10QSB 1 dyn10qsb0307.txt DYNASIL CORPORATION OF AMERICA FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB (Mark One) XX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE --- ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______. Commission file number 000-27503 ____________________ DYNASIL CORPORATION OF AMERICA ------------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) New Jersey 22-1734088 -------------- ------------------------------- (State or other jurisdiction (IRS Employer Identification No.) of incorporation) 385 Cooper Road, West Berlin, New Jersey, 08091 ---------------------------------------------------------- (Address of principal executive offices) (856) 767-4600 -------------------------------------------------- (Registrant's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days) Yes XX No ---- ---- The Company had 6,114,718 shares of common stock, par value $.0005 per share, outstanding as of May 7, 2007. 1 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES INDEX PAGE PART 1. FINANCIAL INFORMATION ---- ITEM 1. FINANCIAL STATEMENTS DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES ----------------------------------------------- CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2007 AND SEPTEMBER 30, 2006 3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2007 AND 2006 4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2007 AND 2006 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 11 ITEM 3. CONTROLS AND PROCEDURES 15 PART II. OTHER INFORMATION 15 ITEM 1. LEGAL PROCEEDINGS 15 ITEM 2. CHANGES IN SECURITIES 15 ITEM 3. DEFAULTS ON SENIOR SECURITIES 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 5. OTHER INFORMATION 16 ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 2 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS March 31 September 30 2007 2006 (Unaudited) ---------- ---------- Current assets Cash and cash equivalents $ 259,559 $ 352,139 Accounts receivable, net of allowance for doubtful accounts of $34,167 and $12,530 for March 31, 2007 and September 30, 2006, respectively 1,474,833 1,086,394 Inventories 1,417,054 1,131,648 Deferred tax asset 87,400 61,500 Prepaid expenses and other current assets 187,180 128,957 ---------- ---------- Total current assets 3,426,026 2,760,638 Property, Plant and Equipment, net 2,374,227 626,790 Other Assets 87,687 78,812 ---------- ---------- Total Assets $5,887,940 $3,466,240 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Note payable to bank- Line of credit $407,251 $190,000 Current portion - long term debt 98,906 72,482 Accounts payable 436,590 390,110 Accrued expenses 551,451 368,977 ---------- ---------- Total current liabilities 1,494,198 1,021,569 Long-term Debt, net 1,594,095 593,889 Stockholders' Equity Common Stock, $.0005 par value, 25,000,000 shares authorized, 6,923,183 and 4,698,453 shares issued, 6,113,023 and 3,888,293 shares outstanding 3,462 2,350 Preferred Stock, $.001 par value, 10,000,000 Shares 710 700 authorized, -0- and 700,000 Series A shares and 710,000 and -0- shares Series B shares issued and outstanding for March 31, 2007 and September 30, 2006 respectively, 10% cumulative, convertible Additional paid in capital 2,978,802 2,100,098 Retained earnings 803,015 733,976 ---------- ---------- 3,785,989 2,837,124 Less 810,160 shares in treasury - at cost (986,342) (986,342) ---------- ---------- Total stockholders' equity 2,799,647 1,850,782 ---------- ---------- Total Liabilities and Stockholders' Equity $5,887,940 $3,466,240 ========== ==========
3 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Six Months Ended March 31 March 31 2007 2006 2007 2006 ---------- --------- ---------- --------- Sales $3,003,216 $1,665,496 $5,539,512 $3,213,536 Cost of Sales 2,144,767 1,072,295 4,028,630 2,142,192 ---------- --------- ---------- --------- 858,449 593,201 1,510,882 1,071,344 Selling, general and administrative 715,962 486,640 1,321,429 913,298 ---------- --------- ---------- --------- Income from Operations 142,487 106,561 189,453 158,046 Interest expense - net (18,672) (18,709) (33,670) (39,244) ---------- --------- ---------- --------- Income before Income Taxes 123,815 87,852 155,783 118,802 Income Tax (11,586) (5,971) (20,655) (11,496) ---------- --------- ---------- --------- Net income $112,229 $81,881 $135,128 $107,306 ========== ========= ========== ========= Net income per share Basic $0.02 $0.02 $0.02 $0.02 Diluted $0.02 $0.01 $0.01 $0.01 Weighted average shares outstanding 4,943,093 3,846,542 4,599,067 3,807,660
