-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F9xQC6pyKaI3qQCPrTOBnYjA1VBD36PcWVIspK7Q1SnPmq3W2hrdyRu4w1bh/vyj u6Eyasp8ULc66dw0dTERvg== 0001260415-10-000042.txt : 20100816 0001260415-10-000042.hdr.sgml : 20100816 20100816060803 ACCESSION NUMBER: 0001260415-10-000042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20100630 FILED AS OF DATE: 20100816 DATE AS OF CHANGE: 20100816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DYNASIL CORP OF AMERICA CENTRAL INDEX KEY: 0000030831 STANDARD INDUSTRIAL CLASSIFICATION: GLASS, GLASSWARE, PRESSED OR BLOWN [3220] IRS NUMBER: 221734088 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27503 FILM NUMBER: 101016997 BUSINESS ADDRESS: STREET 1: 385 COOPER RD CITY: WEST BERLIN STATE: NJ ZIP: 08091 BUSINESS PHONE: 8567674600 MAIL ADDRESS: STREET 1: 385 COOPER RD CITY: WEST BERLIN STATE: NJ ZIP: 08091 10-Q 1 dyn10q063010.txt DYNASIL CORPORATION OF AMERICA FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) XX QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010 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 (IRS Employer of incorporation) Identification No.) 385 Cooper Road, West Berlin, New Jersey, 08091 ---------------------------------------------------------- (Address of principal executive offices) (856) 767-4600 -------------------------------------------------- (Registrant's telephone number, including area code) 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 XX 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 No ---- ---- 1 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 XX ------ ------ Indicate by check mark whether the registrant is a shell company Yes No XX ---- ----- The Company had 12,671,645 shares of common stock, par value $.0005 per share, outstanding as of August 16, 2010. 2 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES INDEX PART 1. FINANCIAL INFORMATION PAGE 3 - ------ Item 1. Financial Statements DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES ----------------------------------------------- CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2010 AND SEPTEMBER 30, 2009 4 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009 6 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 2010 AND 2009 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8 Item 2. Management's Discussion and Analysis of Financial 14 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 22 Market Risk Item 4T. Controls and Procedures 23 PART II. OTHER INFORMATION 23 Item 1. Legal Proceedings 23 Item 6. Exhibits 23 Signatures 24 3 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS June 30 September 30 2010 2009 (Unaudited) ---------- ---------- Current assets Cash and cash equivalents $4,002,366 $ 3,104,778 Accounts receivable, net of allowance for doubtful accounts of $113,553 and $123,853 and sales returns of $41,714 and $18,916 for June 30, 2010 and September 30, 2009, respectively 4,690,587 4,053,742 Inventories 2,183,367 2,371,516 Deferred tax asset 346,500 290,100 Prepaid expenses and other current assets 425,595 306,848 ---------- ---------- Total current assets 11,648,415 10,126,984 Property, Plant and Equipment, net 2,641,397 2,744,724 Other Assets Intangibles, net 6,820,353 7,232,035 Goodwill 11,054,396 11,054,396 Deferred financing costs, net 53,499 64,637 ---------- ---------- Total other assets 17,928,248 18,351,068 ---------- ---------- Total Assets $32,218,060 $31,222,776 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long term debt $1,847,785 $ 1,749,524 Note payable to related party 2,000,000 -0- Accounts payable 869,826 773,837 Accrued expenses and other current liabilities 1,809,680 1,111,342 Income taxes payable 345,828 507,122 Billings in excess of costs -0- 60,448 Dividends payable 131,400 149,150 ---------- ---------- Total current liabilities 7,004,519 4,351,423 Long-term Liabilities Long-term debt, net 4,685,547 6,386,796 Note payable to related party -0- 2,000,000 ---------- ---------- Total long-term liabilities 4,685,547 8,386,796
4 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued) June 30 September 30 2010 2009 (Unaudited) ---------- ---------- Temporary Equity Redeemable common stock at redemption value $2,000,000 2,000,000 2,000,000 Put option on 1,000,000 shares, 1,000,000 shares issued and outstanding in 2010 and 2009. Stockholders' Equity Common Stock, $.0005 par value, 40,000,000 shares authorized, 12,428,941 and 11,250,257 shares issued, 11,618,781 and 10,440,097 shares outstanding 6,214 5,625 Preferred Stock, $.001 par value, 10,000,000 Shares authorized, 5,256,000 and 5,966,000 5,256 5,966 shares issued and outstanding for June 30, 2010 and September 30, 2009, 10% cumulative, convertible Additional paid in capital 15,003,262 14,364,888 Retained earnings 4,663,100 3,094,420 ---------- ---------- 19,677,832 17,470,899 Deferred Compensation - Common Stock (163,496) -0- Less 810,160 shares in treasury - at cost (986,342) (986,342) ---------- ---------- Total stockholders' equity 18,527,994 16,484,557 ---------- ---------- Total Liabilities and Stockholders' Equity $32,218,060 $31,222,776 ========== ==========
5 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended June 30 June 30 2010 2009 2010 2009 ---------- --------- ---------- ---------- Net revenues $11,294,868 $8,512,892 $31,494,960 $25,883,053 Cost of revenues 6,562,323 4,860,590 18,669,123 15,643,287 ---------- --------- ---------- ---------- Gross profit 4,732,545 3,652,302 12,825,837 10,239,766 Selling, general and administrative expenses 3,399,584 2,957,111 9,311,918 8,131,946 ---------- --------- ---------- ---------- Income from operations 1,332,961 695,191 3,513,919 2,107,820 Interest expense, net 142,578 160,367 457,007 567,025 ---------- --------- ---------- ---------- Income before income taxes 1,190,383 534,824 3,056,912 1,540,795 Income taxes 462,737 141,456 1,082,199 387,654 ---------- --------- ---------- ---------- Net income $727,646 $393,368 $1,974,713 $1,153,141 ========== ========= ========== ========== Three Months Ended Nine Months Ended June 30 June 30 2010 2009 2010 2009 ---------- --------- ---------- ---------- Net income $727,646 $393,368 $1,974,713 $1,153,141 Dividends on preferred stock 131,400 149,150 406,033 447,450 ---------- --------- ---------- ---------- Net income applicable to common shareholders 596,246 244,218 1,568,680 705,691 Dividend add back due to assumed Preferred Stock conversion 131,400 17,750 406,033 53,250 ---------- --------- ---------- ---------- Net income for diluted income per common share $727,646 $261,968 $1,974,713 $758,941 ========== ========= ========== ========== Basic net income per common share $0.05 $0.02 $0.13 $0.06 Diluted net income per common share $0.05 $0.02 $0.13 $0.06 Weighted average shares outstanding Basic 12,610,116 11,371,933 12,315,532 11,362,745 Diluted 14,982,382 12,346,636 14,687,798 12,337,448
