sales for the six months ended March 31, 2011. The change was primarily caused by higher SG&A costs for revitalization of our product lines and commercialization of new technologies.

 

Net interest expense for the six months ended March 31, 2012 was $246,637 compared with $313,352 for the six months ended March 31, 2011, primarily due to the continued reduction in debt.

 

The Company recognized a tax benefit of $250,911 for the six months ended March 31, 2012 in recognition of specific federal and state tax losses and current period Research and Experimentation tax credits.

 

Net Income for the six months ended March 31, 2012 was ($94,511) or ($0.01) in basic earnings per share, compared with $771,398, or $0.06 in basic earnings per share, for the quarter ended March 31, 2011.

 

Liquidity and Capital Resources

 

Cash decreased by $2,610,104 for the six months ended March 31, 2012 to $1,869,736. The primary sources of cash included non-cash stock compensation expense of $578,529 and depreciation and amortization of $713,669. These items totaled $1,292,198. There was a large increase in accounts receivable of $2,464,287 during the six months ended March 31, 2012. Revenues for the six months ended March 31, 2012 have remained at historical highs, but collections have not kept pace. Days Sales Outstanding (DSO) increased to 60.5 days at March 31, 2012 from 56.4 days at December 31, 2011 and 46.1 days at September 30, 2011. The $2,464,287 increase in accounts receivable is comprised of an increase of $1,640,244 from the Contract Research segment and an increase of $824,043 from the Products and Technology segment. In our Contracts Research segment, the required submission of some technical reports has been internally delayed, which has delayed payments. In addition, certain governmental agencies have adopted practices requiring more stringent paperwork in order for payment to be made. Once the processes are streamlined with the governmental agencies, there should be no further delays in payments. We believe that these paperwork submission difficulties are temporary and due in part to management transitions at RMD occurring earlier in the year. We do not believe that these procedural matters will ultimately affect the collectability of these receivables and accordingly, we have not made any increase in allowance for doubtful accounts for these receivables. The $824,043 increase in accounts receivable for the Products and Technology segment was due primarily to (i) delayed collections from the largest customer within the segment even though total revenue represents less than 10% of the segment (ii) slower customer payments in general and (iii) individual sale in excess of $200,000 to a large, well-established customer in the UK which has not yet been paid. DSO in this segment increased to 68.5 days from 60.8 days at December 31, 2011 and 61.3 days at September 30, 2011. The provision for doubtful accounts and sales returns was increased by $5,118. Activities are underway to improve collections in both segments and return to lower historical DSO levels. Inventories declined by $183,843 and inventory turns were 4.1 turns compared to 4.0 turns at September 30, 2011. Inventories are all within the Products and Technology segment.

 

Cash Used in Operating Activities

 

In total, including the increased investment in accounts receivable, operating activities used $1,107,639..

 

Cash Used in Investing and Financing Activities

 

Cash used for the purchase of property, plant and equipment was $687,328. Payments on long term debt were $949,002 as part of regularly schedule payments to Sovereign Bank, N.A. (“Sovereign” or the “Lender”) under the five year Term Debt and Acquisition Line of Credit. Net cash used in financing activities was $917,301.

 

19
 

 

Expenses and Operating Income

 

The Company has heavily invested in strategic initiatives for the future. These expenses have primarily been recognized in SG&A expenses and have reduced operating income. These expenses include organic product development within Dynasil Products, increased spending on intellectual property creation, staff additions in support of organic products, continued costs to commercialize the dual mode detector technology and spending to support our longer term product/technology pipeline which includes our biomedical portfolio. These expenses, without corresponding revenue, have reduced operating income and reduced cash flow and reduced borrowing capacity. SG&A expenses associated with Dynasil Product’s initiatives to revitalize all product lines was $713,000 in research & development and an additional $243,000 in sales & marketing efforts. There was $452,000 spent in the last six months for continuing development of the Dynasil Biomedical technologies purchased in April, 2011.

 

Sovereign Bank Loan Agreement

 

Due in part to the factors described above, on April 12, 2012, the Company entered into Amendment No. 2 to Loan and Security Agreement (“Amendment No. 2”) with Sovereign Bank which amended the Loan and Security Agreement, dated July 7, 2010, as amended by Amendment No. 1 to Loan and Security Agreement, dated April 1, 2011 (the “Original Loan Agreement”). As described in more detail below, the purpose of the amendment was to extend the term of the revolving line of credit and amend the financial covenants during the current period as the Company worked through the accounts receivable and SG&A expense issues described above.