4 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six months Ended March 31, 2007 2006 ----------- ----------- Cash flows from operating activities: Net income $ 135,128 $ 107,306 Adjustments to reconcile net income to net cash provided by (used in)operating activities: Depreciation 165,392 102,000 Amortization expense 7,806 13,602 Gain on disposal of assets -0- (2,000) Stock based compensation 11,366 -0- Allowance for doubtful accounts 21,637 10,998 (Increase) decrease in: Accounts receivable (127,501) 36,576 Inventories (210,195) (166,334) Prepaid expenses and other current asset (19,065) (14,772) Increase (decrease) in: Accounts payable and accrued expenses (250,803) 82,789 --------- ---------- Net cash provided by (used in) operating activities (266,235) 170,165 --------- ---------- Cash flows from investing activities: Acquisition of property, plant and equipment (123,206) (56,968) Proceeds from sale of assets -0- 2,000 Cash paid for acquisition of EMF (674,890) -0- --------- ---------- Net cash used in investing activities (798,096) (54,968) --------- ---------- Cash flows from financing activities: Issuance of common stock 168,461 41,270 Issuance of preferred stock 700,000 -0- Payments on long-term debt (47,778) (68,562) Proceeds from refinanced long-term debt 174,816 457 Payments on short-term debt (227,278) -0- Proceeds from short-term debt 251,870 -0- Deferred financing costs incurred -0- (41,464) Preferred stock dividends paid (48,340) (35,000) --------- ---------- Net cash provided by (used in) financing activities 971,751 (103,299) --------- ---------- Net increase (decrease) in cash (92,580) 11,898 Cash - beginning of period 352,139 308,210 --------- ---------- Cash - end of period $ 259,559 $ 320,108 ========== =========== Supplemental Disclosure of cash flow information: Non-cash investing and financing activities: Acquisition of EMF Corporation on October 2, 2006 Fair market value of current assets acquired $ 468,300 Property, plant and equipment 1,789,621 Fair market value of liabilities assumed (1,063,031) Total cost of acquisition 1,194,890 Debt incurred to pay seller (520,000) ---------- Net Cash paid for EMF Corporation $ 674,890
5 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(Continued) 2007 2006 Reconciliation of debt refinancing activities: Proceeds of new loans for New Jersey operations $ -0- $449,346 Repayment of old New Jersey Term Loan -0- 448,889 ------ ------- Net Proceeds of refinancing activity $ -0- $ 457 Preferred stock dividends declared $66,090 $35,000 Less dividends payable at March 31 (17,750) $ -0- ------ ------- Net cash paid for dividends $48,340 $35,000 To partially fund the acquisition of Evaporated Metal Films Corporation ("EMF"), the Company issued 710,000 shares of preferred stock, valued at $1.00 per share, incurred stock issuance costs of $10,000 and received net proceeds of $700,000. On October 2, 2006, concurrently with the acquisition of EMF Corporation, EMF borrowed $1,050,000, which amount was guaranteed by the Company. The proceeds were used as follows: 1) repayment of assumed liabilities of $338,161 at closing, 2) payment of the balance due the seller of $520,000 directly by the bank at closing, 3) payment of transaction costs of $17,023 at closing, and 4) the remaining balance of $174,816 was used for working capital purposes. DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation The consolidated balance sheet as of September 30, 2006 was audited and appears in the Form 10-KSB previously filed by the Company. The consolidated balance sheet as of March 31, 2007 and the consolidated statements of operations and cash flows for the three and six months ended March 31, 2007 and 2006, and the related information contained in these notes have been prepared by management without audit. In the opinion of management, all adjustments (which include only normal recurring items) necessary to present fairly the financial position, results of operations and cash flows in conformity with generally accepted accounting principles as of March 31, 2007 and for all periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year. On October 2, 2006, Dynasil acquired 100% of the stock of Evaporated Metal Films Corporation ("EMF") of Ithaca, NY. EMF provides optical thin-film coatings for a broad range of application markets including display systems, optical instruments, satellite communications and lighting. EMF provides products and services to optics markets which are related to those served by Dynasil. Dynasil's financial statements at March 31, 2007 include the EMF results of operations since October 2, 2006. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 2006 Annual Report on Form 10-KSB previously filed by the Company with the Securities and Exchange Commission. 6 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 2 - Business Acquisition On October 2, 2006, the Company completed its acquisition of all of the outstanding capital stock of EMF in a transaction accounted for as a purchase. Total cost of the acquisition was $1,194,890 of which $1.1 million was paid to the seller, and $94,890 represented acquisition costs incurred. From the proceeds of the issuance of 710,000 shares of Preferred Stock, Dynasil paid $580,000 in cash to the seller, incurred stock issuance costs of $10,000 and incurred acquisition related costs of approximately $94,890. Also on October 2, 2006, in a concurrent bank transaction, EMF borrowed $1,050,000 of which $338,161 was used to retire assumed EMF debt, $520,000 was paid directly to the seller at settlement, $17,023 was used to pay transaction costs and the remaining funds of $174,816 were used for working capital purposes. The total purchase price of approximately $1,194,890 has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values. The results of operations of EMF have been included in the consolidated financial statements from October 2, 2006, the