6 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended June 30 2010 2009 ---------- ----------- Cash flows from operating activities: Net income $ 1,974,713 $1,153,141 Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expense 202,325 96,345 Provision for doubtful accounts and sales returns 12,498 (48,318) Depreciation and amortization 767,686 732,725 Deferred income taxes (56,400) -0- (Increase) decrease in: Accounts receivable (649,343) (374,360) Inventories 188,149 406,595 Prepaid expenses and other current assets (164,573) (34,324) Increase (decrease) in: Accounts payable and accrued expenses 776,576 (487,778) Income taxes payable (161,294) 117,400 Billings in excess of cost (60,448) 180,011 ----------- ---------- Net cash provided by operating activities 2,829,889 1,741,437 ----------- ---------- Cash flows from investing activities: Purchases of property, plant and equipment (241,468) (292,567) Decrease in other assets (71) 5,269 ----------- ---------- Net cash used in investing activities (241,539) (287,298) ----------- ---------- Cash flows from financing activities: Issuance of common stock 264,509 66,347 Repayment of long-term debt (1,602,988) (1,275,940) Repayment of short-term debt -0- (490,117) Deferred financing costs incurred -0- 6,130 Preferred stock dividends paid (352,283) (447,450) ----------- ---------- Net cash used in financing activities (1,690,762) (2,141,030) ----------- ---------- Net increase (decrease) in cash and cash equivalents 897,588 (686,891) Cash and cash equivalents, beginning 3,104,778 3,882,955 ----------- ---------- Cash and cash equivalents, ending $4,002,366 $3,196,064 =========== =========== Supplemental Information on Cash Flows Non cash portion of preferred stock dividends paid $53,750 $-0-
Preferred dividends totaled $406,033 during the period ended June 30, 2010, of which $352,283 was paid in cash and $53,750 was paid in common stock issuance. 7 DYNASIL CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation The consolidated balance sheet as of September 30, 2009 was audited and appears in the Form 10-K previously filed by the Company. The consolidated balance sheet as of June 30, 2010 and the consolidated statements of operations and cash flows for the three and nine months ended June 30, 2010 and 2009, and the related information contained in these notes have been prepared by management without audit. In the opinion of management, all adjustments (which include only normal recurring items) necessary to present fairly the financial position, results of operations and cash flows in conformity with generally accepted accounting principles as of June 30, 2010 and for all periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 2009 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission. Reclassifications Certain amounts as previously reported have been reclassified to conform to the current year financial statement presentation. In addition, see Note 7 describing a reclassification relating to temporary equity. 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 adjustments for impairments as required. Inventories consisted of the following: June 30, 2010 September 30, 2009 ----------------- ------------------ Raw Materials $1,499,316 $1,374,134 Work-in-Process 346,117 550,151 Finished Goods 337,934 447,231 ----------------- ------------------ $2,183,367 $2,371,516 ================= ================== Note 3 - Billings in Excess of Costs Billings in excess of costs relates to research and development contracts and consists of billings at provisional contract rates less actual costs plus fees. 8 Note 4 - Intangible Assets Intangible assets at June 30, 2010 and September 30, 2010 consist of the following: Useful Gross Accumulated June 30, 2010 Life (Years) Amount Amortization - ------------- ------------ ------ ------------ Acquired Customer Base 5-15 $7,025,413 $ 986,060 Know How 15 512,000 68,267 Trade Names 15 219,000 29,200 Backlog 4 182,000 34,533 ---------- ----------- $7,938,413 $1,118,060 ========== =========== Useful Gross Accumulated September 30, 2009 Life (Years) Amount Amortization - ------------------ ------------ ------ ------------ Acquired Customer Base 5-15 $7,025,413 $ 630,294 Know How 15 512,000 42,667 Trade Names 15 219,000 18,250 Backlog 4 182,000 15,167 ---------- ----------- $7,938,413 $ 706,378 ========== ===========
During the period ended June 30, 2010, the Company adjusted the useful life of the Company's Backlog from 15 years to 4 years from the date of acquisition (July 1, 2008). A useful life of 4 years coincides with the corresponding revenues generated from the backlog. The Company determined that amortizing the backlog over 15 years versus 4 years from the date of acquisition did not have a material impact on the current or prior period financial statements. Commencing April 1, 2010, the net book value of the backlog of $160,767 is being amortized over its remaining useful life of 27 months. Note 5 - Net Income Per Share Basic net income per common share is computed by dividing the net income applicable to common shares after preferred stock dividend requirements, if applicable, by the weighted average number of common shares outstanding during each period. Diluted net income per common share adjusts basic earnings per share for the effects of common stock options, convertible preferred stock and other potential dilutive common shares outstanding during the periods. For purposes of computing diluted earnings per share, 2,372,266 and 974,703 common share equivalents were assumed to be outstanding for the quarters ended June 30, 2010 and 2009, respectively. The effect of the assumed conversion of certain stock options was anti-dilutive and therefore excluded from the computations. The computation of basic and diluted net income per common share is as follows: Calculation of Net Income for Basic Earnings per Share June 30,2010 June 30, 2009 ---------- ----------- Net income $1,974,713 $1,153,141 Less: Preferred stock dividends (406,033) (447,450) ---------- ----------- Income allocable to common shareholders $1,568,680 $ 705,691 9 Calculation of Net Income for Diluted Earnings per Share June 30,2010 June 30, 2009 ---------- ----------- Net income $1,974,713 $1,153,141 Less: Preferred stock dividends $ -0- (394,200) ---------- ----------- Net Income for Dilutive Earnings per Share $1,974,713 $ 758,941 Weighted average shares outstanding June 30,2010 June 30, 2009 Basic 12,315,532 11,362,745 Effect of dilutive securities Stock Options 269,866 30,403 Convertible Preferred Stock 2,102,400 944,300 ---------- ----------- Diluted average shares outstanding 14,687,798 12,337,448 Note 6 - Stock Based Compensation The fair value of the stock options granted was estimated at the date of grant using the Black-Scholes options pricing model. The list of assumptions used for the Black-Scholes option pricing model is presented below with numbers shown for the most recent grant: May 10, 2010 (Date of most recent grant) Expected term in years 3 years Risk-free interest rate 4.23% Expected volatility 68.33% Expected dividend yield 0.00% The expected volatility was determined with reference to the historical volatility of the Company's stock. The expected term of options granted represents the period of time for which the options have been granted. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant. During the three months ended June 30, 2010, 6,471 stock options were granted at $3.58 per share and 15,000 stock options were exercised. The stock options granted vest in 2012 and are for employee compensation with a Black Scholes value of $7,000. The options exercised had an exercise price of $2.00 per share with $30,000 paid in cash. For the three months ended June 30, 2010, total stock-based compensation charged to operations was $81,962 consisting of $43,189 from previously granted options that vested during this period and $38,773 for stock grants. At June 30, 2010, there was approximately $301,752 of total unrecognized compensation expense related to non-exercisable option-based compensation arrangements under the Plan. The Company cancelled $0 worth of options during the three months ended June 30, 2010. Compensation expense relating to stock grants during the three months ended June 30, 2010 totaled $38,773, comprised of 2,302 shares granted at $2.61 and 718 shares granted at $2.99 per share and 43,619 shares for deferred directors' compensation issued March 2010 at $2.69 per share. During the nine months ended June 30, 2010, 671,118 stock options were granted at prices ranging from $3.19 to $4.06 per share and 121,459 stock options were exercised. Of the granted stock options, 550,000 vest quarterly beginning in January 2010, 20,000 of the remaining options vest in 2011, 6,471 vest in 2012 and the remaining 94,647 are currently vested. Of the options exercised, 110,000 had an exercise price of $2.00 per share with $220,000 paid in cash, 3,876 had an exercise price of $0.60 per share with $2,325.60 paid in 10 cash, 2,182 had an exercise price of $0.51 per share with $1,112.82 paid in cash, and 2,134 had an exercise price of $0.53 per share with $1,131.02 paid in cash. For the nine months ending June 30, 2010, total stock based compensation was charged to operations was $202,325, consisting of $32,296 from previously granted options that vested during this period, $82,831 from Director stock options, and $87,198 from stock grants. The Company cancelled $12,954 worth of stock options during the nine months ended June 30, 2010. Compensation expense relating to stock grants during the nine months ended June 30, 2010 totaled $87,198, comprised of 6,200 shares granted at $2.80, 300 shares granted at $2.99, 3,769 shares granted at $1.99, 2,768 shares granted at $2.71, 2,302 shares granted at $2.61, 718 shares granted at $2.79 and 47,584 shares granted at $2.69 per share, which includes 43,619 shares for deferred directors' compensation. Note 7 - Equity On July 1, 2008, the Company acquired certain business assets from RMD Instruments, LLC (the "Seller") through a new Dynasil wholly-owned subsidiary named RMD Instruments Corporation. This was done in order to maintain the name in the marketplace with customers. As part of the transaction, the Company issued one million Dynasil common stock shares to the members of the Seller. Commencing July 1, 2010, the Seller's members may tender these shares of Dynasil common stock to the Company for repurchase by it at a repurchase price of $2.00 per share during a two year period ending July 1, 2012, upon no less than ninety (90) days prior notice to the Company. During the period ended June 30, 2010, the Company reclassified the 1,000,000 shares of redeemable common stock valued at its redemption value of $2.00 per share, or $2,000,000, from permanent equity to temporary equity to properly reflect the repurchase requirement that is not within the Company's control. Management believes the likelihood of redemption is remote and has determined that the reclassification adjustment has no material impact on the financial statements for the periods presented. There is no material impact on the Company's financial position, results of operations or earnings per share. In addition, there is no material impact on liquidity ratios: debt to equity, debt leverage, return on equity or working capital. The reclassification adjustment resulted in a decrease in common stock of $500 and additional paid-in-capital of $1,999,500 and an increase in temporary equity of $2,000,000. Prior periods presented have been reclassified to conform with the current period financial statement presentation. On November 30, 2009, Dynasil issued an aggregate of 946,431 shares of its Common Stock, $.0005 par value per share, as a result of the exercise of the conversion rights by holders of 710,000 shares of its Series B 10% Cumulative Convertible Preferred Stock (the "Series B Preferred Shares"). Dynasil had previously called all of the Series B Preferred Shares for redemption on November 30, 2009. 100% of the Series B preferred stock was converted to common stock which eliminates dividend payments of $71,000 on an annual basis. As of June 30, 2010, 5,256,000 shares of Dynasil's Series C 10% Cumulative Convertible Preferred Stock (the "Series C Preferred Shares") were outstanding. The Company's convertible preferred stock, when issued, was convertible to common stock at or above the current market price of the Company's common stock and therefore, contains no beneficial conversion feature. Dividends on the Series C Preferred Shares are payable quarterly in cash or common stock at the election of the stockholder. A Series C preferred stockholder's ability to elect for dividends in common stock is terminated once Dynasil has issued 480,000 shares of common stock in respect of such elections. As of June 30, 2010, a total of 447,500 shares of common stock remain available. If payment in shares is elected (and available), the shares are to be issued at $2.50 per share. 11 Note 8 - Segment, Customer and Geographical Reporting Segment Financial Information Dynasil's business breaks down into two segments: optics/photonics products and instruments and 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 optics/photonics products and instruments segment manufactures optical materials, components, coatings and specialized instruments used in various applications in the medical, industrial, and homeland security/defense sectors. Our contract research segment is one of the largest small business participants in U.S. government-funded research. Nine Months Ended Segment June 30, 2010 June 30, 2009 - -------- -------------- -------------- Contract Research Revenues $ 17,369,196 $14,817,723 Income from Operations 1,144,596 1,019,356 Income as a percent of revenues 6.6% 6.9% Photonics Products and Instruments Revenues $14,125,764 $11,065,330 Income from Operations 2,369,323 1,088,464 Income as a percent of revenues 16.8% 9.8% Total Revenues $ 31,494,960 $ 25,883,053 Income from Operations 3,513,919 2,107,820 Income as a percent of revenues 11.2% 8.1% Goodwill Contract Research $ 4,754,825 $ 4,754,825 Photonics Products and Instruments 6,299,571 6,299,571
Customer Financial Information For the quarter and the nine months ended June 30, 2010, the top three customers for the Contract Research segment were each various agencies of the U.S. Government. For the quarter ended June 30, 2010, these customers made up 83% of Contract Research revenues. For the nine months ended June 30, 2010, these customers made up 80% of Contract Research revenues. For the Products and Instruments segment, there was no customer whose revenue represented more than 10% of the total segment revenues for either the quarter ended or for the nine months ended June 30, 2010. 12 Geographic Financial Information Revenues by geographic location in total and as a percentage of total revenues, for the three months and nine months ended June 30, 2010 and 2009 are as follows: Three Months Ended Nine Months Ended June 30, 2010 June 30, 2010 ----------- ---------- Geographic Location Revenues % of Total Revenues % of Total - ------------------- -------- ---------- -------- ---------- United States $ 9,738,147 86.3% $27,288,686 86.6% Europe 603,072 5.3% 2,348,835 7.5% Other 953,649 8.4% 1,857,439 5.9% ---------- ------ ---------- ------ Total Revenues $11,294,868 100.0% $31,494,960 100.0%
