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DYSL > SEC Filings for DYSL > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for DYNASIL CORP OF AMERICA


15-May-2013

Quarterly Report


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

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in the Dynasil Corporation of America ("Dynasil", the "Company" or "we") Annual Report on Form 10-K for the year ended September 30, 2012, as filed with the Securities and Exchange Commission, as amended on February 14, 2013. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. "Risk Factors".

General Business Overview

On December 31, 2012, the Company announced it is in default of certain financial covenants set forth in the terms of its outstanding indebtedness with respect to its fiscal year ended September 30, 2012. Under the default condition, our lenders have the ability to require immediate payment of all indebtedness under our loan agreements. While the lenders have not exercised this right, their ability to require immediate payment has caused all of our outstanding indebtedness to be accelerated to current classification on our consolidated financial statements.

The Company has accrued but not remitted interest payments for February and March 2013 to its subordinated lender. The Company has made all principal and interest payments due to its senior lender through May 13, 2013, the date of this filing. Management has provided a revised forecast to its lenders and is engaged in discussions with its senior lender to address the financial covenant situation. However, the Company cannot predict when or whether a resolution of this situation will be achieved. Because of the uncertainty of any resolution of the covenant violations and the possibility of an acceleration of the indebtedness by the lenders, the Company reclassified all of its outstanding indebtedness as a current liability in the accompanying consolidated balance sheets.

Given the uncertainty created by the defaults under the Company's outstanding indebtedness, the Company's independent registered public accounting firm has included a "going concern" qualification in its audit opinion for the year ended September 30, 2012.

Revenue for the second quarter of fiscal year 2013, which ended March 31, 2013, was $10.5 million, a decrease of 15% compared with revenue of $12.3 million for the quarter ended March 31, 2012. The decrease in revenue was primarily in the Contract Research and Instruments segments. Contract Research revenues declined $1.5 million primarily as a result of lower billable material and subcontractor costs. Contract revenue backlog continues to be strong at approximately $33 million, however, due to the U.S. federal budget uncertainties and the sequester, we remain cautious. The Instruments segment revenues declined $615,000 primarily due to delays by customers of purchases of the existing products in anticipation of the availability of newly refreshed products which were not yet approved by the necessary regulatory agencies as of the end of the second quarter.

Cost of revenue for the second quarter of 2013 was $5.7 million, a decrease of 21% compared with $7.2 million for the quarter ended March 31, 2012. The Company recorded a $6.8 million impairment charge in the second quarter ended March 31, 2013 to write-down the goodwill and long-lived assets of the Company's Products asset group. Excluding the $6.8 million impairment charge, total operating expenses decreased $407,000 or 7% to $5.3 million compared to the three month period ended March 31, 2012.

Loss from operations for the quarter ended March 31, 2013 was ($7.3 million) which includes a $6.8 million non-cash impairment write-down of goodwill and other long lived assets (primarily acquired customer base). Excluding the impairment write-down the loss from operations for the quarter ended March 31, 2013 was ($485,000) compared with loss from operations of ($600,000) for the quarter ended March 31, 2012. Net loss was ($7.2 million) or ($0.49) per share for the quarter ended March 31, 2013, compared with net loss of ($585,000), or ($0.04) per share, for the quarter ended March 31, 2012. The net loss for the quarter ended March 31, 2013 excluding the impairment charge was ($479,000) or ($0.03) per share.

We continue to invest in efforts to support growth initiatives for our dual mode detector commercialization effort within Contract Research and development of certain Biomedical technologies. These investments include technology development activities, capital equipment depreciation, development of intellectual property and staff.

The dual mode detector technology is beginning to produce revenue. We are currently delivering limited quantities of commercial grade crystals and are working to further improve the size and quality of this product. Also, at the current time, the Company is actively exploring commercialization opportunities in thin film digital x-rays, sensors for nondestructive testing and radiation dosimeters based on technologies developed in the Contracts Research segment, however there can be no assurances that we will be successful in these commercialization efforts.

Additionally, the Company has prepared a separate business and financing plan for one of the biomedical technologies. Our intention was to spin out the tissue sealant technology into an independent entity in which the Company would retain a substantial interest. This would accomplish both the elimination of some of the general and administrative expenses ("G&A") support for these technologies as well as enable us to recruit additional expertise to help us advance the technology. During the second quarter, our senior lender refused to release the intellectual property and related collateral in connection with the spin-out. As a result, we continued to fund this research through the second quarter; however, there can be no assurance that we will continue to fund this research or consummate this transaction at any future time.