effective date of acquisition. The allocation of purchase price is summarized below: Purchase price: Total consideration to seller $1,100,000 Acquisition costs incurred $ 94,890 --------- Total purchase price $1,194,890 ========= Purchase price allocation: Cash and cash equivalents $ 45,457 Accounts receivable 282,575 Inventories 75,211 Prepaid expenses and other current assets 65,057 Property and equipment 1,789,621 Current liabilities assumed ( 443,158) Other liabilities assumed ( 74,227) Debt assumed ( 545,646) --------- Net fair value of assets acquired $1,194,890 ========= The following is the proforma financial information of the Company for the six months ended March 31, 2006 assuming the transaction had been consummated at the beginning of the fiscal year ended September 30, 2006: For the six Months ended March 31, 2006 (Unaudited) Statement of Operations: Revenues $4,638,960 Cost of Sales 3,137,224 --------- Gross Profit 1,501,736 Operating Expenses 1,293,609 --------- Income from Operations 208,127 Interest Expense 54,033 --------- Income before taxes 154,094 Provision for income taxes 11,496 --------- Net Income $142,598 ========= 7 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Earnings per Share: Basic $ 0.02 Diluted $ 0.02 Note 3 - Debt On October 2, 2006, in conjunction with the EMF acquisition, EMF entered into Mortgage Note and Line of Credit Note Agreements with Tompkins Trust Company ("TTC") which were guaranteed by Dynasil. The guaranteed loans include (a) a $1,050,000 principal amount commercial mortgage (the "mortgage") and (b) a $215,000 principal amount line of credit facility (the "line of credit"). Proceeds of the mortgage were used to repay certain EMF debts, to pay for part of the acquisition of EMF and for working capital purposes. Proceeds of the line of credit will be used for general corporate purposes. The applicable borrowing documents were entered into at arms-length between EMF and Dynasil, on the one hand, and TTC, on the other hand, on commercial lending terms and conditions, including acceleration rights, events of default, TTC's rights and remedies and similar provisions that Dynasil believes are customary for commercial loans of this sort. In connection with the loan transactions, EMF and Dynasil executed and delivered to TTC customary forms of notes, mortgage, security agreement, assignment of leases and rents, and similar documents. The mortgage provides for repayment over a 20 year period at a fixed annual interest rate of 7.80% for the first 5 years, reset to a fixed annual interest rate of 2.80 percentage points over the Federal Home Loan Bank of New York Advance Rate for five- year maturities at five year intervals. The term loan is secured by a first mortgage on EMF's real estate, equipment, and fixtures, as well as Dynasil's guarantee. The line of credit has a term running until December 22, 2010 and carries an annual interest rate of one-half percent over The Wall Street Journal Prime Rate of interest, which is adjusted monthly. It is secured by EMF's real estate, equipment and fixtures, as well as Dynasil's guarantee. Note 4 - Convertible Preferred Stock On October 2, 2006, the Company sold 710,000 shares of a Series B 10% Cumulative Convertible Preferred Stock in a private placement. The stock was sold at a price of $1.00 per share. Total expenses for the stock placement were $10,000. No underwriting discounts or commissions were paid in connection with the sale. Each share of preferred stock carries a 10% per annum dividend and is convertible to 1.33 shares of common stock at any time by the holders and is callable after two years by Dynasil at a redemption price of $1.00 per share. Proceeds of the preferred stock sale were primarily used to acquire the capital stock of EMF and for related acquisition costs. On March 9, 2007, the company issued an aggregate of 1,555,540 shares of its Common Stock, $.0005 par value per share, as a result of the exercise of the conversion rights by holders of 700,000 shares of Dynasil's Series A 10% Cumulative Convertible Preferred Stock (the "Series A Preferred Shares"). Dynasil had previously called all of the Series A Preferred Shares for redemption on March 9, 2007. All of the shares of the Series A Preferred Shares that were called for redemption were converted to shares of common stock. Note 5 - Inventories Inventories are stated at the lower of average cost or market. Cost is determined using the first-in, first-out (FIFO) method. Inventories consist primarily of raw materials, work-in- process and finished goods. The Company evaluates inventory levels and expected usage on a periodic basis and records adjustments for impairments as required. 