Note 8 - Income Taxes The FASB's guidance on income taxes requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on differing treatment of items for financial reporting and income tax reporting purposes. The deferred tax balances are adjusted to reflect tax rates by tax jurisdiction, based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are expected to reverse. We have provided deferred income tax benefits on net operating loss carry-forwards to the extent we believe we will be able to utilize them in future tax filings. The FASB's guidance also prescribes a comprehensive model for how a company should measure, recognize, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. The Company recognizes the tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Interest and penalties, if incurred, are included in interest and financing expense. The Company's income tax filings are subject to audit by various taxing authorities. The Company's open audit periods are 2006 - 2009. There are no material uncertain positions. Note 9 - Subsequent Events On July 9, 2010, the Company completed bank financing with Sovereign Bank (the "Bank") (which refinanced all outstanding debt and increased Dynasil's line of credit from $1.2 million to $8 million by entering into a Loan and Security Agreement with the Bank dated as of July 7, 2010. Under the Bank Loan Agreement, the Bank provided Dynasil with three borrowing facilities: a five-year $9 million term loan (the "Term Loan") at an interest rate of 5.58%; a $3 million working capital line of credit (the "Working Capital Line of Credit") at an interest rate of Prime or one month LIBOR plus 2.75% and a monthly fee calculated at the rate of 0.25% per annum of the unused Working Capital Line of Credit; and a $5 million acquisition line of credit (the "Acquisition Line of Credit") at an interest rate of one month LIBOR plus 3.5% and a monthly fee calculated at the rate of 0.25% per annum of the unused Acquisition Line of Credit. See the Company's report on form 8-K filed on July 14, 2010 for additional details. 13 On July 19, 2010, the Company completed the acquisition of 100% of the issued and outstanding stock of Hilger Crystals Limited ("Hilger") from Newport Corporation ("Newport"). Hilger, located in Margate, Kent, England, is engaged in the manufacture of synthetic crystals for infrared spectroscopy and x-ray and gamma ray detection. Pursuant to the Share Purchase Agreement dated July 19, 2010 by and among the Company, Newport, Hilger and Newport Spectra-Physics Limited, Dynasil acquired 100% of the issued and outstanding stock of Hilger for an initial cash payment of $4 million and a possible additional payment of up to $0.75 million after eighteen months based on Hilger's current business revenues for the eighteen months following the acquisition. See the Company's report on form 8-K filed on July 23, 2010 for additional details. 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 ending September 30, 2009. General Business Overview Revenues for the third quarter of fiscal year 2010 which ended June 30, 2010 were at a record level of $11.3 million, an increase of 32.7% over revenues of $8.5 million for the quarter ended June 30, 2009. Income from Operations for the quarter was $1.33 million, an increase of 91.7% over Income from Operations of $0.7 million for the quarter ended June 30, 2009. Income before Taxes for the quarter was $1.2 million, an increase of 122% over Income before Taxes of $0.5 million for the quarter ended June 30, 2009. Net Income for the quarter was $727,646 or $0.05 per share, compared with a Net Income of $393,368, or $0.02 per share, for the quarter ended June 30, 2009. Year to date revenues of $31,494,960 are up 22% versus last year's $25,883,053, year to date Income from Operations of $3,513,919 is 67% above last year's $2,107,820, year to date Income before Taxes of $3,056,912 is up 98.4% versus $1,540,795 for the nine months ended June 30, 2009, and year to date Net Income of $1,974,713 is up 71.2% versus $1,153,141 for the nine months ended June 30, 2009. For the nine months ended June 30, 2010, our Contract Research segment ("Contract Research") revenues increased 17.2% over the prior year period. Revenue has increased from the ramp-up of research resources which was required to meet contract timing given increased contract wins. Operating Income has increased in tandem with revenues since the majority of these research contracts are primarily on a 'cost plus' basis. For the same nine month period, the revenues for our Optics Photonics and Instruments Segment ("Products and Instruments") increased 27.7%, but Income from Operations increased 117.7%. Gross Profit margin improved from 36.6% of sales to 41.5%. The increased revenues came from a combination of growth initiatives and improved economic conditions. The large increase in profitability was driven by the higher revenues coupled with continued cost reductions and controls. 14
Results of Operations - Quarter Ending June 30 3 Months Ended 6/30/10 3 Months Ended 6/30/09 ---------------------- ---------------------- Contract Products & Contract Products & Research Instruments Total Research Instruments Total -------- ----------- ---------- -------- ----------- -------- Revenue $5,747,204 $5,547,664 $11,294,868 $5,012,397 $3,500,495 $8,512,892 Gross Profit 2,249,290 2,483,255 4,732,545 2,300,418 1,351,884 3,652,302 SG&A 2,077,688 1,321,896 3,399,584 1,991,140 965,971 2,957,111 Operating Income 171,602 1,161,359 1,332,961 309,278 385,913 695,191
Revenue for the three months ended June 30, 2010 was $11,294,868, a 32.7% increase from $8,512,892 for the three months ended June 30, 2009. Contract Research revenue was increased by 14.6%. Products and Instruments revenue achieved an increase of 58.4% due to a combination of customer and new product initiatives as well as improved economic conditions. Gross Profit for the three months ended June 30, 2010 was $4,732,545 or 41.9% of sales, a 29.6% increase from $3,652,302, or 42.9% of sales for the three months ended June 30, 2009 due primarily to increased revenue. Selling, general and administrative ("SG&A") expenses for the three months ended June 30, 2010 were $3,399,584 or 30.0% of sales. This was a decrease of 4.7% of sales from SG&A expenses of $2,957,111 or 34.7% of sales for the three months ended June 30, 2009. This was driven by higher revenues combined with cost controls. Income from Operations for the three months ended June 30, 2010 was $1,332,961, an increase of 91.7% over Income from Operations of $695,191 for the quarter ended June 30, 2009. Contract Research Income from Operations was lower in 2010 for the quarter due to an adjustment for unallowable costs associated with government contracts. Net interest expense for the three months ended June 30, 2010 was $142,578, compared to $160,367 for the three months ended June 30, 2009, which was a result of paying down debt. Net income for the three months ended June 30, 2010 was $727,646 or $0.05 in basic earnings per share, which is up 85.0% from net income for the three months ended June 30, 2009, of $393,368, or $0.02 in basic earnings per share. The Company had a $462,737 provision for income taxes for the quarter ended June 30, 2010 and a $141,456 provision for the quarter ended June 30, 2009.
