The following management's discussion
and analysis should be read in conjunction with our financial statements and the notes thereto appearing elsewhere in this Annual
Report on Form 10-K.
We have three reporting segments
based on our main operating activities. Below is a summary of these segments:
The segment amounts included in management's
discussion and analysis are presented on a basis consistent with our internal management reporting and accounting principles generally
accepted in the U.S. (“U.S. GAAP”). Segment information appearing in Note 16 – Segment, Customer and Geographical
Reporting of the Notes to Financial Statements included in this Report are also presented on this basis. A description of our strategy
is included in Item 1 of this Annual Report on Form 10-K.
Our markets are characterized by
rapidly changing technology and the needs of our customers, which change and evolve regularly. Accordingly, our success depends
on our ability to develop services and products that address these changing needs and to provide the people and technology needed
to deliver these services and products. To remain competitive, we must consistently provide superior service, technology and performance
on a cost-effective basis to our customers. Our business performance is also influenced by a variety of other factors including,
but not limited to, economic conditions, U.S. Government spending on research and development programs, competition, regulatory
requirements and insurance costs. Further information on certain risks to our Company is included in Item 1A of this Annual Report
on Form 10-K.
Our revenue in 2018 was $40.7 million,
as compared to $37.3 million in 2017. This 9% increase in revenue resulted from a $3.8 million, or 20%, increase in revenue in
our Optics segment, somewhat offset by a $0.4 million, or 2%, decrease in revenue in our Innovation and Development segment.
In fiscal year 2018, we had net income
of $1.6 million compared to net income of $1.9 million in 2017. Our net income included losses of approximately $1.0 million and
$1.4 million in 2018 and 2017, respectively, associated with research and start-up costs of Xcede, a joint venture with Mayo. As
of September 30, 2018, we owned 63% of Xcede’s stock and, as a result, Xcede is included in the Company’s consolidated
balance sheets, results of operations and cash flows. The 63% ownership includes preferred stock with a liquidation preference,
and as a result, for reporting purposes only, common stock ownership is used in the allocation of noncontrolling interest. Dynasil’s
common stock ownership is 83% and the remaining 17% of Xcede’s common stock is owned by others and accounted for under the
rules applicable to non-controlling interest. The non-controlling amount related to the common stock owned by others was $0.2 million
in both fiscal years ended September 30, 2018 and 2017, and was not included in the Company’s net income attributable to
common stockholders of $1.8 million and $2.2 million, respectively.
In 2018, Xcede was funded by $0.6
million in cash from Dynasil, committed in November 2016, and $0.2 million in R&D services from Cook Biotech as it worked on
developing the first in human clinical trial for Xcede’s hemostatic tissue sealant product under a note agreement. In 2017,
Xcede’s funding included $0.7 million in cash from Dynasil, committed in November 2016, and $0.3 million in R&D services
from Cook Biotech under a note agreement.
Liquidity and Capital Resources
Liquidity Overview
Our net cash as of September 30, 2018 was $2.3
million, a decrease of $0.1 million, compared to $2.4 million at September 30, 2017. The cash reduction was primarily the result
of fixed asset additions for new product lines offset by cash from operating activity.
We believe our cash on hand and borrowing capacity
under our revolving line of credit will be sufficient to fund our current debt obligations, estimated capital expenditures and
working capital needs for the next twelve months.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was
$2.1 million for fiscal year 2018 versus $1.5 million for fiscal year 2017.
In fiscal year 2018, the principal
differences between the net income of $1.6 million and net cash provided of $2.1 million were a noncash benefit related to
the increase of deferred income taxes resulting from the Xcede state tax valuation allowance release, R&E tax credits for
the years ended 2013 through 2016, and impairment of long-lived assets, partially offset by depreciation, stock compensation,
and Xcede’s R&D service expenses. Additionally, cash was used by an increase in accounts receivable due to strong
fourth quarter shipments.
In fiscal year 2017, the principal differences between the net income of $1.9 million and net cash provided
of $1.5 million were a noncash benefit related to the increase of deferred income taxes as a result of the Xcede federal tax deconsolidation,
partially offset by depreciation, stock compensation and Xcede’s R&D service expenses. Additionally, cash was used to
increase our inventory balance after a slowdown in shipments to a key customer and to allow for immediate shipment of our new e-commerce
website products. These were offset by increases in accounts payable due to material and equipment purchases and advances for subcontractor
payments.
Cash Flows from Investing Activities
Cash flows from investing activities resulted in a use of $2.3 million for fiscal 2018 compared with a
use of $1.0 million for fiscal 2017. In both fiscal 2018 and 2017, these funds were primarily used to purchase property, plant
and equipment, as we continue to invest in our future operations, including our new highly efficient anti-reflective, diamond-like
coating product lines. We currently plan on additional capital expenditures of approximately $2.0 million during fiscal year 2019
for expansion into new customer markets within our existing segments.