8 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Inventories consisted of the following: March 31, 2006 September 30, 2006 ----------------- ------------------ Raw Materials $852,620 $600,451 Work-in-Process 298,636 259,425 Finished Goods 265,798 271,772 ------- ------- $1,417,054 $1,131,648 ======= ======= Note 6 - Net Income Per Share Basic net income per share is computed using the weighted average number of common shares outstanding. The dilutive effects of potential common shares outstanding are included in diluted net earnings per share. Note 7 - Stock Based Compensation Prior to October 1, 2006, the Company accounted for stock options issued under the Plan under the recognition and measurements provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by FASB Statement No. 123, Accounting FOR stock Based Compensation ("SFAS No. 123"). Effective October 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123 (revised 2004), "Share-Based Payment", ("SFAS 123(R)") which requires the measurement and recognition of compensation expense for all stock-based payments awards made to employees and directors, including employee stock options, based on estimated fair values. We had previously applied Accounting Principles Board Opinion No. 25, "Account for Stock Issued Employees," ("APB 25") and related Interpretations and provided the required pro forma disclosures of State of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation ("SFAS 123") which was superceded by SFAS 123(R). The Company has also applied the provisions of Staff Accounting Bulletin No. 107 ("SAB 107") in the adoption of SFAS 123(R). We elected to adopt the modified prospective application transition method as provided by SFAS 123(R). In accordance with the modified prospective transition method, consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Under that transition method, compensation cost recognized in the six months ended March 31, 2007 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of March 31, 2007, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to October 1, 2005, based on the grant-dated fair value estimated in accordance with the provisions of Statement 123(R). The fair value of stock options granted was estimated at the date of grant using the Black-Scholes options pricing model. The Company used the following assumptions for determining the fair value of options granted under Black-Scholes option pricing model: March 31 2007 2006 Expected term in years 3 years 5 years Risk-free interest rate 4.82% 4.60% Expected volatility 20.42% 16.00% Expected dividend yield 0.00% 0.00% 9 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The expected volatility was determined with reference to the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant. During the six months ended March 31, 2007, 100,000 stock options were granted at prices ranging from $1.66 to $2.00 per share and 80,000 options were exercised. 20,000 of the granted stock options can not be exercised until 1/2/08 and therefore the stock-based compensation expense will be recognized at that time if they become exercisable. The 80,000 options exercised had an exercise price of $0.40 per share with $32,000 paid in cash. For six months ended March 31, 2007, total stock-based compensation charged to operations for option-based arrangements amounted to $11,366. At March 31, 2007, there was approximately $9,620 of total unrecognized compensation expense related to non- exercisable option-based compensation arrangements under the Plan. During the six months ended March 31, 2006, 130,000 stock options were granted at prices ranging from $0.85 to $1.50 per share and 80,000 options were exercised. The 80,000 options exercised had an exercise price of $0.40 per share with $23,857 paid in cash and $8,143 relating to Mr. Dunham's 2005 fiscal year bonus. The company cancelled -0- and 90,000 options during the six months ended March 31, 2007 and 2006, respectively. Compensation expense relating to non-employee stock options granted during the six months ended March 31, 2007 and 2006 were $-0-. The pro forma disclosures of net income and net income per share for the six months ended March 31, 2006, as permitted by SFAS 123(R), are presented below: Six months ended March 31, 2006 ----------- Net income, as reported $107,306 Add: Stock-based employee compensation expense included in reported net income -0- Less: Total stock-based employee compensation expense determined under fair value based method for all options (4,636) ----------- Pro forma net profit (loss) $102,670 =========== Actual net profit (loss) per common share $ 0.02 Pro forma net profit (loss) per common share $ 0.02 10 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Overview This is the second quarter of results after Dynasil Corporation of America ("Dynasil", the "Company" or "we") acquired 100% of the stock of Evaporated Metal Films Corporation ("EMF") in Ithaca, NY on October 2, 2006. EMF provides optical thin-film coatings for a broad range of application markets including display systems, optical instruments, satellite communications and lighting. EMF provides products and services to optics markets which are related to those served by Dynasil's historical operations. The Dynasil financial statements include the EMF results from October 2, 2006 through March 31, 2007. The results from time periods previous to October 2, 2006 do not include EMF except for pro forma financial information for the six months ended March 31, 2006. Revenues for the second quarter of fiscal year 2007 which ended March 31, 2007 were $3,003,216, an increase of 80.3% over revenues of $1,665,496 for the quarter ended March 31, 2006. Revenues for the six months ended March 31, 2007 