Results of Operations - Year to Date 9 Months Ended 6/30/10 9 Months Ended 6/30/09 ---------------------- ---------------------- Contract Products & Contract Products & Research Instruments Total Research Instruments Total -------- ----------- ---------- -------- ----------- -------- Revenue $17,369,196 $14,125,764 $31,494,960 $14,817,723 $11,065,330 $25,883,053 Gross Profit 6,966,152 5,859,685 12,825,837 6,194,395 4,045,371 10,239,766 SG&A 5,821,556 3,490,362 9,311,918 5,175,039 2,956,907 8,131,946 Operating Income 1,144,596 2,369,323 3,513,919 1,019,356 1,088,464 2,107,820
15 Revenues for the nine months ended June 30, 2010 were $31,494,460, an increase of 21.7% over revenues of $25,883,053 for the nine months ended June 30, 2009. The nine month revenue increase was driven by a 17.2% Contract Research increase and a 27.7% Products and Instruments increase. We continue to be successful at winning Contract Research programs and our backlog of contracts awarded continues to be in excess of one year. Our Products and Instruments segment continues to win additional business with both existing and new products. Gross Profit for the nine months ended June 30, 2010 was $12,825,837, or 40.7% of sales, an increase of 25.3% over the nine months ended June 30, 2009 of $10,239,766 or 39.6% of sales. The nine month gross profit dollars for our Contract Research segment grew with revenues and the gross profit as a percent of sales moderated from 41.8% in 2009 to 40.1% at June 30, 2010, as a nearly equal amount of costs shifted between Cost of Sales and SG&A expenses. The gross profit margin for our Products and Instruments segment improved from 36.6% to 41.5% due to higher revenue, operational improvements and cost controls as compared to the nine months periods ended June 30, 2009. Selling, general and administrative ("SG&A") expenses for the nine months ended June 30, 2010 were $9,311,918 or 29.6% of sales, a 1.8 percentage improvement from the nine months ended June 30, 2009 of $8,131,946 or 31.4% of sales. SG&A expenses for the Contract Research segment improved by 1.4 percent from 33.5% of sales for the nine months ended June 30, 2010 to 34.9% of sales in the previous year, as a nearly equal amount of costs shifted between Cost of Sales and SG&A expenses. The nine month SG&A expenses for the Products and Instruments segment ended June 30, 2010 were 24.7% improved from 26.7% in the same period in 2009 due primarily to higher revenues along with cost controls. Income from Operations for the nine months ended June 30, 2010 was $3,513,919, an increase of 66.7% over Income from Operations for the nine months ended June 30, 2009 of $2,107,820. Contract Research had increased Income from Operations of $125,240 while Products and Instruments' Income from Operations rose $1,280,859 from the same period for 2009. Net interest expense for the nine months ended June 30, 2010 was $457,007, compared to $567,025 for the nine months ended June 30, 2009. The decrease in combined interest expense was solely the result of the repayment of $1.6 million of debt since September 30, 2009. The only change in interest rates was the increase in rate on the RMD Instruments, LLC note of $2,000,000 from 8% to 9%, effective as of October 1, 2009. Net income for the nine months ended June 30, 2010 was $1,974,713, or $0.13 in basic earnings per share, which is up 71.2% from the net income for the nine months ended June 30, 2009, of $1,153,141 or $0.06 in basic earnings per share. When compared to the nine months ended June 30, 2009, the increase in net income was primarily driven by improved operating results combined with lower interest expense, net of taxes. The Company has a $1,082,199 provision for income taxes for the nine months ended June 30, 2010, and a $387,654 provision for the nine months ended June 30, 2009. The tax provision is higher due to increased net income results. The Company had no further federal net operating loss carry- forwards and most New Jersey state tax net operating loss carry-forwards were utilized for the quarter and the nine months ended June 30, 2009. The Company had approximately $445,532 of net operating loss carry-forwards as of September 30, 2009 available to offset certain future New Jersey and New York state taxable income that expire in various years through 2013. The effective tax rate for the nine months ended June 30, 2010 was 35.3% which is up from 25.2% in the previous year as a result of higher profitability and amortization for tax purposes of intangibles from past acquisitions which only offsets a fixed amount of income. 16 Liquidity and Capital Resources Cash was increased by $897,588 for the nine months ended June 30, 2010 to $4,002,366. The primary sources of cash were net income of $1,974,713 with depreciation and amortization expenses that aggregated to $767,686 and issuance of common stock of $264,509. Working Capital accounts were impacted with an increase of $649,343 in accounts receivable. This was an increase of 16% in accounts receivable as compared to a revenue increase of 22%. As a result, days sales outstanding ("DSO") improved 9.8 days from 48.8 days at September 30, 2009 to 39.0 days at June 30, 2010. Inventory was reduced and provided cash of $188,149, despite the rise in sales. Inventory turns, which apply only to the Products and Instruments segment, improved to 5.4 turns from a twelve month average of 4.4 turns. Repayment on long term debt was the largest use of cash with an amount of $1,602,988. Payments on long term debt included the monthly payments on term and mortgage debt of $1,302,988. In addition, a mandatory principal repayment of $300,000 was made to Susquehanna Bank in February, 2010, based on the earnings recapture provision contained in the Term Loan and Line of Credit Loan Agreement dated July 1, 2008 (the "Term Loan Agreement"). Also, income taxes payable were reduced by $161,294 due to the timing of tax provisions and payments of estimated taxes. Cash of $241,468 was used for the investment in capital equipment and $352,283 was used to pay cash dividends on preferred stock. Management believes that its current cash and cash equivalent balances of $4,002,366, combined with the net cash generated by operations and credit lines, are sufficient to meet its anticipated cash needs for working capital and capital expenditures for new business initiatives for at least the next twelve months. On July 9, 2010, the Company completed bank financing with Sovereign Bank (the "Bank") which refinanced all outstanding debt and increased the Company's bank lines of credit from $1.2 million to $8.0 million. The agreement with the Bank provided the Company with three borrowing facilities. First, a five year $9 million term loan was used to refinance all existing indebtedness in the aggregate amount of $8,373,315. The balance of the $9 million term debt was used to pay transaction expenses with a remaining amount of $448,055 added to cash available for use for general corporate purposes. The five year Bank term loan carries a fixed interest rate of 5.58% which reduces average interest rates by 18% as compared to a 6.82% weighted average cost of debt prior to refinancing. In addition to lower interest costs, the Bank term loan is repayable monthly based on a 7- year straight line amortization with a balloon payment due on July 7, 2015. The second borrowing facility with the Bank is a $3 million working capital line of credit