 

Amendment No. 2 extended the Scheduled Termination Date for the Revolving Line of Credit from July 7, 2012 to July 7, 2013 or such other later date as may be agreed to in writing by Lender, and made certain adjustments to the required financial covenants, as described below.

 

Amendment No. 2 adjusted the consolidated maximum leverage ratio required by the Original Loan Agreement to equal to or less than (i) 3.00 to 1.00 for any period ended on or before December 31, 2011 or on or after December 31, 2012, (ii) 3.75 to 1.00 for the rolling four quarter period ended on March 31, 2012, (iii) 3.25 to 1.00 for the rolling four quarter period ending on June 30, 2012, and (iv) 3.25 to 1.00 for the rolling four quarter period ending on September 30, 2012. The required fixed charge coverage ratio for each of those periods had previously been equal to or less than 3.0 to 1.0. The Company’s ratio at March 31, 2012 was 3.56 to 1.00.

 

Additionally, Amendment No. 2 adjusted the consolidated fixed charge coverage ratio required by the Original Loan Agreement to not less than (i) 1.20 to 1.00 for any period ended on or before December 31, 2011 or on or after December 31, 2012, (ii) 0.90 to 1.00 for the rolling four quarter period ended on March 31, 2012, (iii) 1.05 to 1.00 for the rolling four quarter period ending on June 30, 2012, and (iv) 1.10 to 1.00 for the rolling four quarter period ending on September 30, 2012. The consolidated fixed charge coverage ratio for each of those periods had previously been not less than 1.20 to 1.00. The Company’s ratio at March 31, 2012 was .99 to 1.00.

 

Amendment No. 2 also adjusted the limit on Unfunded Capital Expenditures (as defined in the Original Loan Agreement) by the Company to $3,250,000 in the aggregate (tested as of the last day of each fiscal quarter ended after September 30, 2011 on a year-to-date basis). During each Fiscal Year of the Company ending after September 30, 2012, the Company shall not incur Unfunded Capital Expenditures in excess of $2,000,000.00 in the aggregate (tested as of the last day of each fiscal quarter ended after September 30, 2012 on a year-to-date basis). The limit on Unfunded Capital Expenditures had previously been $1,700,000 (tested as of the last day of each fiscal quarter ended after September 30, 2011 on a year-to-date basis). The Company’s unfunded capital expenditures were $687,328 at March 31, 2012.

 

The Company was in compliance with all financial covenants, as amended, at March 31, 2012. See “Liquidity Outlook” below.

 

Obligation to Repurchase Stock

 

The former owners of RMD Instruments, LLC, which the Company acquired in 2008 for a combination of cash and shares of Dynasil common stock, have the right to require the Company to repurchase up to 1,000,000 shares of Dynasil common stock issued to them as partial consideration for the transaction at a repurchase price of $2.00 per share (the "Put Right"). As previously disclosed, on February 27, 2012, Dr. Gerald Entine, a former owner of RMD Instruments, LLC, exercised this Put Right to require the repurchase of a total of 928,773 shares of Dynasil common stock held by Dr. Entine and certain affiliates (“Entine”). By no later than May 29, 2012, the Company must pay Entine an aggregate purchase price of $1,857,546 for these shares. To the extent that the Company does not pay cash for these shares, it must issue to Entine a promissory note in payment of the remaining purchase price not paid in cash. According to the terms of the Put Right, any amount of purchase price evidenced by a promissory note would be amortized over a 3-year period to maturity and shall bear interest at the greater of (x) 10% or (y) the prime interest rate published by the Wall Street Journal on the closing date, plus 5%. In addition, any such promissory note shall be secured by the shares purchased with the promissory note.

 

Dr. Entine was previously a member of the Company’s board of directors until his retirement from the board effective as of the Company’s 2012 Annual Meeting of Stockholders.

 

20
 

 

There are an additional 71,227 shares of common stock outstanding that are subject to the Put Right, which could require additional payments by the Company if exercised, at the same $2 per share purchase price. The Put Right with respect to these additional shares will expire on July 1, 2012. 