Results of Operations



                                Results of Operations for the Three Months Ended March 31,
                                                           2013
                                    Contract Research        Optics        Instruments      Biomedical         Total
Revenue                            $         5,488,000     $ 3,932,000     $  1,014,000     $    51,000     $ 10,485,000
Gross Profit                                 2,648,000       1,632,000          461,000          51,000        4,792,000
Impairment of goodwill &
long-lived assets                                  -0-             -0-        6,763,000             -0-        6,763,000
Operating Income (Loss)                        233,000           2,000       (7,271,000 )      (212,000 )     (7,248,000 )

Depreciation and Amortization                   80,000         185,000          164,000          15,000          444,000
Capital expenditures                          (187,000 )        88,000              -0-             -0-          (99,000 )

Intangibles, Net                               350,000         866,000        2,350,000         210,000        3,776,000
Goodwill                                     4,939,000       1,197,000              -0-             -0-        6,136,000
Total Assets                                13,332,000       9,748,000        4,863,000         335,000       28,278,000




                                 Results of Operations for the Three Months Ended March 31,
                                                            2012
                                     Contract Research         Optics        Instruments      Biomedical         Total
Revenue                             $         6,979,000     $  3,684,000     $  1,629,000     $     7,000     $ 12,299,000
Gross Profit                                  2,772,000        1,471,000          837,000           4,000        5,084,000
Operating Income (Loss)                         158,000           31,000         (539,000 )      (250,000 )       (600,000 )

Depreciation and Amortization                    58,000          155,000          135,000          15,000          363,000
Capital expenditures                             85,000          184,000           13,000             -0-          282,000

Intangibles, Net                                402,000            2,000        5,375,000         270,000        6,049,000
Goodwill                                      4,939,000        2,115,000        6,300,000             -0-       13,354,000
Total Assets                                 12,797,000       11,385,000       15,277,000         250,000       39,709,000

Revenue for the three months ended March 31, 2013 was $10,485,000, a 15% decrease from $12,299,000 for the three months ended March 31, 2012.

Revenue from our Contract Research segment decreased $1,491,000 or 21% for the three months ended March 31, 2013. The Contract Research segment revenue decline primarily reflects lower billable material and subcontractor costs partially offset by higher billable direct labor hours during the three months ended March 31, 2013 compared to the three months ended March 31, 2012. The research backlog for the Contracts Research segment has remained consistent at nearly 18 months or approximately $33 million. The Company expects the Contract Research revenue for the three and nine months ending June 30, 2013 to continue to be lower than revenue for the corresponding prior year periods.

Revenue from our Instruments segment decreased $615,000 or 38% for the three months ended March 31, 2013 compared to the same period in 2012. We believe the Instruments segment revenue decline is primarily a result of customers delaying purchases of our existing products or purchasing competitor products due to the lack of availability of our updated lead paint analyzer and medical probe products which had not yet been approved by the necessary regulatory agencies as of the March 31, 2013. The Company expects to receive regulatory approval for the sale of the medical probe in the third quarter of 2013. The Company is currently evaluating preliminary testing results received on its updated lead paint analyzer product while also evaluating strategic alternatives associated with the product. There can be no assurance when or if these regulatory approvals will be obtained. We believe that without and until we obtain all necessary regulatory approvals associated with the medical probe and the lead paint analyzer products, revenues in the Instruments segment will continue at current levels.

The Optics segment revenue increased $248,000 or 7% for the three months ended March 31, 2013 compared to the same period in 2012, primarily as a result of the timing and mix of product sales.

The Biomedical segment revenues primarily relate to a technology development contract with the Mayo Clinic.

Gross profit for the three months ended March 31, 2013 was $4,792,000, or 46% of sales, compared to $5,084,000 or 41% of sales for the three months ended March 31, 2012. Gross profit as a percent of sales increased for the Contract Research segment to 48% at March 31, 2013 from 39% at March 31, 2012 primarily as a result of a change in the mix of costs from material and subcontractor to direct labor which results in an increase in gross profit margin (although the total contract profitability is unchanged) as well as the timing of certain non-billable costs and the level of profitability of the contracts in process during the respective periods.

