U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2011

 

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______.

 

Commission file number: 000-27503

 

DYNASIL CORPORATION OF AMERICA

(Exact name of registrant as specified in its charter)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days Yes x No o

 

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

 

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  S

 

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

 

As of February 2, 2012 there were 15,705,043 shares of common stock, par value $.0005 per share, outstanding.

 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

 

INDEX

 

Page

PART 1.   FINANCIAL INFORMATION
Item 1.   Financial Statements
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011 AND SEPTEMBER 30, 2011	3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2011 AND 2010	5
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED DECEMBER 31, 2011	6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2011 AND 2010	7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.   Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.  Controls and Procedures	20
PART II.  OTHER INFORMATION	20
Item 6.   Exhibits	21
Signatures	21

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

ASSETS
		December 31,				September 30,
		2011				2011
		(unaudited)
Current assets
Cash and cash equivalents		$	2,737,424			$	4,479,840
Accounts receivable, net of allowance for doubtful accounts of $228,067 and $182,634 and sales returns allowance of $33,890 and $18,356 for December 31, 2011 and September 30, 2011, respectively			7,426,283				5,837,139
Inventories			2,978,189				3,250,539
Costs in excess of billings			224,135				408,240
Deferred tax asset			1,156,359				1,119,800
Prepaid income taxes			341,825				341,825
Prepaid expenses and other current assets			291,695				453,738
Total current assets			15,155,910				15,891,121
Property, Plant and Equipment, net			5,068,102				4,860,328
Other Assets
Intangibles, net			6,211,526				6,374,329
Goodwill			13,330,182				13,330,182
Deferred tax asset - non current			807,932				694,800
Deferred financing costs, net			140,678				150,656
Total other assets			20,490,318				20,549,967
Total Assets		$	40,714,330			$	41,301,416
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt		$	1,868,231			$	1,859,728
Accounts payable			2,249,904				2,088,395
Accrued expenses and other liabilities			1,575,976				2,322,459
Contingent consideration			183,713				183,713
Total current liabilities			5,877,824				6,454,295
Long-term Liabilities
Long-term debt, net			8,501,780				8,985,442
Deferred tax liability			1,619,637				1,619,637
Total long-term liabilities			10,121,417				10,605,079

 

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

 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED) (Continued)

 

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)
		December 31,				September 30,
		2011				2011
		(unaudited)
Temporary Equity
Redeemable common stock, at redemption value of  $2 per share or $2,000,000; put option on 1,000,000 shares issued and outstanding at December 31, 2011 and September 30, 2011, respectively		$	2,000,000			$	2,000,000
Stockholders' Equity
Common Stock, $0.0005 par value, 40,000,000 shares authorized,15,402,835 and 15,393,053 shares issued, 14,672,675 and and 14,582,893 shares outstanding at December 31, 2011 and September 30, 2011, respectively			7,701				7,696
Additional paid in capital			17,645,245				17,593,140
Deferred compensation			(1,460,155	)			(1,696,385	)
Accumulated other comprehensive income			237,206				297,566
Retained earnings			7,271,434				7,026,367
			23,701,431				23,228,384
Less 810,160 shares of treasury stock - at cost			(986,342	)			(986,342	)
Total stockholders' equity			22,715,089				22,242,042
Total Liabilities and Stockholders' Equity		$	40,714,330			$	41,301,416

  

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

 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended
		December 31,
		2011				2010
Net revenue		$	12,398,254			$	11,626,507
Cost of revenue			7,095,036				6,719,783
Gross profit			5,303,218				4,906,724
Selling, general and administrative expenses			5,054,566				4,171,010
Income from operations			248,652				735,714
Interest expense, net			124,157				158,196
Income before income taxes			124,495				577,518
Income taxes			(120,572	)			202,341
Net income		$	245,067			$	375,177
Net Income		$	245,067			$	375,177
Other comprehensive income:
Foreign currency translation, net of $31,094 income tax benefit and $21,562 income taxes in 2011 and 2010			(60,360	)			41,681
Total comprehensive income		$	184,707			$	416,858
Net income		$	245,067			$	375,177
Dividends on preferred stock			-0-				131,400
Net income applicable to common stockholders			245,067				243,777
Dividend add back due to preferred stock conversion			-0-				131,400
Net income for diluted income per common share		$	245,067			$	375,177
Basic net income per common share		$	0.02			$	0.03
Diluted net income per common share		$	0.02			$	0.02
Weighted average shares outstanding
Basic			15,583,103				12,979,939
Diluted			15,683,834				15,497,495