Cash Flows from Financing Activities
Cash flows from financing activities increased
$0.1 million of net cash in fiscal 2018, due to using our equipment line of credit through Middlesex Savings Bank. Cash flows from
financing activities used $0.7 million of net cash in fiscal 2017, primarily through the payments of our loans and capital leases.
We have the full $4.0 million available under our line of credit with Middlesex Savings Bank at September 30, 2018.
Terms of Outstanding Indebtedness
As of September 30, 2018, Dynasil is in compliance
with the terms of all of its outstanding indebtedness. As of such date, we had total indebtedness consisting of:
|
·
|
approximately $1.0 million senior debt
term loan with Middlesex Savings Bank, subject to the terms and conditions of the Middlesex Savings Bank Loan Agreement;
|
|
·
|
approximately $0.8 million of equipment
term notes;
|
|
·
|
approximately $0.9 million of subordinated
debt owed to Massachusetts Capital Resource Company; and
|
|
·
|
approximately $0.2 million of Notes Payable
to two government agencies.
|
|
·
|
Additionally, Xcede had $0.5 million of outstanding indebtedness owed
to Cook Biotech Inc.
|
The following is a summary of the terms of
the existing loan agreement in place with our senior lender, Middlesex Savings Bank, the terms of subordinated debt owed to Massachusetts
Capital Resources Company and the terms of subordinated debt owed by Xcede to Cook Biotech Inc.
Middlesex Savings Bank Loan Agreement
On May 1, 2014, Dynasil entered into a loan
and security agreement (the “Bank Loan Agreement”) and line of credit note (the “Note”) with Middlesex
Savings Bank pursuant to which Middlesex agreed to provide up to $4 million, subject to the availability restrictions described
below, under a revolving line of credit loan to Dynasil for general corporate purposes. The Bank Loan Agreement provided that the
loan expired on May 1, 2017, at which time all outstanding principal and unpaid interest was to become due and payable.
The Bank Loan Agreement was amended on September
29, 2015 to allow the Company to repay up to $3 million of the subordinated debt owed Massachusetts Capital Resources Company (“MCRC”)
and also provide for the Company, if it meets certain conditions, to convert up to $2 million of the advances under the line of
credit to a fixed rate note with the principal amortizing monthly over a five year term. On February 1, 2016, the Company converted
$2 million of its outstanding advances under the line of credit note to a fixed rate, five-year term note bearing interest at an
annual rate of 4.5%. As of September 30, 2018, approximately $1.0 million was outstanding under the five-year term note.
On May 16, 2017, the Company and Middlesex
Savings Bank entered in an agreement to extend the terms of the existing line of credit and term loan from May 2017 to May 2020
at which time all outstanding principal and unpaid interest will be due and payable. Additionally, the Company and Middlesex Savings
Bank entered into an annual $1.0 million equipment line of credit agreement in which the outstanding balance will be converted
into a five year term note on the one year anniversary.
On July 31, 2018, the Company converted the
outstanding balance on the equipment line of credit with Middlesex Savings Bank (“Middlesex”) of approximately $750,000
into a five year term note with an interest rate of 5.66%. Additionally, on August 9, 2018, the Company’s equipment line
of credit was renewed for $750,000 through April 30, 2019, at which time the outstanding balance will be converted into a five
year term note. As part of the renewal process and due to the additional credit being extended to the Company, the Middlesex loan
and security agreement was amended on August 9, 2018 to change the maximum debt leverage ratio covenant to 2.5x from 3.0x.
As of September 30, 2018, no amounts were outstanding
under either the revolving or equipment lines of credit with Middlesex.
The Bank Loan Agreement and the Note are secured
by (i) a security interest in substantially all of the Company’s personal property and (ii) sixty-five percent (65%) of the
Company’s equity interests in its U.K. subsidiary, Hilger Crystals, Ltd. Under the note, the borrowing base is determined
monthly based on eligible billed and unbilled accounts receivable and eligible inventory. The interest rate under the Note is equal
to the Prime Rate, but in no event less than 3.25%.
The 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, at the close of each fiscal quarter, to maintain a Debt Service Coverage ratio, as defined, of at least 1.20 to 1.00 and
a Maximum Leverage Ratio, as defined, of less than 2.50 to 1.00, both on a trailing four quarter basis.
The Bank Loan Agreement provides for events
of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation,
breach of covenants, representations and warranties, insolvency and bankruptcy, change of management, as defined and the occurrence
of a material adverse change, as defined.
Note Purchase Agreement – Massachusetts Capital Resource
Company
On July 31, 2012, the Company entered into
a Note Purchase Agreement (the “Agreement”) with MCRC. Pursuant to the terms of the Agreement, the Company issued and
sold to MCRC a $3.0 million subordinated note (the “Subordinated Note”) for proceeds of $3.0 million. The Subordinated
Note initially was scheduled to mature on July 31, 2017, unless accelerated pursuant to an event of default, as described below.