Gross profit for the Instruments segment decreased to 45% of sales at March 31, 2013 from 51% of sales for the quarter ended March 31, 2012 as a result of lower product volumes and unfavorable manufacturing efficiencies.

Gross profit for the Optics segment increased to 41% of sales at March 31, 2013 from 40% of sales for the quarter ended March 31, 2012 primarily as a result of better margins on the mix of products sold.

The Biomedical segment gross profit equals its revenue because the cost of the funded research is included in research and development expense.

Operating expenses for the current quarter include an impairment charge of $6,763,000 associated with an interim impairment evaluation performed on the Company's Products business unit in the Instruments segment. As a result, total operating expenses for the three months ended March 31, 2013 were $12,040,000. Total operating expenses excluding the impairment charge decreased slightly to $5,277,000 compared to $5,684,000 for the three months ended March 31, 2012. The decrease (excluding the impairment charge) in operating expenses primarily reflects the decrease in research and development expenses associated with the product refreshes within the Instruments segment.

Loss from operations for the three months ended March 31, 2013 was ($7,248,000) compared to loss from operations of ($600,000) for the three months ended March 31, 2012. Excluding the goodwill and long-lived asset impairment charge, the loss from operations for the three months ended March 31, 2013 would have been ($485,000).

Net interest expense for the three months ended March 31, 2013 was $177,000, compared with $122,000 for the three months ended March 31, 2012. The increase in interest expense was primarily associated with the issuance of a $3 million subordinated note payable in July, 2012 at an interest rate of 10%.
Interest-bearing debt outstanding at March 31, 2013 was $11,413,000, compared to $11,984,000 at September 30, 2012.

Income tax expense for the three months ended March 31, 2013 consisted primarily of state tax expense offset by the estimated net operating loss ("NOL") carryback to 2011 and certain U.K. tax research credits.

Net loss for the three months ended March 31, 2013 was ($7,242,000) or ($0.49) per share, compared with net loss of ($585,000), or ($0.04) per share, for the quarter ended March 31, 2012. Excluding the impairment loss of $6,763,000, the net loss for the quarter would have been ($479,000) or ($0.03) per share.

Results of Operations - Year to Date



                                 Results of Operations for the Six Months Ended March 31,
                                                           2013
                                    Contract Research        Optics        Instruments      Biomedical         Total
Revenue                            $        10,399,000     $ 8,184,000     $  2,298,000     $   157,000     $ 21,038,000
Gross Profit                                 4,861,000       3,333,000        1,067,000         157,000        9,418,000
Impairment of goodwill &
long-lived assets                                  -0-             -0-        6,763,000             -0-        6,763,000
Operating Income (Loss)                        231,000         388,000       (7,726,000 )      (332,000 )     (7,439,000 )

Depreciation and Amortization                  142,000         370,000          328,000          30,000          870,000
Capital expenditures                            (1,000 )       210,000            7,000             -0-          216,000

Intangibles, Net                               350,000         866,000        2,350,000         210,000        3,776,000
Goodwill                                     4,939,000       1,197,000              -0-             -0-        6,136,000
Total Assets                                13,332,000       9,748,000        4,863,000         335,000       28,278,000




                                  Results of Operations for the Six Months Ended March 31,
                                                            2012
                                     Contract Research         Optics        Instruments      Biomedical         Total
Revenue                             $        13,204,000     $  7,596,000     $  3,613,000     $    18,000     $ 24,431,000
Gross Profit                                  5,211,000        2,934,000        2,089,000         (23,000 )     10,211,000
Operating Income (Loss)                         304,000          195,000         (459,000 )      (453,000 )       (413,000 )

Depreciation and Amortization                    94,000          349,000          270,000          30,000          743,000
Capital expenditures                            347,000          325,000           15,000             -0-          687,000

Intangibles, Net                                402,000            2,000        5,375,000         270,000        6,049,000
Goodwill                                      4,939,000        2,115,000        6,300,000             -0-       13,354,000
Total Assets                                 12,797,000       11,385,000       15,277,000         250,000       39,709,000

Revenue for the six months ended March 31, 2013 was $21,038,000, a 16.0% decrease from $24,431,000 for the six months ended March 31, 2012.