  

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

 

  

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

																														Accumulated
																		Additional				Deferred								Other												Total
		Common				Common				Preferred				Preferred				Paid-in				Stock				Retained				Comprehensive				Treasury Stock								Stockholders'
		Shares				Amount				Shares				Amount				Capital				Compensation				Earnings				Income				Shares				Amount				Equity
Balance, October 1, 2011			15,393,053			$	7,696				0			$	0			$	17,593,140			($	1,696,385	)		$	7,026,367			$	297,566				810,160			($	986,342	)		$	22,242,042
Issuance of shares of common stock under employee stock purchase plan			9,782				5				-0-				-0-				15,128				-0-				-0-				-0-				-0-				-0-				15,133
Compensation costs recognized for directors			-0-				-0-				-0-				-0-				-0-				60,281				-0-				-0-				-0-				-0-				60,281
Compensation costs recognized in connection with stock options			-0-				-0-				-0-				-0-				36,978				-0-				-0-				-0-				-0-				-0-				36,978
Compensation costs recognized			-0-				-0-				-0-				-0-				-0-				27,624				-0-				-0-				-0-				-0-				27,624
Compensation costs recognized in connection with employment contracts			-0-				-0-				-0-				-0-				-0-				148,325				-0-				-0-				-0-				-0-				148,325
Foreign currency translation adjustment net of income taxes			-0-				-0-				-0-				-0-				-0-				-0-				-0-				(60,360	)			-0-				-0-				(60,360	)
Net income			-0-				-0-				-0-				-0-				-0-				-0-				245,067				-0-				-0-				-0-				245,067
Balance, December 31, 2011			15,402,835				7,701				0				0				17,645,245				(1,460,155	)			7,271,434				237,206				810,160				(986,342	)			22,715,089

 

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

 

 

AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended
		December 31,
		2011				2010
Cash flows from operating activities:
Net income		$	245,067			$	375,177
Adjustments to reconcile net income to net cash provided by operating activities
Stock compensation expense			273,208				188,530
Provision for doubtful accounts and sales returns			60,970				1,350
Depreciation and amortization			370,347				327,596
Deferred income taxes			(113,132	)			(21,562	)
Net (increase) decrease in costs in excess of billings			184,105				(325,567	)
(Increase) decrease in:
Accounts receivable			(1,650,115	)			(490,491	)
Inventories			272,350				(206,597	)
Prepaid expenses and other current assets			162,043				13,111
Increase (decrease) in:
Accounts payable and accrued expenses			(484,930	)			(712,403	)
Income taxes payable			(100,039	)			(69,569	)
Net cash used in operating activities			(780,126	)			(920,425	)
Cash flows from investing activities:
Purchases of property, plant and equipment			(405,341	)			(124,124	)
Net cash used in investing activities			(405,341	)			(124,124	)
Cash flows from financing activities
Issuance of common stock			15,133				83,159
Repayment of long term debt			(475,159	)			(465,036	)
Preferred stock dividends paid			-0-				(46,375	)
Net cash used in financing activities			(460,026	)			(428,252	)
Effect of exchange rates on cash and cash equivalents			(96,923	)			(14,976	)
Net decrease in cash and cash equivalents			(1,742,416	)			(1,487,777	)
Cash and cash equivalents, beginning			4,479,840				4,111,966
Cash and cash equivalents, ending		$	2,737,424			$	2,624,189

  

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

 

 

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - Basis of Presentation

 

The consolidated balance sheet as of September 30, 2011 was audited and appears in the Form 10-K previously filed by the Company. The consolidated balance sheet as of December 31, 2011, the consolidated statements of operations for the three months ended December 31, 2011 and 2010, changes in stockholders’ equity for the three months ended December 31, 2011 and cash flows for the three months ended December 31, 2011 and 2010, 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 December 31, 2011 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, 2011 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission.