The Subordinated Note initially provided for interest at the rate of ten percent (10%) per annum, with interest to be payable monthly
on the last day of each calendar month in each year, the first such payment to be due and payable on August 31, 2012. Under the
original terms of the Agreement, beginning on and with September 30, 2015, and on the last day of each calendar month thereafter
through and including July 31, 2017, the Company would redeem, without premium, $130,000 in principal amount of the Subordinated
Note together with all accrued and unpaid interest then due on the amount redeemed.
Effective October 1, 2015, in connection with
the prepayment of $2 million of the Subordinated Note, MCRC agreed to adjust the interest rate to 6% and to amend the principal
repayment terms such that beginning on September 30, 2016, the Company will redeem monthly, without premium, $43,478 in principal
amount of the Subordinated Note together with all accrued and unpaid interest then due on the amount redeemed.
On December 15, 2016, the Company amended the
Note Purchase Agreement with Massachusetts Capital Resource Company (MCRC) to reinstate the interest only payment requirements
of the loan and defer principal repayment requirements to November 30, 2017. Such amendment also extended the maturity date from
July 31, 2018 to July 31, 2019.
On January 3, 2018, the Company amended the
Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the
loan and defer principal repayment requirements to November 30, 2018. Such amendment also increased the interest rate of the note
from six percent (6%) to seven percent (7%) per annum.
On November 27, 2018, the Company amended the
Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the
loan and defer principal repayment requirements to begin November 30, 2019. This amendment also extended the maturity date from
July 31, 2019 to November 30, 2021.
Under the terms of the Agreement and a Subordination
Agreement dated July 31, 2012, MCRC and any successor holder of the Subordinated Note have agreed that the payment of the principal
of and interest on the Subordinated Note is subordinated in right of payment, to the prior payment in full of all indebtedness
of the Company for money borrowed from banks or other institutional lenders at any time outstanding.
The Agreement contains customary representations,
warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations,
substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. In addition,
the Agreement contains financial covenants by the Company (as further defined in the Agreement) that (i) impose a Consolidated
Maximum Leverage Ratio (consolidated total funded debt to consolidated EBITDA) equal to or less than 4.5 to 1.0 for each rolling
four quarter period ending on or after March 31, 2013, and (ii) require a Consolidated Fixed Charge Coverage Ratio (consolidated
EBITDA to consolidated fixed charges) of not less than 0.95 to 1.00 for each rolling four quarter period ending on or after September
30, 2013.
The Agreement also provides for events of default
customary for agreements of this type, including, but not limited to, non-payment, breach of covenants, insolvency and defaults
on other debt. Upon an event of default, MCRC may elect to declare all obligations (including principal, interest and all others
amounts payable) immediately due and payable, which will occur automatically if the Company becomes insolvent.
Note Purchase Agreement – Cook Biotech, Inc. and Xcede
In November 2016, Xcede entered into an additional
Services Agreement, a Secured Promissory Note, a Loan Agreement, a Security Agreement and an Intellectual Property Security Agreement
(collectively the “Note Agreement”) with Cook Biotech, Inc. (CBI), in which CBI committed to fund the pre-clinical
testing of, and subject to the receipt of applicable regulatory approvals to initiate first in human clinical trials for, the Xcede
Patch. Under the terms of the Note Agreement, in exchange for the services performed by CBI, Xcede committed to a multiple
draw credit facility in the aggregate amount not to exceed $1.5 million, with three draws of principal available, each in the amount
of $500,000, upon satisfaction of conditions identified in the Note Agreement. The principal amounts outstanding bear interest
at a fixed rate of 2% and are secured by all the rights of Xcede under the Development Agreement, Supply Agreement, and License
Agreement, all the rights to the data and work product arising from the clinical trial being performed under the Services Agreement,
all regulatory approvals for the Xcede Patch, all patent and patent applications owned or controlled by Xcede, and all trademark
and service mark registrations and applications. The outstanding principal and unpaid interest are due and payable in full
at the earlier of closing of an acquisition transaction or December 31, 2025.
On July 20, 2018, Xcede received a notice of
termination from CBI, its collaboration partner with respect to the Xcede Patch, which claimed that the results of a recent animal
study showed that, in CBI’s assessment, continuing to the next development phase of the Xcede Patch is not commercially reasonable.
Upon a valid termination, CBI has no obligation to conduct further developmental activities with respect to the Xcede Patch, including
any further in-kind funding under the Note Agreement between Xcede and CBI. In addition, CBI has asserted that the foregoing study
results trigger an immediate repayment of the $500,000 promissory note owed by Xcede to CBI under the Note Agreement, which otherwise
has a stated maturity of December 31, 2025. The Xcede promissory note is collateralized by a security interest which CBI has in
all of Xcede’s intellectual property. While Xcede vigorously contests this assertion, at this time it is unclear how this
matter will be resolved between Xcede and CBI. See Note 3 – Xcede Technologies, Inc. Joint Venture.
As of September 30, 2018, Xcede had $0.5 million
of outstanding indebtedness owed to CBI, which the Company carries in short-term debt. Dynasil has no contractual obligation with
respect to Xcede indebtedness. The Xcede promissory note is a contractual obligation solely of Xcede and is secured by Xcede’s
intellectual property.