at an interest rate of Prime or one month LIBOR plus 2.75%. There has been no draw on the working capital line of credit to date. The third borrowing facility is a $5 million acquisition line of credit at an interest rate of one month LIBOR plus 3.5%. Principal debt repayments will be $1,285,714 over the next 12 months. Prior to the refinancing, the current portion of long term debt including a $2,000,000 Note payable to a related party was $3,847,785, resulting in a reduction of required principal payments of $2,562,070 over the next twelve months and an improvement in the current ratio (current assets divided by current liabilities) from 1.66 to 2.62. Beginning on July 1, 2010, the seller's members of RMD Instruments, LLC may tender up to 1,000,000 shares of Dynasil common stock at a repurchase price of $2.00 per share which could require the Company to make a cash payment of up to $2.0 million (see Note 6 to the financial statements contained in this report). The Bank financing requires Dynasil to maintain at all times and measured at the end of each fiscal quarter a Consolidated Maximum Leverage Ratio (Total Funded Debt to EBITDA, as defined in the Bank Loan Agreement) not to exceed 3 to 1 and a Fixed Charge Coverage Ratio of at least 1.2 to 1. Please see the Company's report on form 8-K filed on July 7, 2010 for additional details. 17 The Company was in compliance with the Bank covenants at the time of the Bank financing. We believe that the Company will remain in compliance and maintain access to the Bank lines of credit. However, this belief is based upon many assumptions including the general business climate. A reoccurring worldwide economic slow-down could significantly impact the Company's revenues and profits so that a returning recession could cause a cash shortage. Acquisitions and Commercialization of Research We continue to execute our strategy of significant growth through acquisitions and commercialization of technology from our government funded research as well as organic growth and effective execution in our businesses. The acquisition of Radiation Monitoring Devices, Inc. ("RMD Research") and specific assets of RMD Instruments, LLC ("RMD Instruments" on July 1, 2008 (collectively, "RMD") had a transformational impact on Dynasil with a tripling of revenues as well as significantly increasing our technical capabilities and intellectual property. Management is focused on commercialization of RMD technology either internally or through acquisitions. Specifically, on July 19, 2010, the Company completed the acquisition of 100% of the issued and outstanding stock of Hilger Crystals Limited ("Hilger") from Newport Corporation ("Newport"). Hilger, located in Margate, Kent, U.K., is engaged in the manufacture of synthetic crystals for infrared spectroscopy and x-ray and gamma ray detection. The acquisition combines our technical depth in synthetic crystals at Radiation Monitoring Devices, Inc. ("RMD Research") with Hilger's highly specialized expertise in the growth and manufacturing of crystals. The acquisition of Hilger puts the Company in a strong position as a high quality manufacturer and supplier. The transaction exemplifies our growth strategy to acquire companies with strengths in complementary areas, which enables us to more quickly commercialize our new technology while expanding the scale and scope of our product line and distribution channels. Please see the Company's report on Form 8-K flied on July 23, 2010 for additional details. During the third quarter, Dynasil's Board took a key step with commercialization of RMD Research technology by approving investment into dual mode nuclear detectors for Homeland Security applications which would be used to locate nuclear bombs or nuclear materials at ports and borders. They are designed to be a single detector which replaces two current detector subsystems - the gamma radiation detector and also the helium 3 detectors for neutrons which are in critically short supply. Handheld devices would be the initial target market. Critical Accounting Policies and Estimates There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2009. We have not adopted any accounting policies since September 30, 2009 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, 2009 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. This is when the products are shipped per customers' instructions, the sales 18 price is fixed and determinable, and collections are reasonably assured. Revenues from research and development activities consist of up-front fees, research and development funding and milestone payments. Periodic payments for research and development activities and government grants are recognized over the period that the Company performs the related activities under the terms of the agreements. Government funded services revenue 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. Revenues from fixed-type contracts are 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 represented by agreed 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. We test goodwill 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. Our 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 RMD Research, which comprises our Contract Research segment and RMD Instruments, which is a component of our Optics/Photonic Products and Instruments segment. Step one of our impairment testing compares the carrying value of a 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. If the fair value of the reporting unit is greater than its carrying value, no impairment has been incurred and no further testing or analysis is necessary. 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 19 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 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 2009, step one of the testing determined the estimated fair values of the reporting units substantially exceeded their carrying values by 21%. Accordingly, the Company concluded that no impairment had occurred and no further testing was necessary. 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 RMD, Inc. 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 June 30, 2010 and 2009. 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. With the significant economic downturn during fiscal 2009, the Company concluded that impairment indicators existed. As a result, the Company reviewed its long-lived assets and determined there was no impairment charge during the year ended September 30, 2009. Estimating Allowances for Doubtful Accounts Receivable We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been minimal, within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results. Convertible Preferred Stock The Company considers the guidance of EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and EITF 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments", codified in FASB ASC Topic 20 470-20 when accounting for the issuance of convertible preferred stock. The Company's convertible preferred stock, when issued, are generally convertible to common stock at or above the then current market price of the Company's common stock and therefore, will contain no beneficial conversion feature. 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 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. 