 

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:

 

		December 31,				September 30,
		2011				2011
Raw Materials		$	1,950,558			$	2,149,401
Work-in-Process			414,288				757,709
Finished Goods			613,344				343,429
		$	2,978,189			$	3,250,539

 

Note 3 – Costs in Excess of Billings

 

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

 

Note 4 – Intangible Assets

 

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

 

		Useful				Gross				Accumulated
December 31, 2011		Life (years)				Amount				Amortization
Acquired Customer Base			5-15			$	7,025,413			$	1,697,589
Know How			15				512,000				119,467
Trade Names			15				219,000				49,698
Backlog			4				182,000				145,133
Biomedical Technologies			5				300,000				15,000
						$	8,238,413			$	2,026,887

 

 

		Useful				Gross				Accumulated
September 30, 2011		Life (years)				Amount				Amortization
Acquired Customer Base			5-15			$	7,025,413			$	1,579,001
Know How			15				512,000				110,933
Trade Names			15				219,000				47,450
Backlog			4				182,000				126,700
Biomedical Technologies			5				300,000				-0-
						$	8,238,413			$	1,864,084

 

Amortization expense for the three months ended December 31, 2011 and 2010 was $162,803 and $149,205 respectively. Estimated amortization expense for each of the next five fiscal years is as follows:

 

		2012 (9 Months)				2013				2014				2015				2016				Total
Acquired Customer Base		$	349,140			$	463,133			$	463,133			$	463,133			$	463,133			$	2,201,672
Know How			55,300				73,733				73,733				73,733				73,733				350,232
Trade Names			10,950				14,600				14,600				14,600				14,600				69,350
Backlog			36,867				-0-				-0-				-0-				-0-				36,867
Biomedical Technologies			45,000				60,000				60,000				60,000				60,000				285,000
		$	452,257			$	551,466			$	551,466			$	551,466			$	551,466			$	2,658,121

 

Note 5 – Goodwill

 

There were no changes in the carrying value of goodwill during the three months ended December 31, 2011.

 

Note 6 – Earnings Per Common Share

 

Basic earnings per common share is computed by dividing the net income applicable to common shares after preferred dividends paid, if applicable, by the weighted average number of common shares outstanding during each period. Diluted earnings per common share adjusts basic earnings per share for the effects of common stock options, common stock warrants, convertible preferred stock and other potential dilutive common shares outstanding during the periods.

 

For purposes of computing diluted earnings per share, 100,731 and 2,517,556 common share equivalents were assumed to be outstanding for the three months ended December 31, 2011 and 2010, respectively. In addition, as of December 31, 2011, common stock options of 815,624 shares with exercise prices above current quarterly average market price per share have been excluded from the calculation of earnings per share since their effect is anti-dilutive. The Series C Preferred Stock was converted to common stock on December 21, 2010 thus is not part of the calculations for the three months ended December 31, 2011. The computation of the weighted shares outstanding for the three months ended December 31 is as follows:

  

		December 31, 2011				December 31, 2010
Weighted average shares outstanding
Basic			15,583,103				12,979,939
Effect of dilutive securities
Stock Options			100,731				663,870
Convertible Preferred Stock			-0-				1,853,686
Dilutive Average Shares Outstanding			15,683,834				15,497,495

 

 

Note 7 - Stock Based Compensation

 

The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes options pricing model.

 

	December 2, 2010 (Date of most recent grant)
Expected term in years	3 years
Risk-free interest rate	3.95%
Expected volatility	85.21%
Expected dividend yield	0.00%

 

The expected volatility was determined with reference to the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that the options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant.

 

During the three months ended December 31, 2011, no stock options were granted or exercised. During the three months ended December 31, 2011, 10,000 unvested stock options were cancelled with an exercise price of $5.65. For the three months ended December 31, 2011, stock-based compensation charged to operations for option-based arrangements amounted to $36,978. Additionally, during the three months ended December 31, 2011, 37,500 shares of restricted stock vested with a compensation value of $148,325. Total stock compensation charged to operations for the period ended December 31, 2011 was $273,208.

 

At December 31, 2011, there was approximately $160,467 of total unrecognized compensation expense related to non-exercisable option-based compensation arrangements under the 2010 Stock Incentive Plan.