were $5,539,512, an increase of 72% over revenues of $3,213,536 for the six months ended March 31, 2006. Net income for the quarter ended March 31, 2007 was $112,229 or $0.02 per share, compared with a net income of $81,881,or $0.02 per share, for the quarter ended March 31, 2006. Net income for the six months ended March 31, 2007 was $135,128 or $0.02 per share, compared with a net income of $107,306 or $0.02 per share for the six months ended March 31, 2006. Excluding the impact of the EMF acquisition and $11,366 of stock option expense, for the three months ended March 31, 2007 revenues for our historical businesses were up 39% and net income was up 208%, from $81,881 to $251,941, compared to the three months ended March 31, 2006. Excluding the impact of the EMF acquisition and $11,366 of stock option expense, for the six months ended March 31, 2007 revenues for our historical businesses were up 31% and net income was up 256% compared to the six months ended March 31, 2006. Strong revenue growth combined with continued process improvements drove those significant gains. As anticipated, transitional and process improvement costs resulted in a loss at EMF for its second quarter with Dynasil. The EMF loss offset the outstanding improvements in our historical businesses. Management is clearly focused on the EMF improvements required to show continued improvement in 2007 and to deliver profitable results for fiscal year 2008. During quarter 2, we significantly improved manufacturing yields and reduced production downtime as we develop the disciplined processes required for EMF to consistently execute with excellent quality, service, and cost performance. March 2007 profitability results for EMF were slightly better than break-even. Results of Operations Revenues for the three months ended March 31, 2007 were $3,003,216, an increase of 80.3% over revenues of $1,665,496 for the quarter ended March 31, 2006. The revenue increase came from 39% organic growth in our historical businesses as well as the addition of EMF. Revenues for the six months ended March 31, 2007 were $5,539,512, an increase of 72% over revenues of $3,213,536 for the six months ended March 31, 2006. Cost of sales for the three months ended March 31, 2007 was $2,144,767 or 71.4% of sales, an increase of 7.1 percentage points from the three months ended March 31, 2006 of $1,072,295, or 64.3% of sales. Cost of sales for the six months ended March 31, 2007 was $4,028,630 or 72.7% of sales, an increase of 6.1 percentage points from the six months ended March 31, 2006 of $2,142,192, or 66.6% of sales. The higher cost of sales resulted primarily from EMF costs. 11 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The cost of sales for our historical businesses actually improved by 0.8 percentage points. The Company continues to implement cost reductions such as manufacturing yield improvements. Gross profit for the three months ended March 31, 2007 was $858,449, or 28.5% of sales, an increase of $265,248 over the three months ended March 31, 2006 of $593,201, or 35.6% of sales. Gross profit for the six months ended March 31, 2007 was $1,510,882, or 28.6% of sales, an increase of $439,538 over the six months ended March 31, 2006 of $1,071,344 or 33.4% of sales. Operational improvements at EMF are key to increasing our gross profit in the future. Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2007 were $715,962 or 23.8% of sales, a decrease of 5.4 percentage points from the three months ended March 31, 2006 of $486,640 or 29.2% of sales. SG&A expenses for the six months ended March 31, 2007 were $1,321,429 or 23.9% of sales, a decrease of 4.6 percentage points from the six months ended March 31, 2006 of $913,298 or 28.4% of sales. The changes in SG&A expenses and percentages resulted primarily from the impact of the acquisition of EMF. Net interest expense for the three months ended March 31, 2007 was $18,672, compared to $18,709 for the three months ended March 31, 2006. Net interest expense for the six months ended March 31, 2007 was $33,670 compared to $39,244 for the six months ended March 31, 2006. There is additional EMF interest expense of $40,994 that is allocated to cost of goods sold and SG&A expense so in total, net interest expense was $74,664 which is an increase of $35,420 for the six month period. The increase in combined interest expense is primarily related to the additional interest payments resulting from the indebtedness incurred in connection with the EMF acquisition. Net income for the three months ended March 31, 2007 was $112,229 or $0.02 in basic earnings per share, which is up $30,348 versus net income for the three months ended March 31, 2006 of $81,881 or $.02 in basic profit per share. Net income for the six months ended March 31, 2007 was $135,128 or $0.02 per share, compared with a net income of $107,306 or $0.02 per share for the six months ended March 31, 2006. Organic revenue growth of 39% in our historical businesses along with continued process improvements drove a 208% net income increase for our historical businesses in quarter 2. Losses at EMF offset this improvement and we have a strong focus at EMF to improve our processes and deliver profitability. The