“Off Balance Sheet” Arrangements
Dynasil has no “Off Balance Sheet”
arrangements.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 2, "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial
Statements for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption
and effects on our consolidated financial position, results of operations and cash flows, including the effects of significant
changes in revenue recognition.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition
and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. The preparation
of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. We have identified the following as the items that require the most significant
judgment and often involve complex estimation: revenue recognition, valuation of long-lived assets, intangible assets and goodwill,
estimating allowances for doubtful accounts receivable, stock-based compensation, valuation of inventory, and accounting for income
taxes.
Revenue Recognition
Revenues from the sale of the Company’s
products and services are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have
been rendered, the price is fixed or determinable, and collectability is reasonably assured. The Company generally ships products
F.O.B. shipping point. 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 generally commensurate with billing amounts. Recognition of losses on projects
is taken as soon as the loss is reasonably determinable.
The majority of the Company’s 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.
In May 2014, the FASB issued ASU 2014-09
which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most current revenue recognition guidance, including industry-specific guidance. Using these guidelines, a comprehensive
framework was established for determining how much revenue to recognize and when it should be recognized. The standard is based
on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services using a five-step
process. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred
to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the
adoption of the new standard. In 2016 and 2017, the FASB issued several ASU’s related to ASU 2014-09, which simplify and
provide additional guidance to companies for implementation of the standard.
As of September 30, 2018, the Company has
completed its assessment of the effects of ASU 2014-09 and its amendments on its consolidated financial statements, and has implemented
changes to its business processes, systems and controls to support revenue recognition and the related disclosures under this ASU.
The Company’s assessment included a detailed review of representative contracts from each of the Company’s revenue
streams and a comparison of its historical accounting policies and practices to the new standard. The Company adopted the new standards
on October 1, 2018, and did so retrospectively with the cumulative effect of initially applying the guidance recognized at the
date of initial application (the modified retrospective transition method) ) to all existing contracts that have remaining obligations
as of October 1, 2018. Accordingly, the Company has elected to retroactively adjust only those contracts that do not meet the definition
of a complete contract at the date of the initial application.
The Company believes that this guidance
will lead to very few changes in revenue recognition for the standard contracts in both the Optics and the Innovation and Development
segments. This new guidance may lead to recognition of certain revenue transactions sooner than in the past on contracts that require
the Company to maintain stated inventory levels, as the Company has an enforceable right to payment for the required inventory,
and on contracts such as engineering services and design and tooling transactions, as the Company has an enforceable right to payment
for these performance obligations satisfied over time. The Company will continue to evaluate all new contract arrangements, but
the new accounting standard is not expected to have a material impact on its consolidated financial statements. The cumulative
adjustment to opening retained earnings will be insignificant at October 1, 2018. Additionally, the adoption of this new standard
is not expected to have any tax impact on the consolidated financial statements.
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.
We generally perform our annual impairment
testing of goodwill at the end of the fourth quarter of the fiscal year, or more frequently if events or changes in circumstances
indicate that the assets might be impaired. We test impairment at the reporting unit level using the two-step process. Our primary
reporting units tested for impairment are RMD, which comprises our Innovation and Development segment, and Hilger, which is a component
of the Optics segment.
Step one of the 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.
We estimate 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. Our 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. We regularly assess the estimates
based on the actual performance of each reporting unit.
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 us 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 our annual goodwill impairment testing performed
during the fourth quarter of fiscal year 2018, step one of the testing determined the estimated fair value of RMD and Hilger exceeded
their carrying values. Accordingly, we concluded that no impairment had occurred and no further testing was necessary.
Impairment of Long-Lived Assets
Our long-lived assets include property, plant
and equipment and intangible assets subject to amortization. We evaluate 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, we estimate
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.
There was an impairment charge of $0.2 million in the year ended September 30, 2018 and no impairment
charge during the year ended September 30, 2017.
Intangible Assets
Our intangible assets consist of acquired customer
relationships and trade names of Hilger Crystals, Ltd., acquired know-how of Radiation Monitoring Devices, Inc. and provisionally
patented technologies within Dynasil Biomedical Corp.
We estimate the fair value of indefinite-lived
intangible assets using an income approach, and recognize an impairment loss when the estimated fair value of the indefinite-lived
intangible assets is less than the carrying value. During the fourth quarter of fiscal year 2018, we conducted our annual impairment
review of indefinite-lived intangible assets and concluded the fair value exceeded the carrying value.
We review intangible assets with finite lives
for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability
of these intangible assets is assessed based on the undiscounted future cash flows expected to result from the use of the asset.
If the undiscounted future cash flows are less than the carrying value, the intangible assets with finite lives are considered
to be impaired. The amount of the impairment loss, if any, is measured as the difference between the carrying amount of these assets
and the fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.
We amortize our intangible assets with definitive
lives over their useful lives, which range from 5 to 20 years, based on the time period we expect to receive the economic benefit
from these assets.
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
a 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 historical experience and any specific customer collection issues that have
been 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 as 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 future operating results.