 

Liquidity Outlook

 

Due to the delay in collections relating to the processing of the Company’s invoices with governmental customers, the increased spending on commercialization and R&D activities and the additional liquidity needs created by the exercise of the Put Right, the Company believes it will not satisfy its financial covenants under the Sovereign Bank Loan Agreement as of June 30, 2012 unless it takes one or more of the actions described below.

 

To address compliance with its financial covenants and to maintain sufficient capital resources to meet its anticipated cash needs for working capital for the next 12 months, the Company is pursuing alternatives, including amending bank covenant requirements to obtain short-term waivers and/or obtaining third-party financing. Management has begun discussions with relevant parties to each of the potential actions. In addition, the Company plans to take internal steps to cut costs and reduce capital expenditures and to return its collection processes to their historical levels. However, there can be no assurances that the Company will be successful in implementing any of these actions, or if the Company is successful, whether the terms will be favorable to the Company. At the time of the filing of this Quarterly Report on Form 10-Q, given the preliminary stage of the Company’s discussions with its Lender and others and the related uncertainty, the Company has reclassified the long-term debt associated with the Sovereign Bank Loan Agreement as a current liability amount of $8,028,688.

 

In the event of a future financial covenant breach, the Sovereign Bank Loan Agreement permits the Lender to accelerate the indebtedness and terminate the Loan Agreement, which would cause all amounts outstanding, including all accrued interest and unpaid fees, to become immediately due and payable. As described above, management has begun discussions with the Lender regarding the possible need for a waiver or amendment of the financial covenants, however there can be no assurance that the waiver or amendment will be received or that there will not be a material cost for obtaining such a waiver or amendment. Any such action taken by the Lender could result in the Company’s having to refinance the Loan Agreement and obtain an alternative source of financing. There is no assurance that such financing would be obtained, or if such refinancing is obtained, that the terms of a new facility would be on terms comparable to the current Loan Agreement. If the Company is unable to obtain such financing, its operations and financial condition would be materially adversely affected and it would be forced to seek an alternative source of liquidity, such as by selling additional securities to continue operations, or to limit its operations.

 

Strategy to Commercialize our Advanced Technology

 

Our principal business strategy is to employ our contract research, product development and technological capabilities to establish leading positions in markets including homeland security, industrial and medical. We believe that we can achieve this strategy by: 1) developing and expanding our research portfolio; 2) commercializing the technologies coming from our Contract Research segment; 3) growing organically through investment in existing products; 4) acquiring new technologies or pathways to market to help accelerate commercialization of our technologies into our primary security and medical markets; and 5) identifying and investing in those technologies with the greatest revenue and growth potential in the market.

 

To achieve our strategy we are focusing on:

 

·Building a strong team of business and marketing leadership;
·Increasing our effectiveness across the organization through a series of operational initiatives, enabling us to expand into new product lines and penetrate new markets;
·Further strengthening our technology pipeline by expanding business development and by enhancing our intellectual property estate; and

 

21
 
·Executing a focused acquisition strategy that leverages our research and technology expertise and aligns acquisition dollars with projects closest to field readiness.

 

Contract Research – the Science Behind our Technology

 

Our Contract Research business unit, RMD, is among the largest small business participants in U.S. government-funded research, performing research and development activities for government agencies including Department of Energy, Department of Defense, Department of Homeland Security, Domestic Nuclear Detection Office, National Institutes of Health, and NASA.


RMD develops advanced technology in materials, sensors and prototype instruments that detect, use or measure radiation, light, magnetism or sound for use in security, medical and industrial applications. RMD has technology practices in material science, radiation detection, digital imaging technology, magnetic imaging, laser optics and photonics.

 

For more than 25 years, RMD has successfully conducted government research under the auspices of the Small Business Innovation Research (“SBIR”) program. In recent years, RMD has augmented its SBIR research with larger, competitively bid government research and development contracts. To grow our research portfolio within the federal government, we are broadening our relationships within key federal funding agencies and the U.S. military. Our research initiatives are aligned with our focus on the homeland security, medical and industrial markets. As of March 31, 2012, RMD had a contract backlog of approximately 18 months.

 

We believe that research projects provide an important source for new commercial products in areas such as medical imaging, industrial sensors, critical care and point of care diagnostics and homeland security. For example, precision instrumentation in our Products & Technology segment, including our lead paint analyzer and a medical probe for cancer surgery, emanated from the RMD portfolio. Our government-funded research work also has spawned programs such as our dual-mode radiation detection technology.