Revenue from our Contract Research segment decreased $2,805,000 or 21% for the six months ended March 31, 2013 compared to the same period in 2012. The Contract Research segment revenue decline primarily reflects lower billable material and subcontractor costs partially offset by higher billable direct labor hours during the six months ended March 31, 2013 compared to the six months ended March 31, 2012. The research backlog for the Contracts Research segment has remained consistent at nearly 18 months or approximately $33 million.

Revenue from our Instruments segment decreased $1,315,000 or 36% for the six months ended March 31, 2013 compared to the same period in 2012. We believe the Instruments segment revenue decline is primarily a result of customers delaying purchases of our existing products or purchasing competitor products due to the lack of availability of our updated lead paint analyzer and medical probe products which had not yet been approved by the necessary regulatory agencies as of the March 31, 2013. The Company expects to receive regulatory approval for the sale of the medical probe in the third quarter of 2013. The Company is currently evaluating preliminary testing results received on its updated lead paint analyzer product while also evaluating strategic alternatives associated with the product. There can be no assurance when or if these regulatory approvals will be obtained. We believe that without and until we obtain all necessary regulatory approvals associated with the medical probe and the lead paint analyzer products, revenues in the Instruments segment will continue at the current reduced levels.

The Optics segment revenue increased $587,000 or 8% for the six months ended March 31, 2013, primarily as a result of the timing and mix of product sales.

The Biomedical segment revenues primarily relate to a technology development contract with the Mayo Clinic.

Gross profit for the six months ended March 31, 2013 was $9,418,000, or 45% of sales, compared to $10,211,000 or 42% of sales for the six months ended March 31, 2012. Gross profit as a percent of sales increased for the Contract Research segment to 47% at March 31, 2013 from 39% at March 31, 2012 primarily as a result of a change in the mix of costs from material and subcontractor to direct labor which results in an increase in gross profit margin (although the total contract profitability is unchanged) as well as the timing of certain non-billable costs and the level of profitability of the contracts in process during the respective periods.

Gross profit for the Instruments segment decreased to 46% of sales at March 31, 2013 from 58% of sales for the six months ended March 31, 2012 as a result of lower product volumes and unfavorable manufacturing efficiencies.

Gross profit for the Optics segment increased to 41% of sales at March 31, 2013 from 39% of sales for the six months ended March 31, 2012 primarily as a result of better margins on the mix of products sold.

The Biomedical segment gross profit equals its revenue because the cost of the funded research is included in research and development expense.

Total operating expenses for the six months ended March 31, 2013 included a non-cash impairment charge of $6,763,000. Excluding that charge, operating expenses decreased slightly to $10,095,000, or 48% of sales compared to $10,625,000 or 43% of sales for the six months ended March 31, 2012. The decrease (excluding the impairment charge) in total operating expenses primarily relates to a decrease in research and development expenses associated with the product refreshes within the Instruments segment.

Loss from operations for the six months ended March 31, 2013 was ($7,439,000) compared to Loss from Operations of ($413,000) for the prior year comparable period. Excluding the impact of the impairment charge, the loss from operations would have been ($676,000). The decrease was primarily associated with the lower gross profit in the Instruments segment discussed above partially offset by lower operating expenses in the Instruments segment. The increase in operating income in the Optics and Biomedical segments primarily reflect the increase in revenue and improved gross profit discussed above.

Net interest expense for the six months ended March 31, 2013 was $364,000, compared with $247,000 for the six months ended March 31, 2012. The increase in interest expense was primarily associated with the issuance of a $3 million subordinated note payable in July, 2012 at an interest rate of 10%.
Interest-bearing debt outstanding at March 31, 2013 was $11,413,000, compared to $11,984,000 at September 30, 2012.

Income tax expense for the six months ended March 31, 2013 consisted primarily of estimated NOL carryback to 2011 and certain U.K. tax research credits partially offset by state tax expense. The Company recorded a tax benefit of $445,000 for the six months ended March 31, 2012 primarily from the recognition of Research and Experimentation credits and certain state tax losses.

Net loss for the six months ended March 31, 2013 was ($7,621,000), or ($0.52) per share, compared with Net loss of ($215,000), or ($0.01) per share, for the six months ended March 31, 2012. Excluding the impact of the impairment charge, the loss from operations would have been ($858,000) or ($0.06) per share.