Stock-Based Compensation
We account for stock-based compensation
using fair value. Compensation costs are recognized for stock options granted to employees and directors. Options and warrants
granted to employees and non-employees are recorded as an expense over the requisite service period based on the grant date estimated
fair value of the grant, determined using the Black-Scholes option pricing model.
Income Taxes
As part of the process of preparing our
consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions
in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary
differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within our consolidated balance sheets. We regularly evaluate our ability to recover
the reported amount of our deferred income tax asset considering several factors, including our estimate of the likelihood of our
generating sufficient taxable income in future years during the period over which temporary differences reverse. As a result of
the conversion of the Xcede convertible notes in November 2016, our ownership percentage in Xcede decreased to less than 80%. Based
on this ownership percentage, beginning with the year ended September 30, 2017, Xcede is no longer included in the consolidated
federal tax return and the Company can no longer offset taxable income or share net operating losses with Xcede. The tax accounting
impact, including the assessment on the valuation allowance against the U.S. federal and state net deferred tax assets, will continue
to be evaluated in subsequent periods. The valuation allowance will be addressed independently for the Company and Xcede, instead
of on a consolidated basis.
Inventories
Inventories are stated at the lower of
average cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method and includes material, labor
and overhead. Inventories consist primarily of raw materials, work-in-process and finished goods.
A significant decrease in demand for the
Company's products could result in a short-term increase in the cost of inventory and an increase of excess inventory quantities
on hand. In addition, as technologies change or new products are developed, product obsolescence could result in an increase in
the amount of obsolete inventory quantities on hand. The Company records, as a charge to cost of revenue, any amounts required
to reduce the carrying value to net realizable value.
Forward-Looking Statements
The statements contained in
this Annual Report on Form 10-K which are not historical facts are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future
results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our
management, including, without limitation, our expectations regarding results of operations, our compliance with the
financial covenants under our loan agreements with Middlesex Savings Bank and Massachusetts Capital Resource Company, our
expectations regarding results of operations, the commercialization of our technology, including the Xcede patch and our dual
mode detectors, the success of efforts to develop a successful Xcede Patch and to fund that development, our development of
new technologies including at Dynasil Biomedical, the adequacy of our current financing sources to fund our current
operations, our growth initiatives, 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 “plans,” “intends,”
“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, including
obtaining regulatory approvals, 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, Xcede’s ability to produce preclinical data sufficient to enable it to initiate clinical studies of
hemostatic patch, clinical results of Xcede’s programs which may not support further development, the ability of our
RMD business unit to identify and pursue possible continued development opportunities for the Xcede patch, which is not assured,
competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to
governmental customers, litigation, the effect of governmental regulatory developments, the availability of financing
sources, our ability to deleverage our balance sheet, 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 Annual Report
on Form 10-K, including the risk factors contained in Item 1A, 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.
Financial Statements
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part of these consolidated
financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated
financial st
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 1 – Nature of Operations
Nature of Operations
Dynasil Corporation of America (“Dynasil”
or the “Company”) is primarily engaged in the development, marketing and manufacturing of detection, sensing and analysis
technology and optical components as well as contract research. The Company’s products and services are used in a broad range
of application markets including the homeland security, industrial and medical markets sectors. The products and services are sold
throughout the United States (“U.S.”) and internationally.
Note 2 – Summary of Significant
Accounting Policies
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of Dynasil Corporation of America and its wholly-owned subsidiaries: Optometrics Corporation (“Optometrics”),
Evaporated Metal Films Corporation (“EMF”), Radiation Monitoring Devices, Inc. (“RMD”), Hilger Crystals,
Ltd (“Hilger”) and Dynasil Biomedical Corp (“Dynasil Biomedical”). Xcede Technologies, Inc. (“Xcede”)
is a joint venture between Dynasil Biomedical and Mayo Clinic to spin out and separately fund the development of a tissue sealant
technology. As of September 30, 2018, Dynasil Biomedical owned 63% of Xcede’s stock and, as a result, Xcede is included in
the Company’s consolidated balance sheets, results of operations and cash flows. The 63% ownership includes preferred stock
with a liquidation preference, and as a result, for reporting purposes only, common stock ownership is used in the allocation of
noncontrolling interest. Dynasil’s common stock ownership is 83% and the remaining 17% of Xcede’s common stock is owned
by others and accounted for under the rules applicable to non-controlling interest. All significant intercompany transactions and
balances have been eliminated.
Revenue Recognition
Revenues from the sale of the Company’s products and services are recognized when persuasive evidence
of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability
is reasonably assured. The Company generally ships products F.O.B. shipping point.
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.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Revenue Recognition (continued)
Government funded services revenues from
cost plus contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable
portion of the contracts’ fixed fees. Revenue from fixed-type contracts is recognized under the percentage of completion
method with estimated costs and profits included in contract revenue as work is performed. Revenues from time and materials contracts
are recognized as costs are incurred at amounts generally commensurate with billing amounts. Recognition of losses on projects
is taken as soon as the loss is reasonably determinable.