 

Intellectual Property

 

During FY 2011, we were granted five new U.S. patents and have filed 25 new patent applications. Our current portfolio is 41 issued and 54 pending applications. We believe that intellectual property represents an important strategic advantage for us. As a result, we recently established a patent committee to help broaden the value of our intellectual property estate. The committee is strengthening the identification of intellectual property within the Company by implementing a broad based vetting process to specifically understand product definition, technical maturity, the value proposition, competition, and market size to ensure that we develop IP that maximizes the market value of our research. This is consistent with our strategy and will allow us to protect selected technologies that we believe have commercial potential – either through product offerings or licensing agreements.


Products & Technology – Bringing Technology to Market


Our Products & Technology segment includes six business units that manufacture specialized precision instruments, optical materials, components, and coatings for various applications in the medical, industrial, and homeland security/defense sectors.

 

The largest business unit within our Products & Technology segment manufactures precision instruments such as handheld lead paint analyzers, medical probes that help surgeons detect cancer tracers, thereby enabling more effective surgical procedures, and a radiation imaging camera system. Previously referred to as RMD Instruments, this business unit has been renamed Dynasil Products.

 

We have continued investments in our pipeline of commercial product opportunities in homeland security and medical technology. Our Products & Technology businesses are helping to fund the commercial launch of our dual mode detector as well as evaluation, development and testing of certain assets within our biomedical technology portfolio.


We have begun to implement a Product Realization Process designed to support the evaluation, assessment, development and commercialization of our technologies. Concurrently, we will be screening technologies with this tool to develop Dynasil’s pipeline of commercial technology opportunities. This process also will serve to identify licensing or acquisition opportunities to help speed our offerings to market.

 

22
 

 

In conjunction with our Product Realization Process, we are building the foundation for an enhanced product development, engineering and management capability within Dynasil for those technologies that we choose to commercialize. This process also effectively provides a single resource to evaluate our design for manufacturability, contract manufacturing pathways, cost of goods and pricing, as well as our launch and distribution strategies.


These initiatives will be managed within our Dynasil Products business unit as it will be the commercial engine for the company generating income through organic programs and technology licensing opportunities.

 

Dynasil is also investing in organic product development in 2012. Guided by our product realization process, our product development team is undertaking simultaneous and extensive product line updates to improve features and functionality on our lead paint analyzer, medical probe and radiation imaging camera. In April, we announced the launch of our LPXpro Lead Paint Analyzer.

 

Product Pipeline

 

One of our current commercialization programs is our dual mode radiation detection technology. Our dual mode technology was developed by RMD under a program for the Department of Homeland Security for use in locating nuclear bombs or nuclear materials at our nation’s ports and borders. This technology is of critical importance to our national security, as well as other radiation detection applications, such as nuclear power plant safety.


Our dual mode detector technology is designed to be a single detector that replaces two detector subsystems – the gamma radiation detector and also the helium-3 detectors for neutrons. Increasing our value proposition is the fact that the stockpile of the chemical element helium-3, a byproduct of nuclear weapons production, is in critically short supply. The stockpile of helium-3 has been drawn down over the past ten years, as the federal government has increased its use in neutron detectors to help prevent nuclear and radiological material from being smuggled into the U.S.


In order to accelerate the pace of this technology to market, and to establish manufacturing capacity, in July 2010 we acquired Hilger Crystals, a leading manufacturer of scintillation crystals based in Margate, Kent, U.K. During the 2011 fiscal year, our specialized furnaces began pilot production of our proprietary scintillation crystals. Additional furnaces have been fabricated and tested, installed and commissioned during the first half of Fiscal Year 2012.


Potential applications for our synthetic crystals include homeland security, baggage scanning, medical imaging, oil exploration and military. During the fourth quarter of 2011, we made progress during developing commercial relationships with lead original equipment manufacturer (“OEM”) customers to make the dual mode technology available to several markets. We expect to deliver our dual mode detectors to OEM customers for beta testing with early adopters and begin to produce revenue in fiscal year 2012.

 

As part of our product pipeline review, we are continuing our efforts to evaluate additional promising technologies with commercial potential in the security, medical and industrial markets as we put our product realization process in place. Early stage opportunities currently under evaluation include dosimeters, thin film digital x-rays, sensors for non-destructive testing and certain biomedical technologies.