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. The Company believes that these carryforwards will be realized, and has adjusted the valuation allowance accordingly. New Accounting Standards Recently Adopted Standards In June 2008, the Financial Accounting Standards Board ("FASB") issued certain provisions of Accounting Standards Codification ("ASC") 260, "Earnings per Share", which state that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share under the two-class method as described in ASC 260. These provisions were effective for fiscal years beginning after December 15, 2008 (October 1, 2009 for the Company) with early adoption prohibited. These provisions require all presented prior-period earnings per share data to be adjusted. The Company adopted ASC 260, as of October 1, 2009. The adoption of these provisions did not have a material effect on the consolidated financial statements. Recently Issued Accounting Standards In August 2009, the FASB issued changes to measuring liabilities at fair value. The standard changes provide clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. These changes were effective for the Company on October 1, 2009. The adoption of this standard did not have an impact on the Company's consolidated financial statements. In September 2009, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables. This guidance provides another alternative for establishing fair value for a deliverable. When vendor specific objective evidence or third-party evidence for deliverables in an arrangement cannot be determined, companies will be required to develop a 21 best estimate of the selling price for separate deliverables and allocate arrangement consideration using the relative selling price method. This guidance is effective October 1, 2010, and early adoption is permitted. The Company is currently evaluating the potential impact of this guidance on its financial position and results of operations. In January 2010, the FASB issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance will be effective for interim and annual reporting periods beginning after December 15, 2009. The Company does not expect the adoption of this guidance will have a material effect on its consolidated financial statements. In April 2010, the FASB issued ASC Topic 605 "Revenue Recognition - Milestone Method." This issue provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. The new guidance recognizes the milestone method as an acceptable revenue recognition method for substantive milestones in research or development transactions. It is effective on a prospective basis to milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. We believe the adoption of this new guidance will not have a material impact on our consolidated financial statements. Forward-Looking Statements The statements contained in this Quarterly Report on Form 10-Q which are not historical facts, including, but not limited to, statements about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance, including, but not limited to, the future markets and demand for our products, new research and development initiatives, our debt covenant compliance, and the Company's potential repurchase obligation with respect to equity issued in connection with the RMD acquisition are forward-looking statements that involve a number of risks and uncertainties. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Quarterly Report on Form 10-Q, including, without limitation, those set forth under Management's Discussion and Analysis of Financial Condition and Results of Operations, and the risks and uncertainties set forth from time to time in the Company's 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, consumer acceptance of new products, general economic conditions, consumer trends, costs and availability of raw materials and management information systems, competition, litigation and the effect of governmental regulation. 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 Quantitative and Qualitative Disclosures About Market Risk. Dynasil, as a smaller reporting company, is not required to complete this item. 22 ITEM 4T 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 1 Legal Proceedings On or about May 6, 2008, the Company's EMF subsidiary ("EMF") received a Summons with Notice (the "Summons") filed on January 18, 2008 in the Supreme Court of the State of New York, County of Albany, by the New York State Attorney General on behalf of the State of New York Workers' Compensation Board (the "Board"), as plaintiff. The Summons required EMF, which is one of a large number of defendants, to appear in the action commenced by the Board alleging its entitlement to recover previously billed and unpaid assessments in a Manufacturing Self Insurance Trust that terminated on or about August 31, 2007. On April 6, 2010, EMF accepted a settlement offer from the Board that calls for EMF to pay $21,509.37 no later than June 3, 2010. The settlement offer has been accepted by the Board as of May 4, 2010 without any contingency requirements. The settlement has been paid and no further action is required. ITEM 6 Exhibits (a) Exhibits and index of Exhibits 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 August 16, 2010 issued by Dynasil Corporation of America announcing its financial results for the quarter ended June 30, 2010. (b) Reports on Form 8-K On July 14, 2010 an 8-K report for Items 1.02, 2.03, 8.01 and 9.01 reporting that Dynasil completed bank financing with Sovereign Bank (the "Bank") (which refinanced all outstanding debt and increased Dynasil's line of credit from $1.2 million to $8 million by entering into a Loan and Security Agreement with the Bank dated as of July 7, 2010. On July 23, 2010, an 8-K report for Items 2.01, 2.03, 8.01, and 9.01 reporting that Dynasil completed the acquisition of 100% of the issued and outstanding stock of Hilger Crystals Limited ("Hilger") from Newport Corporation ("Newport"). Pursuant to the Share Purchase Agreement dated July 19, 2010 by and among the Company, Newport, Hilger and Newport Spectra-Physics Limited, Dynasil acquired 100% of the issued and outstanding stock of Hilger for an initial cash payment of $4 million and a possible additional payment of up to $0.75 million after eighteen months based on Hilger's current business revenues for the eighteen months following the acquisition. 23 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/ Craig T. Dunham DATED: August 16, 2010 --------------------------------- -------------------- Craig T. Dunham, President and CEO /s/ Richard A. Johnson DATED: August 16, 2010 --------------------------------- -------------------- Richard A. Johnson, Chief Financial Officer 24 EX-31 2 dynex31a.txt CERTIFICATION EXHIBIT 31.1 (a) CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) and SECTION 302 OF THE SARBANES-OXLEY ACT I, Craig Dunham, certify that: 1. I have reviewed this Form 10-Q of Dynasil Corporation of America; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f))for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 16, 2010 /s/ Craig T Dunham ------------------ ----------------------- Craig T Dunham President and Chief Executive Officer EX-31 3 dynex31b.txt CERTIFICATION EXHIBIT 31.1 (b) CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) and SECTION 302 OF THE SARBANES-OXLEY ACT I, Richard Johnson, certify that: 1. I have reviewed this Form 10-Q of Dynasil Corporation of America; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f))for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant', including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 16, 2010 /s/ Richard A. Johnson ----------------------- Richard A. Johnson Chief Financial Officer EX-32 4 dynex32-1.