The majority of the Company’s 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.
In May 2014, the FASB issued ASU 2014-09
which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
and supersedes most current revenue recognition guidance, including industry-specific guidance. Using these guidelines, a comprehensive
framework was established for determining how much revenue to recognize and when it should be recognized. The standard is based
on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services using a five-step
process. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred
to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the
adoption of the new standard. In 2016 and 2017, the FASB issued several ASU’s related to ASU 2014-09, which simplify and
provide additional guidance to companies for implementation of the standard.
As of September 30, 2018, the Company has
completed its assessment of the effects of ASU 2014-09 and its amendments on its consolidated financial statements, and has implemented
changes to its business processes, systems and controls to support revenue recognition and the related disclosures under this ASU.
The Company’s assessment included a detailed review of representative contracts from each of the Company’s revenue
streams and a comparison of its historical accounting policies and practices to the new standard. The Company adopted the new standards
on October 1, 2018, and did so retrospectively with the cumulative effect of initially applying the guidance recognized at the
date of initial application (the modified retrospective transition method) ) to all existing contracts that have remaining obligations
as of October 1, 2018. Accordingly, the Company has elected to retroactively adjust only those contracts that do not meet the definition
of a complete contract at the date of the initial application.
The Company believes that this guidance
will lead to very few changes in revenue recognition for the standard contracts in both the Optics and the Innovation and Development
segments. This new guidance may lead to recognition of certain revenue transactions sooner than in the past on contracts that require
the Company to maintain stated inventory levels, as the Company has an enforceable right to payment for the required inventory,
and on contracts such as engineering services and design and tooling transactions, as the Company has an enforceable right to payment
for these performance obligations satisfied over time. The Company will continue to evaluate all new contract arrangements, but
the new accounting standard is not expected to have a material impact on its consolidated financial statements. The cumulative
adjustment to opening retained earnings will be insignificant at October 1, 2018. Additionally, the adoption of this new standard
is not expected to have any tax impact on the consolidated financial statements.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Allowance for Doubtful Accounts Receivable
The Company performs ongoing credit evaluations
of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined
by a review of their current credit information. The Company continuously monitors collections and payments from its customers
and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues
that have been identified. While such credit losses have historically been minimal, within expectations and the provisions established,
the Company cannot guarantee that it will continue to experience the same credit loss rates as in the past. A significant change
in the liquidity or financial position of any significant customers could have a material adverse effect on the collectability
of accounts receivable and future operating results. When all collection efforts have failed and it is deemed probable that a customer
account is uncollectible, that balance is written off against the existing allowance.
Shipping and Handling Costs
Shipping and handling costs are included
in the cost of sales. The amounts billed for shipping and included in net revenue were approximately $40,000 and $45,000 for the
years ended September 30, 2018 and 2017, respectively.
Research and Development
The
Company expenses research and development costs as incurred. Research and development costs include salaries, employee benefit
costs, direct project costs, supplies and other related
costs. Substantially all the Innovation
and Development segment’s cost of revenue relates to research contracts performed by RMD which are in turn billed to the
contracting party. Amounts of research and development included within cost of revenue for the years ended September 30, 2018
and 2017 were $9.9 million and $10.7 million, respectively. Research and development for the Company’s other businesses
totaled $0.8 million and $0.9 million in fiscal years 2018 and 2017, respectively.
Costs in Excess of Billings and Unbilled
Receivables
Costs in excess of billings and unbilled
receivables relate to research and development contracts and consists of actual costs incurred plus fees in excess of billings
at contractual rates.
Patent Costs
Costs incurred in filing, prosecuting and maintaining patents (principally legal fees) are expensed as
incurred and recorded within general and administrative expenses on the consolidated statements of operations. Such costs aggregated
approximately $0.4 and $0.3 million for the years ended September 30, 2018 and 2017, respectively. Xcede capitalizes its patents
which totaled $0 and $0.1 million at September 30, 2018 and 2017, respectively. In fiscal year 2018, Xcede recorded an impairment
of $0.2 million.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Inventories
Inventories are stated at the lower of
average cost or net realizable value. Cost is determined using the first-in, first-out (FIFO) method and includes material, labor
and overhead. Inventories consist primarily of raw materials, work-in-process and finished goods.
A significant decrease in demand for the
Company's products could result in a short-term increase in the cost of inventory and an increase of excess inventory quantities
on hand. In addition, as technologies change or new products are developed, product obsolescence could result in an increase in
the amount of obsolete inventory quantities on hand. The Company records, as a charge to cost of revenue, any amounts required
to reduce the carrying value to net realizable value.
Property, Plant and Equipment
Property, plant and equipment are recorded
at cost or at fair market value for assets acquired in a business combination. Depreciation is provided using the straight-line
method over the estimated useful lives of the respective assets. The estimated useful lives of assets for financial reporting purposes
are as follows: building and improvements, 8 to 25 years; machinery and equipment, 5 to 20 years; office furniture and fixtures,
5 to 10 years; transportation equipment, 5 years. Maintenance and repairs are charged to expense as incurred; major renewals and
betterments are capitalized. When items of property, plant and equipment are sold or retired, the related costs and accumulated
depreciation are removed from the accounts and any gain or loss is included in income.