 

·Dosimeters: We are developing compact, low cost radiation badges (dosimeters) for potential military, industrial, medical and consumer applications. The project is being funded by the DOD’s Defense Threat Reduction Agency. We have partially completed shipments of 150 prototypes for field evaluation. The Company is researching the potential customer base and marketability of this potential product. According to Introductory Profile 2010 on dosimetryimaging.com, the total dosimeter market size is currently about $500 million.

 

23
 

 

·Thin film digital X-rays: RMD is developing a family of thin film scintillators that – as a component – make possible digital X-ray detectors with higher image resolution and faster rates of image capture, all at a lower effective X-ray dose to the patient. Thicker variations of these films offer promise of lower-cost, higher-performance substitutes for use in CT, SPECT and PET imaging system detectors for medical, industrial and domestic security applications. An August 2011 report by Nanomarkets LC indicated that the area of thin film scintillators used is expected to grow from 72 million cm² in 2011 to 258 million cm² in 2018. According to the PET/SPECT Report dated November 10, 2010 from the firm Markets and Markets, the market for PET/SPECT imaging systems – of which our technology is a component — is expected to grow from $6.8 billion in 2010 to $10.3 billion in 2015.

 

·Sensors for non-destructive testing: We are developing a product with an enhanced capability to detect cracks in high value components such as aircraft wings and jet engine turbine blades at a higher rate of speed. Unlike conventional probes that use hand wound coils, our advanced technology uses solid state sensors with high sensitivity to magnetic fields and low noise characteristics. When fully developed, this emerging technology could dramatically improve the ability and speed to inspect high value components. During the fourth quarter of 2011, we reached agreement to co-develop and evaluate the advanced technology on aircraft engine applications with an early adopter customer.

 

·Biomedical technologies: In April 2011, we acquired the rights to six biomedical technologies from Dr. Daniel Ericson, a former hematologist at the Mayo Clinic, which jointly owns rights to certain of the technologies acquired. The six purchased technology rights include a method that could significantly extend the storage time for red blood cells as well as enhancing the quality of those cells, a tuberculosis test with the potential to provide a rapid (one hour) test, a high tensile strength tissue sealant developed for both topical and internal bleeding that could accelerate clot formation, and a set of technologies focused on point of care diagnostics for assessing hemophilia, blood coagulation and cardiovascular risk. The Dynasil Biomedical technology portfolio is being managed by and has become part of our Dynasil Products business unit which already has a presence and a proven track record in medical diagnostics. We will seek opportunities to license these technologies as well as obtain research grants with the Mayo Clinic to advance several of the development-stage technologies for various therapeutic applications.

 

All of these technologies are in early stages of development and may require significant investment to support further development, regulatory approval and commercialization. While Dynasil currently believes that these technologies represent exciting opportunities, there can be no assurances that any of these technologies will be successfully commercialized.

 

Strategic Acquisition Targets

 

We are focused on completing new acquisitions in the homeland security, medical and industrial markets, where the Company has core competencies. Future acquisition targets will include businesses that enable us to acquire advanced products or technologies to expand our product portfolio, or to gain complementary capabilities, such as manufacturing and distribution, for our current businesses and for technologies originating from the Company’s research engine.

 

Critical Accounting Policies and Estimates

 

There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2011. We have not adopted any accounting policies since September 30, 2011 that have or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see the “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011 as well as the notes in this Form 10-Q.

 

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. Revenue from research and development activities is derived generally from the following types of contracts: reimbursement of costs plus fees, fixed price or time and material type contracts. Revenue is recognized when the products are shipped per customers’ instructions, the contract has been executed, the contract or sales price is fixed or determinable, delivery of services or products has occurred and the Company’s ability to collect the contract price is considered reasonably assured.

 

24
 

 

Government funded services revenues from cost plus contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the contracts’ fixed fees. Revenue from fixed-type contracts is recognized under the percentage of completion method with estimated costs and profits included in contract revenue as work is performed. Revenues from time and materials contracts are recognized as costs are incurred at amounts generally commensurate with billing amounts. Recognition of losses on projects is taken as soon as the loss is reasonably determinable. The Company has no current accrual provision for potential losses on existing research projects based on Management expectations as well as historical experience.

 

The majority of the Company’s contract research revenue is derived from the United States government and government related contracts. Such contracts have certain risks which include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under United States government contracts are subject to audit. The Company believes that the results of such audits will not have a material adverse effect on its financial position or its results of operations.