Company had a $11,586 provision for Massachusetts income taxes for the quarter ended March 31, 2007 and a $5,971 provision for the quarter ended March 31, 2006. The Company had a $20,136 provision for Massachusetts income taxes for the six months ended March 31, 2007 and a $11,496 provision for the six months ended March 31, 2006. As of September 30, 2006, the Company had approximately $900,000 of net operating loss carry forwards to offset future income for federal tax purposes expiring in various years through 2021. In addition, the Company had approximately $550,000 of net operating loss carryforwards to offset certain future New Jersey taxable income, expiring in various years through 2013. Liquidity and Capital Resources Cash decreased by $92,580 for the six months ended March 31, 2007. The primary sources of cash were net income of $135,128, depreciation and amortization expenses that aggregated $173,198, net borrowings of $221,613, the issuance of common stock of $168,461 and issuance of preferred stock of $700,000. The primary uses of cash were acquisition of property, plant and 12 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) equipment of $123,206, accounts receivable increase of $127,501, an inventory increase of $210,195, reductions in accounts payable and accrued expenses of $250,803, dividend payments of $48,340 on Preferred Stock and the acquisition of EMF of $674,890. The increase in inventory was a result of purchasing fused silica raw material that was previously provided as consignment inventory by our primary supplier as well. The reduction in accounts payable and accrued expense came from the timing of accounts payable expenses as well as a reduction in accrued expenses and accounts payable at EMF. The Company believes that its current cash and cash equivalent balances, along with the net cash generated by operations and credit lines, are sufficient to meet its anticipated cash needs for working capital for at least the next 12 months. There are currently no plans for any major capital expenditures in the next six to nine months. Any major business expansions or acquisitions likely will require the Company to seek additional debt and/or equity financing. Critical Accounting Policies and Estimates There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2006. Except for the adoption of SFAS 123(R), we have not adopted an accounting policy that has or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see Footnote 1 "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2006. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: Revenue Recognition Revenue from sales of products is recognized at the time title and the risks and rewards of ownership pass. This is when the products are shipped per customers' instructions, the sales price is fixed and determinable, and collections are reasonably assured. Valuation of Long-Lived Assets We assess the recoverability of long-lived assets whenever we determine that events or changes in circumstances indicate that their carrying amount may not be recoverable. Our assessment is primarily based upon our estimate of future cash flows associated with these assets. These valuations contain certain assumptions concerning estimated future revenues and future expenses. We have determined that there is no indication of impairment of any of our assets. However, should our operating results deteriorate, we may determine that a portion of our long-lived assets is impaired. Such a determination could result in non-cash charges to income that could materially and adversely affect the Company's financial position or results of operations for that period. Estimating Allowances for Doubtful Accounts Receivable We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been minimal, within our expectations and the provisions 13 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectibility of our accounts receivable and our future operating results. Valuation of Deferred Tax Assets We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse. Based on the Company's history of significant fluctuations in net earnings, the Company established a full valuation allowance as of September 30, 2004 and prior due to the uncertainty as to the realization of certain net operating loss carryforwards. With the asset acquisition from Optometrics LLC in March 2005, the Company now believes that some of these carryforwards will be realized, and has adjusted the valuation allowance accordingly as outlined in the Company's Annual Report on Form 10-KSB for the fiscal year ended September 30, 2006. Stock-Based Compensation Effective October 1, 2006, we adopted SFAS 123(R), "Accounting for Stock Based Compensation." As a result, compensation costs are now recognized for stock options granted to employees and directors. Options and warrants granted to employees and non-employees are recorded as an expense at the date of grant based on the then estimated fair value of the security in question, determined using the Black Scholes option pricing model. Recent Accounting Pronouncements In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115" (SFAS 159). SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of the provisions of SFAS 159 