Goodwill
The Company annually assesses
goodwill impairment at the end of the fourth quarter of the fiscal year by applying a fair value test. In the first step of
testing for goodwill impairment, the Company estimates the fair value of each reporting unit. The reporting units with
goodwill have been determined to be RMD, which is the Innovation and Development reportable segment, and Hilger, which is a
component of the Optics reportable segment. The Company compares the fair value with the carrying value of the net assets
assigned to each reporting unit. If the fair value is less than its carrying value, then the Company performs a second step
and determines the fair value of the goodwill. In this second step, the fair value of goodwill is determined by deducting the
fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a
whole, as if that reporting unit had just been acquired and the purchase price were being initially allocated. If the fair
value of the goodwill is less than its carrying value for a reporting unit, an impairment charge is recorded to earnings.
To determine the fair value of each of
the reporting units as a whole, the Company uses a discounted cash flow analysis, which requires significant assumptions and estimates
about the future operations of each reporting unit. Significant judgments inherent in this analysis include the determination of
appropriate discount rates, the amount and timing of expected future cash flows and growth rates. The cash flows employed in the
discounted cash flow analyses are based on financial forecasts developed internally by management. The discount rate assumptions
are based on an assessment of the Company’s risk adjusted discount rate applicable for each reporting unit. In assessing
the reasonableness of the determined fair values of the reporting units, the Company evaluates its results against its current
market capitalization.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Goodwill (continued)
In addition, the Company evaluates a reporting
unit for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events
or circumstances include the following:
|
•
|
a significant adverse change in legal status or in the business climate,
|
|
•
|
an adverse action or assessment by a regulator,
|
|
•
|
a more likely than not expectation that a segment or a significant portion thereof will be sold,
or
|
|
•
|
the testing for recoverability of a significant asset group within the segment.
|
Intangible Assets
The Company's intangible assets consist
of acquired customer relationships, trade names, acquired backlog, know-how and provisionally patented technologies. The Company
amortizes its intangible assets with definitive lives over their useful lives, which range from 5 to 20 years, based on the time
period the Company expects to receive the economic benefit from these assets.
The Company has a trade name related to
its subsidiary located in the United Kingdom (“U.K.”) that has been determined to have an indefinite life and is therefore
not subject to amortization and is reviewed at least annually for potential impairment. The fair value of the Company’s trade
name is estimated and compared to its carrying value to determine if impairment exists. The Company estimates the fair value of
this intangible asset based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu
of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of this asset. This approach
is dependent on a number of factors, including estimates of future sales, royalty rates in the category of intellectual property,
discount rates and other variables. Significant differences between these estimates and actual results could materially affect
the Company’s future financial results.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Recovery of Long-Lived Assets
The Company continually assesses whether
events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its long-lived assets
(other than goodwill and any indefinite lived assets) or whether the remaining balances of those assets should be evaluated for
possible impairment. Long-lived assets include, for example, customer relationships, trade names, backlog, know-how and provisionally
patented technologies. Events or changes in circumstances that may indicate that an asset may be impaired include the following:
|
•
|
a significant decrease in the market price of an asset or asset group,
|
|
•
|
a significant adverse change in the extent or manner in which an asset or asset group is being
used or in its physical condition,
|
|
•
|
a significant adverse change in legal factors or in the business climate that could affect the
value of an asset or asset group, including an adverse action or assessment by a regulator,
|
|
•
|
an accumulation of costs significantly in excess of the amount originally expected for the acquisition
or construction of a long-lived asset,
|
|
•
|
a current period operating or cash flow loss combined with a history of operating or cash flow
losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group,
|
|
•
|
a current expectation that, more likely than not, a long-lived asset or asset group will be sold
or otherwise disposed of significantly before the end of its previously estimated useful life, or
|
|
•
|
an impairment of goodwill at a reporting unit.
|
If an impairment indicator occurs, the
Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected
future cash flows, including proceeds from the disposition of the asset. The Company groups its long-lived assets for this purpose
at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets or asset groups.
If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing
the fair value of the asset or asset group to its carrying value.
To determine fair value the Company uses
discounted cash flow analyses and estimates about the future cash flows of the asset or asset group. This analysis includes a determination
of an appropriate discount rate, the amount and timing of expected future cash flows and growth rates. The cash flows employed
in the discounted cash flow analyses are typically based on financial forecasts developed internally by management. The discount
rate used is commensurate with the risks involved. The Company may also rely on third party valuations
and or information available regarding the market value for similar assets.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Recovery of Long-Lived Assets (continued)
If the fair value of an asset or asset
group is determined to be less than the carrying amount of the asset or asset group, impairment in the amount of the difference
is recorded in the period that the impairment occurs. Estimating future cash flows requires significant judgment and projections
may vary from the cash flows eventually realized.