 

Valuation of Long-Lived Assets, Intangible Assets and Goodwill

 

Goodwill

 

Goodwill and intangible assets which have indefinite lives are subject to annual impairment tests. Goodwill is tested by reviewing the carrying value compared to the fair value at the reporting unit level. Fair value for the reporting unit is derived using the income approach. Under the income approach, fair value is calculated based on the present value of estimated future cash flows. Assumptions by management are necessary to evaluate the impact of operating and economic changes and to estimate future cash flows. Management’s evaluation includes assumptions on future growth rates and cost of capital that are consistent with internal projections and operating plans.

 

The Company generally performs its annual impairment testing of goodwill during the fourth quarter of its fiscal year, or more frequently if events or changes in circumstances indicate that the assets might be impaired. The Company tests impairment at the reporting unit level using the two-step process. The Company’s primary reporting units tested for impairment are Radiation Monitoring Devices, which comprises our Contract Research segment, Dynasil Products (previously known as RMD Instruments), which is a component of our Products and Technology segment, and Hilger Crystals, also a component of our Products and Technology segment.

 

Step one of our impairment testing compares the carrying value of the reporting unit to its fair value. The carrying value represents the net book value of the net assets of the reporting unit or simply the equity of the reporting unit if the reporting unit is the entire entity. The Company estimates fair value using a discounted cash flow methodology which calculates fair value based on the present value of estimated future cash flows. Estimating future cash flows requires significant judgment and includes making assumptions about projected growth rates, industry-specific factors, working capital requirements, weighted average cost of capital, and current and anticipated operating conditions. Assumptions by management are necessary to evaluate the impact of operating and economic changes. The Company’s evaluation includes assumptions on future growth rates and cost of capital that are consistent with internal projections and operating plans. The use of different assumptions or estimates for future cash flows could produce different results. The Company regularly assesses the estimates based on the actual performance of our reporting units.

 

If the carrying value of a reporting unit is greater than its fair value, step two of the impairment testing process is performed to determine the amount of impairment, if any, to be recognized. Step two requires the Company to estimate an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill. An impairment then exists if the carrying value of the goodwill is greater than the goodwill’s implied fair value. With respect to the Company's annual goodwill impairment testing performed during the fourth quarter of fiscal year 2011, step one of the testing determined the estimated fair values of Radiation Monitoring Devices and Hilger Crystals substantially exceeded their carrying values by more than 20%. The estimated fair value of the Dynasil Products (formerly known as RMD Instruments) reporting unit narrowly exceeded its carrying value. Therefore, the Company undertook a step two analysis by performing essentially a new purchase price allocation as of the date of the impairment test. Values were determined of both originally recognized assets and any new assets that may have been unrecognized at the time of the original transaction, but were developed between the acquisition date and the test date. The result was confirmation that the residual value of goodwill was higher than the carrying value. Accordingly, the Company concluded that no impairment had occurred.

 

25
 

 

Intangible Assets

 

The Company’s intangible assets consist of an acquired customer base of Optometrics, LLC, acquired customer relationships and trade names of RMD Instruments, LLC, and acquired backlog and know how of Radiation Monitoring Devices, Inc. and purchased biomedical technologies within Dynasil Biomedical Corp. The Company amortizes its intangible assets with definitive lives over their useful lives, which range from 4 to 15 years, based on the time period the Company expects to receive the economic benefit from these assets. No impairment charge was recorded during the periods ended March 31, 2012 and 2011.

 

Impairment of Long-Lived Assets

 

The Company’s long-lived assets include property, plant and equipment and intangible assets subject to amortization. The Company evaluates long-lived assets for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized.

 

Allowance 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 collectability of our accounts receivable and our future operating results.

 

Stock-Based Compensation

 

We account for stock-based compensation using fair value. Compensation costs are recognized for stock options granted to employees and directors. Options and warrants granted to employees and non-employees are recorded as an expense over the requisite service period based on the grant date estimated fair value of the grant, determined using the Black-Scholes option pricing model.

 

Income Taxes

 

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. 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.

 

26
 

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

In May 2011, the FASB issued Accounting Standards Update No. 2011-04 (ASU 2011-04), Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU 2011-04 clarifies some existing concepts, eliminates wording differences between U.S. GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting standard is not expected to have a material impact on the Company’s financial position, results of operations, cash flows and disclosures.