Use of Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with generally accepted accounting principles (GAAP), this MD&A also contains non-GAAP financial measures. Specifically, Dynasil has presented Operating Expenses and Loss from Operations, in each case excluding the effect of the $6.8 million impairment charge recorded in the second quarter of 2013 to write down the goodwill and long-lived intangible assets of the Company's Instruments segment. The Company believes that the inclusion of these non-GAAP financial measures helps investors to gain a meaningful understanding of the Company's core operating results and enhance comparing such performance with prior periods. The non-GAAP financial measures included in this MD&A are not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP.

Liquidity and Capital Resources

Liquidity Overview

On December 31, 2012, the Company announced it is in default of the financial covenants set forth in the terms of its outstanding indebtedness at September 30, 2012. These covenants require the Company to maintain specified ratios of earnings before interest, taxes, depreciation and amortization (EBITDA) to fixed charges and to total/senior debt. The Company continues to be current with all principal and interest payments due on its senior outstanding indebtedness and management expects to continue discussions with its senior lender to address the financial covenant situation. The Company has accrued but not remitted interest payments for February or March 2013 to its subordinated lender.

These financial covenant defaults give the senior lender the right to accelerate the maturity of the indebtedness outstanding and foreclose on any security interest. Furthermore, Sovereign Bank, N.A, the Company's senior lender, may, at its option, impose a default interest rate with respect to the senior debt outstanding, which is 5% higher than the rate otherwise in effect. To date, the lenders have not taken any such actions.

As of March 31, 2013, the Company had total indebtedness outstanding of approximately $11.4 million, consisting of approximately $8.0 million of senior debt owed to Sovereign Bank and approximately $3.0 million of subordinated debt owed to Massachusetts Capital Resources Company and approximately $365,000 in new equipment leases. The Company's indebtedness is secured by substantially all the accounts and assets of the Company and is guaranteed by its subsidiaries.

The causes for the covenant violations are lower revenue and higher than expected expenses in the Company's Instruments and Contract Research segments during the fiscal quarter ended September 30, 2012 and continuing into the first and second quarter of fiscal 2013, combined with the continued investment in its Biomedical technologies and its Dual Mode nuclear detection initiative.

Management expects to continue discussions with its lenders to address the financial covenant defaults as of September 30, 2012 as described above. These financial covenant defaults continued through the second quarter of fiscal 2013. The Company cannot predict when or whether a resolution of this situation will be achieved.

The Company has recently taken and will continue to take actions to improve its liquidity, including the implementation of a number of initiatives designed to conserve cash, optimize profitability and right-size the cost structure of its various businesses. The Company has retained Argus Management Corporation and Mirus Capital as financial advisors to assist it in evaluating strategic and restructuring alternatives, including the potential sale of product lines and/or a Company division. While the Company is actively considering such strategic alternatives, there can be no assurances that any such transaction will occur, or, if a transaction is completed, it will be on terms favorable to the Company.

Liquidity Outlook

Net cash as of March 31, 2013 was $2,132,900 or approximately $1,282,000 less than the net cash of $3,414,900 at September 30, 2012. The Company does not currently have cash available to satisfy its obligations under its indebtedness if it were to be accelerated or payment demanded. If the Company is not able to resolve its current defaults under its outstanding indebtedness and improve its liquidity through the actions described above, it may not have sufficient liquidity to meet its anticipated cash needs for the next twelve months.

Cash Provided by (Used in) Operating Activities

In total, including the changes in accounts receivable and accounts payable and accrued expenses, operating activities used cash of $219,000 for the six months ended March 31, 2013.

Cash Used in Investing and Financing Activities

Cash used for the purchase of property, plant and equipment for the six months ended March 31, 2013 was approximately $216,000. Payments of long term debt for the six months ended March 31, 2013 were $904,000 primarily as part of regularly scheduled payments to Sovereign Bank, N.A., the Company's senior lender, under the five year Term Debt and Acquisition Line of Credit. Net cash used in financing activities was approximately $557,000 for the six months ended March 31, 2013.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2012. We have not adopted any accounting policies since September 30, 2012 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, 2012 as well as the notes in this Form 10-Q.

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