on our results of operations and financial position. Forward-Looking Statements The statements contained in this Quarterly Report on Form 10-QSB which are not historical facts, including, but not limited to, certain statements found under the captions "Overview", "Results of Operations" and "Liquidity and Capital Resources" above, are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements could differ materially from those stated in 14 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Quarterly Report on Form 10-QSB, including, without limitation, the portions of such reports under the captions referenced above, and the uncertainties set forth from time to time described in this and the Company's other filings with the Securities and Exchange Commission, and other public statements. Such risks and uncertainties include, without limitation, seasonality, interest in the Company's products, customer acceptance of new products, general economic conditions, market trends, costs and availability of raw materials and management information systems, competition, litigation, need for additional financing, the effect of governmental regulation and other matters. The Company disclaims any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 3 CONTROLS AND PROCEDURES As required by Rule 13a-15(e) under the Exchange Act, our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of the end of the period covered by the report and have determined that such disclosure controls and procedures are effective. There has been no change in our internal control over financial reporting in connection with this evaluation that occurred during our last fiscal quarter that materially affected, or it is reasonably likely to materially affect, our internal control over financial reporting. PART II OTHER INFORMATION ------------------ ITEM 1 LEGAL PROCEEDINGS On April 24, 2007, the Company was dismissed as a defendant from a previously reported wrongful death and loss of consortium action entitled Torrero v. Alcoa, Inc., et al in the Los Angeles (CA) Superior Court. The dismissal did not require the expenditure of any funds by the Company. On August 30, 2004, the Company had been served with a Summons and Complaint in that action which had been filed on August 19, 2004. In the case, the plaintiffs, Lucy Torrero and Juan Pedrosa Torrero, alleged that glass blanks manufactured and sold by the Company, along with the products or tools made and sold by approximately twenty other defendants including General Electric, ALCOA, Corning Incorporated and Raytheon, caused plaintiff Lucy Torrero to develop lung cancer and other injuries during her employment as an optical lens grinder and laborer by companies that purchased or used those products or tools. The plaintiffs sought compensatory and punitive damages aggregating approximately $31,500,000. The lawsuit was refiled as a wrongful death suit following the death of Lucy Torrero on April 11, 2006. As previously reported, the Company referred the matter to its commercial general liability insurance carriers which defended the Company under reservations of rights. The Company has no other pending legal proceedings. 15 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ITEM 2 CHANGES IN SECURITIES On March 9, 2007, the company issued an aggregate of 1,555,540 shares of its Common Stock, $.0005 par value per share, as a result of the exercise of the conversion rights by holders of 700,000 shares of Dynasil's Series A 10% Cumulative Convertible Preferred Stock (the "Series A Preferred Shares"). Dynasil had previously called all of the Series A Preferred Shares for redemption on March 9, 2007. All of the Series A Preferred Shares that had been called for redemption were converted to common stock. ITEM 3 DEFAULTS ON SENIOR SECURITIES NONE ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE ITEM 5 OTHER INFORMATION The information presented in Items 1 and 2 of Part I of this Report is incorporated herein by reference. On May 14, 2007, the Company issued a press release announcing its financial results for its second quarter ending March 31, 2007. A copy of this press release is attached as Exhibit 99 to this Report on Form 10-QSB. This information is being furnished pursuant to Item 5 of Part II of Form 10-QSB and shall not be deemed to be "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits and index of Exhibits 31.1(a) and (b) Rule 13a-14(a)/15d-14(a) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished but not filed for purposes of the Securities Exchange Act of 1934) 99.1 Press release, dated May 14, 2007, issued by Dynasil Corporation of America announcing its financial results for the second quarter ending March 31, 2007. (b) Reports on Form 8-K - On 3/12/07, a current report on Form 8-K Items 3.02 and 8.01 for the conversion of the Series A Convertible Preferred Stock to common stock. 16 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DYNASIL CORPORATION OF AMERICA BY: /s/ Craig T. Dunham DATED: May 14, 2007 --------------------------------- -------------------- Craig T. Dunham, President and CEO /s/ Laura Lunardo DATED: May 14, 2007 ----------------------------- -------------------- Laura Lunardo Chief Financial Officer 17