 

Note 8 – Segment, Customer and Geographical Reporting

 

Segment Financial Information

 

Dynasil’s business breaks down into two segments: products and technology (“Products and Technology”) and contract research (“Contract Research”). Within these segments, there is a segregation of reportable units based upon the organizational structure used to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure. The Products and Technology segment manufactures optical materials, components, coatings and specialized instruments used in various applications in the medical, industrial, and homeland security/defense sectors. Our recent new business venture, Dynasil Biomedical Corp. (“Dynasil Biomedical”) is reported within this segment. It has been determined that this new business venture will primarily pursue product commercialization of technologies and technology licensing opportunities, though there can be no assurances that any of these opportunities will become successfully commercialized. Dynasil’s Contract Research segment is one of the largest small business participants in U.S. government-funded research. The Company’s segment information is summarized below:

  

		Three Months Ended
		December 31,
Segment		2011				2010
Contract Research
Revenue		$	6,215,800			$	6,067,119
Income from Operations			68,954				192,946
Income as a percent of revenue			1.1	%			3.2	%
Products and Technology
Revenue		$	6,182,454			$	5,559,388
Income from Operations			179,698				542,768
Income as a percent of revenue			2.9	%			9.8	%
Total
Revenue		$	12,398,254			$	11,626,507
Income from Operations			248,652			$	735,714
Income as a percent of revenue			2.0	%			6.3	%
Goodwill
Contract Research		$	4,938,625			$	4,754,825
Products and Technologies		$	8,391,557			$	8,836,462

  

 

Customer Financial Information

 

For the three months ended December 31, 2011 and 2010, the top three customers for the Contract Research segment were each various agencies of the U.S. Government. For the three months ended December 31, 2011 and 2010, these customers made up 78% and 82%, respectively, of Contract Research revenue.

 

For the Products and Technology segment, there was no customer whose revenue represented more than 10% of the total segment revenue for the three months ended December 31, 2011 and 2010.

 

Geographic Financial Information

 

Revenue by geographic location in total and as a percentage of total revenue, for the three months ended December 31, 2011 and 2010 are as follows:

 

		2011								2010
Geographic Location		Revenue				% of Total				Revenue				% of Total
United States			10,028,479				80.9	%		$	9,405,637				80.9	%
Europe			1,392,311				11.2	%			1,514,286				13.0	%
Other			977,464				7.9	%			706,584				6.1	%
		$	12,398,254				100.0	%		$	11,626,507				100.0	%

  

Note 9 – Business Acquisition – Dynasil Biomedical

 

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

 

Note 10 - Income Taxes

 

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

 

The Company has Research and Experimentation tax credits available at both the state and local levels designed to encourage and reward companies for efforts in the areas of research and experimentation. As of December 31, 2011, the Company has federal and state tax credit carryovers totaling approximately $1,300,000.

 

The Company’s income tax provision includes a tax benefit of an estimated $113,000 for Research and Experimentation credits attributable to the three months ended December 31, 2011.

 

As of December 31, 2011 and 2010, the Company had no net operating loss carryforwards to offset future taxable income for federal income tax purposes. However, the Company has approximately $490,000 in net operating loss carryforwards to offset certain future state income taxes expiring through 2026.

 

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s tax filings for federal and state jurisdictions for the years from 2009 to 2011 are still subject to examination.

 

 

The Company uses the asset and liability approach to account for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss and tax credit carryforwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates, and tax laws, in the respective tax jurisdiction then in effect. Valuation allowances are provided if it is more likely than not that some or all of the deferred tax assets will not be realized. The provision for income taxes includes taxes currently payable, if any, plus the net change during the year in deferred tax assets and liabilities recorded by the Company.

 

The Company applies the authoritative provisions related to accounting for uncertainty in income taxes. As required by these provisions, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company has applied these provisions to all tax positions for which the statute of limitations remained open. There was no impact on the Company’s consolidated financial position, results of operations, or cash flows as of December 31, 2011 and 2010. As of December 31, 2011 and 2010, the Company had no unrecognized tax benefits. The Company’s practice is to recognize interest and/or penalties related to income tax matters in interest income tax expense, respectively. The Company currently has no federal or state tax examinations in progress.

 

Note 11 – Subsequent Events

 

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

 

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

 

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

 

General Business Overview

 