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity. All non-owner changes in shareholders’ equity instead must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is to be adopted retrospectively and will be effective for annual periods beginning after December 2011. The adoption of ASU 2011-05 will not have an impact on the Company’s consolidated financial position, results of operations, or cash flows, as the guidance only changes the presentation of financial information. In December 2011, the FASB issued ASU 2011-12 deferring the effective date for implementation of ASU 2011-05 related only to reclassification out of accumulated other comprehensive income until a later date to be determined after further consideration by the FASB.

 

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU No. 2011-08 provides companies an option to perform a qualitative assessment to determine whether further goodwill impairment testing is necessary. If, as a result of the qualitative assessment, it is determined that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, the two-step quantitative impairment test is required. Otherwise, no further testing is required. ASU No. 2011-08 will be effective for the Company for goodwill impairment tests performed in the fiscal year ending September 30, 2013, with early adoption permitted. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

 

Forward-Looking Statements

 

The statements contained in this Quarterly Report on Form 10-Q which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding results of operations, our compliance with the financial covenants under our loan agreement with Sovereign Bank, and our efforts to seek an amendment or waiver of the financial covenants under our loan agreement, seek an amendment of the put option exercised in February 2012 and/or seek additional outside financing, in each case as described under the “Liquidity and Capital Resources” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the commercialization of our products including our dual mode detectors, our development of new technologies including at Dynasil Biomedical, the adequacy of our current financing sources to fund our current operations, our growth initiatives and the put right exercised in February 2012, our capital expenditures and the strength of our intellectual property portfolio. These forward-looking statements may be identified by the use of words such as “may,” “could,” “expect,” “estimate,” “anticipate,” “continue” or similar terms, though not all forward-looking statements contain such words. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to develop and commercialize our products, the size and growth of the potential markets for our products and our ability to serve those markets, the rate and degree of market acceptance of any of our products, general economic conditions, costs and availability of raw materials and management information systems, our ability to obtain and maintain intellectual property protection for our products, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to identify and execute on acquisition opportunities and integrate such acquisitions into our business, and seasonality, as well as the uncertainties set forth in this Quarterly Report on Form 10-Q and from time to time in the Company's other filings with the Securities and Exchange Commission. The Company disclaims any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

27
 

 

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.

 

Dynasil, as a smaller reporting company, is not required to complete this item.

 

ITEM 4 Controls and Procedures

 

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the period covered by this report and have determined that, as of such date, such disclosure controls and procedures are effective.

 

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with this evaluation that occurred during our last fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 6 Exhibits

 

(a) Exhibits and index of Exhibits

 

10.1 Amendment No. 2 to Loan and Security Agreement, dated as of April 12, 2012 by and between Sovereign Bank, N.A., and Dynasil Corporation of America, filed as Exhibit 10.1 to Form 8-K filed on April 16, 2012, and incorporated herein by reference.

 

10.2 Dynasil Corporation of America Amended and Restated Employee Stock Purchase Plan filed as Appendix A to Definitive Proxy Statement, filed on January 11, 2012, and incorporated herein by reference.

 

31.1(a) Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.1(b) Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer 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 15, 2012 issued by Dynasil Corporation of America announcing its financial results for the quarter ended March 31, 2012.

 

101** The following materials from Dynasil Corporation of America’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of March 31, 2012 and September 30, 2011, (ii) Consolidated Statements of Operations for the six months ended March 31, 2012 and 2011, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2012; (iv) Consolidated Statements of Cash Flows for the six months ended March 31, 2012 and 2011, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.

 

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

28
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DYNASIL CORPORATION OF AMERICA

 

BY: /s/ Steven K. Ruggieri   DATED: May 15, 2012
  Steven K. Ruggieri,    
  President and Chief Executive Officer    
       
  /s/ Richard A. Johnson   DATED: May 15, 2012
  Richard A. Johnson,    
  Chief Financial Officer    

 

29

 

XNAS:DYSL Dynasil Corp of America Quarterly Report 10-Q Filling

Dynasil Corp of America XNAS:DYSL Stock - Get Quarterly Report SEC Filing of Dynasil Corp of America XNAS:DYSL stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:DYSL Dynasil Corp of America Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: XNAS:DYSL Dynasil Corp of America Insider Activity 4 Filing - 9/30/2012  |  Next: XNAS:DYSL Dynasil Corp of America Quarterly Report 10-Q Filing - 6/30/2012