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of DYNASIL CORPORATION OF AMERICA (the "Company") on Form 10Q for the period ended June 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Craig T Dunham, President and Chief Executive Officer of the Company and Richard A. Johnson, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that to the best of his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Craig T Dunham ------------------- Craig T Dunham President and Chief Executive Officer /s/ Richard A. Johnson ------------------- Richard A. Johnson Chief Financial Officer August 16, 2010 EX-99 5 dyn10q063010ex99-1.txt PRESS RELEASE Contact: Patty Kehe Dynasil Corporation of America Phone: (607) 272-3320, ext. 26 Email: pkehe@dynasilcorp.com Dynasil Reports Record Third Quarter Results All-Time Record Revenue Net Income From Operations Increases 92% WEST BERLIN, N.J. - August 16, 2010 - Dynasil Corporation of America (OTCBB: DYSL) today announced record financial results for its 2010 third quarter, which ended June 30, 2010. The Company posted record revenue for the 2010 third quarter of $11.3 million which compares to $8.5 million in the third-quarter of 2009, a 33% increase year over year. Operating income, net income and diluted earnings per share for the quarter were $1.33 million, $727,646, and $0.05, increases of 92%, 85%, and 120%, respectively, compared with the prior year. "Dynasil has completed another outstanding quarter with record revenue, earnings and financial results. We are pleased with our strong Q3 results which clearly reflect the strength of our diversified product portfolio, bolstered by innovation, commercialization initiatives and operational excellence." said Craig T. Dunham, CEO at Dynasil. "We are also very excited about our portfolio of products and technologies for the coming year and we continue to see exceptional opportunity for continued strong growth and profitability across all our businesses. In addition, the refinancing of all our debt with Sovereign/Santander Bank provides Dynasil maximum financial flexibility to achieve our expansion goals through both organic and acquisition growth which should further accelerate our progress." "The future looks really bright for Dynasil. Our activities in homeland defense, medical imaging, and material science enable us to serve and partner with our government and major corporations," added Peter Sulick, Chairman, Dynasil Board of Directors. "Our growth strategy to acquire companies with strengths in complementary areas will enable us to more quickly commercialize our new technology while expanding the scale and scope of our product line and distribution channels. Exemplifying this is our recently announced acquisition of Hilger Crystals, a highly specialized expert in the manufacturer of synthetic crystals applicable to a wide range of our industrial, medical and homeland security applications with immediate importance to our nuclear detector business. About Dynasil: Dynasil Corporation of America (OTCBB: DYSL), is a provider of technology, products, services and solutions aimed at making the world safer and healthier. The company supplies a broad range of customers by serving their specific needs in the medical, industrial, and homeland security/defense markets. The Company has operations in New Jersey, New York, Massachusetts and the UK. This news release may contain forward-looking statements usually containing the words "believe," "expect," "plan", "target", "intend" or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act. Future results of operations, projections, and expectations, which may relate to this release, involve certain risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, the factors detailed in the Company's Annual Report or Form 10-K, Quarterly Reports on Form 10-Q, as well as in the Company's other Securities and Exchange Commission filings, continuation of existing market conditions and demand for our products. Dynasil Corporation of America and Subsidiaries Consolidated Balance Sheets March 31 September 30 2010 2009 ASSETS (Unaudited) ----------- ----------- Current assets Cash and cash equivalents $4,002,366 $3,104,778 Accounts receivable, net 4,690,587 4,053,742 Inventories 2,183,367 2,371,516 Deferred tax asset 346,500 290,100 Other current assets 425,595 306,848 ----------- ----------- Total current assets 11,648,415 10,126,984 Property, plant and equipment, net 2,641,397 2,744,724 Other Assets Intangibles, net 6,820,353 7,232,035 Goodwill 11,054,396 11,054,396 Deferred financing costs, net 53,499 64,637 ----------- ----------- Total other assets 17,928,248 18,351,068 ----------- ----------- Total Assets $32,218,060 $31,222,776 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term 1,847,785 1,749,524 debt Note payable to related party 2,000,000 -0- Accounts payable 869,826 773,837 Billings in excess of cost -0- 60,448 Income taxes payable 345,828 507,122 Dividends payable 131,400 149,150 Accrued expenses and other 1,809,680 1,111,342 current liabilities ----------- ----------- Total current liabilities 7,004,519 4,351,423 Long-term Liabilities Long-term debt, net 4,685,547 6,386,796 Note payable to related party -0- 2,000,000 ----------- ----------- Total long-term liabilities 4,685,547 8,386,796 2,000,000 2,000,000 Temporary Equity 18,524,994 16,484,557 Stockholders' Equity ----------- ----------- Total Liabilities and Stockholders' $32,218,060 $31,222,776 Equity =========== =========== DYNASIL CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended June 30 June 30 2010 2009 2010 2009 ----------- ---------- ----------- ----------- Net revenues $11,294,868 8,512,892 $31,494,960 $25,883,053 Cost of revenues 6,562,323 4,860,590 18,669,123 15,643,287 ----------- ---------- ----------- ----------- Gross profit 4,732,545 3,652,302 12,825,837 10,239,766 Selling, general and administrative expenses 3,399,584 2,957,111 9,311,918 8,131,946 ----------- ---------- ----------- ----------- Income from operations 1,332,961 695,191 3,513,919 2,107,820 Interest expense, net 142,578 160,367 457,007 567,025 ----------- ---------- ----------- ----------- Income before income 1,190,383 534,824 3,056,912 1,540,795 taxes Income taxes 462,737 141,456 1,082,199 387,654 ----------- ---------- ----------- ----------- Net income $727,646 $393,368 $1,974,713 $1,153,141 =========== ========== =========== =========== Earnings Per Share Three Months Ended Nine Months Ended June 30 June 30 Net income $727,646 $393,368 $1,974,713 $1,153,141 Dividends on preferred 131,400 149,150 406,033 447,450 stock ----------- ---------- ----------- ----------- Net income applicable to common shareholders 596,246 244,218 1,568,680 705,691 Dividend add back due to assumed Preferred Stock 131,400 17,750 406,033 53,250 conversion ----------- ---------- ----------- ----------- Net income for diluted income per common share $727,646 $261,968 $1,974,713 $758,941 =========== ========== =========== =========== Basic net income per common share $ 0.05 $0.02 $ 0.13 $ 0.06 Diluted net income per common share $ 0.05 $0.02 $ 0.13 $ 0.06 Weighted average shares outstanding Basic 12,610,116 11,371,933 12,215,532 11,362,745 Diluted 14,982,382 12,346,636 14,687,798 12,337,448 -----END PRIVACY-ENHANCED MESSAGE-----