Revenue for the first quarter of fiscal year 2012, which ended December 31, 2011, was $12.4 million, an increase of 6.6% compared with revenue of $11.6 million for the quarter ended December 31, 2010. Income from Operations for the quarter was $248,652 compared with $735,714 for the quarter ended December 31, 2010. Income before Taxes for the quarter was $124,495 compared with $577,518 for the quarter ended December 31, 2010.  Net Income was $245,067 or $0.02 per share for the quarter ended December 31, 2011, compared with $375,177, or $0.03 per share, for the quarter ended December 31, 2010. Included in our business unit costs were expenses to support our growth initiatives with organic product development of specific product lines within Dynasil Products (previously referred to as RMD Instruments), our dual mode detector commercialization effort and development of Dynasil Biomedical Corp (“Dynasil Biomedical”) technologies, all within our Products and Technology segment. We anticipate the dual mode detector business will produce revenue beginning this fiscal year. Commercialization of technology from our extensive research and development portfolio and acquisitions are expected to be the key drivers of our future growth and we plan to continue to invest in these growth opportunities. At the current time, the Company is actively exploring commercialization opportunities in thin film digital x-rays, sensors for non destructive testing and radiation dosimeters based on technologies developed at Radiation Monitoring Devices, Inc. (“RMD”). We are developing three specific technologies within Dynasil Biomedical with the goal to commercialize or license the most promising opportunities. Provisional patents have been filed. No determination has been made as to the Company’s entry into these market segments; however, we anticipate decisions will be made on these opportunities within fiscal year 2012. 

 

 

Results of Operations

 

		Results of Operations for the Three Months Ended December 31,
		2011												2010
		Contract Research				Products & Technology				Total				Contract Research				Products & Technology				Total
Revenue			6,215,800				6,182,454				12,398,254				6,067,119				5,559,388				11,626,507
Gross Profit			2,430,805				2,872,413				5,303,218				2,532,209				2,374,515				4,906,724
SG&A			2,361,851				2,692,715				5,054,566				2,339,263				1,831,747				4,171,010
Operating Income			68,954				179,698				248,652				192,946				542,768				735,714

 

Revenue for the three months ended December 31, 2011 was $12,398,254, a 6.6% increase from $11,626,507 for the three months ended December 31, 2010. Revenue from our Contract Research segment (“Contract Research”) increased by 2.5%. Our Products and Technology segment (“Products and Technology”) had revenue growth of 11.2%. The Contract Research segment revenue growth of 2.5% was modest, but heartening in light of current pressures on government research funding. The research backlog is nearly 18 months and increased modestly as well. The Products and Technology segment growth of 11.2% was nearly all organic and was the result of increases for all business units within the segment.

 

Gross Profit for the three months ended December 31, 2011 was $5,303,218, or 42.8% of sales, a 8.1% increase from $4,906,724, or 42.2% of sales, for the three months ended December 31, 2010. Gross profit declined for the Contract Research segment as a result of higher direct labor costs required for the contract research during the quarter. Gross profit for the Products and Technology segment improved to 46.5% as a percent of sales at December 31, 2011 from 42.7% as a percent of sales for the quarter ended December 31, 2010 as a result of favorable sales mix.

 

Selling, general, and administrative (“SG&A”) expenses for the three months ended December 31, 2011 were $5,054,566, or 40.8% of sales. This was an increase from SG&A expenses of $4,171,010, or 35.9% of sales, for the three months ended December 31, 2010. The Contract Research segment had a small 1% increase in SG&A. The Products & Technology SG&A grew to 43.6% of sales for the three months ended December 31, 2011 compared to 32.9% for the three months ended December 31, 2010. Included in these costs is Dynasil Products’ initiative to revitalize all product lines with the goal of gaining market share through new product launches. Dynasil Products spent $185,000 on these research and development efforts in the three months ended December 31, 2011. The capital expenditures required for the dual mode crystal production initiative are largely complete. However, there were salaries, development and production costs in the three months ended December 31, 2011. Finally, there was $203,000 in SG&A expenses during the three months ended December 31, 2011 for additional development of the Dynasil Biomedical technologies purchased in April 2011.

 

Income from Operations for the three months ended December 31, 2011 was $248,652, a decrease of $487,062 from the prior year comparable period. As a percent of sales, the current quarter was 2.0% compared with 6.3% in 2010. The Contract Research segment had lower gross margin and slightly higher SG&A costs resulting in Income from Operations of 1.1% of sales for the three months ended December 31, 2011 compared to 3.2% of sales for the period ended December 31, 2010. The Products and Technology segment had Income from Operations of $179,698 or 2.9% of sales for the three months ended December 31, 2011, compared with $542,768 or 9.8% of sales for the three months ended December 31, 2010. Dynasil Biomedical experienced expenses during the quarter of $203,000 and Dynasil Products had $185,000 in new organic product development costs.

 

Net interest expense for the three months ended December 31, 2011 was $124,157, compared with $158,196 for the three months ended December 31, 2010. Debt was reduced by $1,869,000 to $10,370,011 at December 31, 2011 from $12,239,000 at December 31, 2010.

 

The Company recognized a tax benefit of $120,572 for the three months ended December 31, 2011 in recognition of specific state tax losses and current period Research and Experimentation tax credits.

 

Net Income for the three months ended December 31, 2011 was $245,067, or $0.02 in basic earnings per share, compared with $375,177, or $0.03 in basic earnings per share, for the quarter ended December 31, 2010.

 

 

Liquidity and Capital Resources

 

Cash decreased by $1,742,416 for the three months ended December 31, 2011 to $2,737,424. The primary sources of cash were net income of $245,067, non-cash stock compensation expense of $273,208 and depreciation and amortization of $370,347. These items totaled $888,622. There was a large increase in accounts receivable of $1,650,115 during the three months ended December 31, 2011. December 2011 revenues were high and collections on the accounts receivable had not yet occurred. An increase in the provision for doubtful accounts was recorded of $60,970. Days Sales Outstanding (DSO) increased to 56.4 days at December 31, 2011 from 46.1 days at the beginning of the year. Both segments had increases resulting from the high December revenues. Inventories declined by $272,350 and inventory turns improved to 4.6 turns from 4.0 turns at September 30, 2011 as a result of higher volumes in December drawing down inventories. Inventories are all within the Products and Technology segment. In total, net cash used by operating activities was $780,126. Cash used for the purchase of property, plant and equipment was $405,341. Payments on long term debt were $475,159 as part of regular scheduled payments to Sovereign Bank under the five year Term Debt and Acquisition Line of Credit.

 

Management 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 twelve months. As of December 31, 2011, the Company had cash of $2,737,424 and available bank line of credit borrowings of $4 million, made up of $3 million available under a working capital line of credit and an additional $1 million remaining available under an acquisition line of credit. The current $3 million working capital line of credit with Sovereign/Santander Bank is scheduled to terminate on July 7, 2012. There are no borrowings under this line of credit and management is in discussions with Sovereign/Santander Bank to extend the termination date. However, there can be no assurance that we will be able to extend the termination on favorable terms, or at all. From July 1, 2010 until June 30, 2012, the former owners of RMD Instruments, LLC may tender to the Company 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 cash payments of up to $2.0 million.

 

The Sovereign Bank Loan Agreement also contains other terms, conditions and provisions that are customary for commercial lending transactions of this sort. The Bank Loan Agreement requires Dynasil to maintain compliance at all times and report 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. The Bank Loan Agreement also provides for events of default customary for credit facilities of this type, including, but not limited to, non-payment, breach of covenants, insolvency and defaults on other debt.

 

The Company was in compliance with all covenants under the Sovereign Bank Loan Agreement at December 31, 2011. 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.

 

Strategy to Commercialize our Advanced Technology

 

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

 

To achieve our strategy we are focusing on:

 

·

Building a strong team of business and marketing leadership;

·

Increasing our effectiveness across the organization through a series of operational initiatives, enabling us to expand into new product lines and penetrate new markets;

·

Further strengthening our technology pipeline by expanding business development and by enhancing our intellectual property estate; and

 

 

·

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

 

Contract Research – the Science Behind our Technology

 

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

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

 

For more than 25 years, RMD Research has successfully conducted government research under the auspices of the Small Business Innovation Research (“SBIR”) program. In recent years, RMD has augmented its SBIR research with larger, competitively bid government research and development contracts. To grow our research portfolio within the federal government, we are broadening our relationships within key federal funding agencies and the U.S. military. Our research initiatives are aligned with our focus on the homeland security, medical and industrial markets. As of December 31, 2011, RMD had a contract backlog of approximately 18 months.

 

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

 

Intellectual Property

 

During FY 2011, we were granted five new U.S. patents and have filed 25 new patent applications. Our current portfolio is 40 issued and 40 pending applications. We believe that intellectual property represents an important strategic advantage for us. As a result, we recently established a patent committee to help broaden the value of our intellectual property estate. The committee is strengthening the identification of intellectual property within the Company by implementing a broad based vetting process to specifically understand product definition, technical maturity, the value proposition, competition, and market size to ensure that we develop IP that maximizes the market value of our research. This is consistent with our strategy and will allow us to protect selected technologies that we believe have commercial potential – either through product offerings or licensing agreements.

Products & Technology – Bringing Technology to Market

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

 

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

 

During the fiscal year ended September 30, 2011, we continued investments in our pipeline of commercial product opportunities in homeland security and medical technology. Our Products & Technology businesses are helping to fund the commercial launch of our dual mode detector as well as evaluation, development and testing of certain assets within our biomedical technology portfolio.

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

 

 

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

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

 

Dynasil is also investing in organic product development in 2012. Guided by our product realization process, our product development team is undertaking simultaneous and extensive product line updates to improve features and functionality on our lead paint analyzer, medical probe and radiation imaging camera.

 

Product Pipeline

 

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

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

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

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

 

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

 

·

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

 

·

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

 

 

·

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

 

·

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

 

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

 

Strategic Acquisition Targets

 

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

 

Critical Accounting Policies and Estimates

 

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

 

The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

 

Revenue Recognition

 

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

 

 

Government funded services revenues from cost plus contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the contracts’ fixed fees. Revenue from fixed-type contracts is recognized under the percentage of completion method with estimated costs and profits included in contract revenue as work is performed. Revenues from time and materials contracts are recognized as costs are incurred at amounts 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. Goodwill is tested by reviewing the carrying value compared to the fair value at the reporting unit level. Fair value for the reporting unit is derived using the income approach. Under the income approach, fair value is calculated based on the present value of estimated future cash flows. Assumptions by management are necessary to evaluate the impact of operating and economic changes and to estimate future cash flows. Management’s evaluation includes assumptions on future growth rates and cost of capital that are consistent with internal projections and operating plans.

 

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

 

Step one of our impairment testing compares the carrying value of 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 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 2011, step one of the testing determined the estimated fair values of RMD Research and Hilger Crystals substantially exceeded their carrying values by more than 20%. The estimated fair value of the Dynasil Products (formerly known as RMD Instruments) reporting unit narrowly exceeded its carrying value. Therefore, the Company undertook a step two analysis by performing essentially a new purchase price allocation as of the date of the impairment test. Values were determined of both originally recognized assets and any new assets that may have been unrecognized at the time of the original transaction, but were developed between the acquisition date and the test date. The result was confirmation that the new residual value of goodwill was higher than the carrying value. 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 Radiation Monitoring Devices, Inc. and provisionally patented technologies within Dynasil Biomedical Corp. The Company amortizes its intangible assets with definitive lives over their useful lives, which range from 4 to 15 years, based on the time period the Company expects to receive the economic benefit from these assets. No impairment charge was recorded during the periods ended December 31, 2011 and 2010.

 

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. The Company reviewed its long-lived assets and determined there was no impairment charge during the periods ended December 31, 2011 and 2010.

 

Allowance for Doubtful Accounts Receivable

 

We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been minimal, within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.

 

Stock-Based Compensation

 

We account for stock-based compensation using fair value. Compensation costs are recognized for stock options granted to employees and directors. Options and warrants granted to employees and non-employees are recorded as an expense 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.

 

 

RECENTLY ISSUED ACCOUNTING STANDARDS

 

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

 

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

 

Forward-Looking Statements

 

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

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk.

 

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

 

ITEM 4 Controls and Procedures

 

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

 

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

 

 

PART II – OTHER INFORMATION

 

ITEM 6 Exhibits

 

(a) Exhibits and index of Exhibits

10.1 Separation Agreement dated November 22, 2011 between the Company and Gerald Entine.

 

10.2 Form of Dynasil Corporation of America Indemnification Agreement with each Director and CEO, CFO and Corporate Secretary.

 

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-OxleyAct of 2002(furnished but not filed for purposes of the Securities Exchange Act of 1934)

 

99.1 Press release, dated February 14, 2012 issued by Dynasil Corporation of America announcing its financial results for the quarter ended December 31, 2011.

 

101** The following materials from Dynasil Corporation of America’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of December 31, 2011 and September 30, 2011, (ii) Consolidated Statements of Operations for the three months ended December 31, 2011 and 2010, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2011; (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2011 and 2010, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.

 

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

 

 

SIGNATURES

 

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

 

 

DYNASIL CORPORATION OF AMERICA

 

 

BY: /s/ Steven K. Ruggieri

DATED: February 14, 2012

 

Steven K. Ruggieri,

President and Chief Executive Officer

 

 

/s/ Richard A. Johnson

DATED: February 14, 2012

  

Richard A. Johnson,

Chief Financial Officer