Advertising
The Company expenses all advertising costs
as incurred. Advertising expense for the years ended September 30, 2018 and 2017 was approximately $145,000 and $135,000, respectively.
Retirement
Plans
The Company has retirement savings plans
available to substantially all full time employees which are intended to qualify as deferred compensation plans under Section 401(k)
of the Internal Revenue Code and similar laws in the United Kingdom. Pursuant to these plans, employees contribute amounts as required
or allowed by the plans or by law. The Company also makes matching contributions in accordance with the terms of the plans.
Income Taxes
The Company uses the asset and liability
approach to account for deferred 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 carry-forwards. 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.
Dynasil Corporation of America and its
wholly owned U.S. subsidiaries file a consolidated federal income tax return and various state returns. The Company’s U.K.
subsidiary files tax returns in the U.K. Prior to November 18, 2016, the Company’s subsidiary, Xcede was included in the
federal and state tax returns filed by Dynasil. On November 18, 2016, Dynasil’s ownership in Xcede was reduced to less than
80%. As a result, Xcede is no longer included in Dynasil’s federal consolidated tax return and files a separate
federal return. Xcede continues to be included in the Dynasil consolidated state tax filings pursuant to the respective state
tax requirements.
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 reached upon ultimate settlement with the relevant
tax authority.
Due
to the Tax Cuts and Jobs Act (“2017 Tax Act”) that was signed into law on December 22, 2017, the Company estimated
and accounted for the tax implications of the Tax Cuts Act and the resultant changes are reflected in the current financial statements.
The Company re-measured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse
in the future, which is generally 21%, and
recorded an income tax expense of $0.7 million related
to such re-measurement in 2018. The one-time transition tax is based on the total unremitted earnings of the Company’s foreign
subsidiary, Hilger, which has previously been deferred from U.S. income taxes. The Company recorded a provision for its one-time
transition liability of its foreign subsidiary resulting in additional income tax expense of $0.2 million in 2018. At September
30, 2018, the Company has completed its accounting for the tax effects of the 2017 Tax Act. See Note 9 – Income Taxes.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Earnings Per Common Share
Basic earnings (loss) per common share
is computed by dividing the net income or loss attributable to common shares 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 for the years ended September 30, 2018 and 2017, no common stock options were included in the calculation of dilutive
shares as all of the 160,537 and 196,769 common stock options outstanding, respectively, had exercise prices above the current
quarterly average market price per share and their inclusion would be anti-dilutive.
The computations of the weighted shares
outstanding for the years ended September 30 are as follows:
|
|
2018
|
|
|
2017
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,161,825
|
|
|
|
16,909,412
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
-
|
|
|
|
-
|
|
Restricted Stock
|
|
|
9,698
|
|
|
|
2,092
|
|
Dilutive Average Shares Outstanding
|
|
|
17,171,523
|
|
|
|
16,911,504
|
|
Stock Based Compensation
Stock-based compensation cost is measured
using the fair value recognition provisions of the FASB authoritative guidance, which requires the measurement and recognition
of compensation expense for all stock-based awards made to employees and directors, including employee stock options, based on
estimated fair values. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized
over the requisite service period of the award.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Foreign Currency Translation
The operations of Hilger, the Company’s
foreign subsidiary, use their local currency as its functional currency. Assets and liabilities of the Company’s foreign
operations, denominated in their local currency, Great Britain Pounds (GBP), are translated at the rate of exchange at the balance
sheet date. Revenue and expense accounts are translated at the average exchange rates during the period. Adjustments resulting
from translating foreign functional currency financial statements into U.S. dollars are included in the foreign currency translation
adjustment, a component of accumulated other comprehensive income in stockholders’ equity. Gains and losses generated by
transactions denominated in foreign currencies are recorded in the accompanying statement of operations in the period in which
they occur.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined
as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner
sources. Accumulated comprehensive income (loss) represents cumulative translation adjustments related to Hilger, the Company’s
foreign subsidiary. The Company presents comprehensive income and losses in the consolidated statements of operations and comprehensive
income (loss).
Financial Instruments
The carrying amount reported in the balance
sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the immediate
or short-term maturity of these financial instruments. The carrying amounts for fixed rate long-term debt and variable rate long-term
debt approximate fair value because the underlying instruments are primarily at current market rates available to the Company for
similar borrowings.
Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of accounts receivable. In the normal course of business,
the Company extends credit to certain customers. Management performs initial and ongoing credit evaluations of its customers and
generally does not require collateral.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Concentration of Credit Risk
The Company maintains allowances for potential credit losses and has not experienced any significant losses
related to the collection of its accounts receivable. As of September 30, 2018 and 2017, approximately $1,724,000 and $863,000
or 40% and 25% of the Company’s accounts receivable are due from foreign sales.
The Company maintains cash and cash equivalents
at various financial institutions in New Jersey, Massachusetts and New York. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $250,000. Hilger also maintains cash and cash equivalents at a financial institution in the
U.K. Accounts at this institution are insured by the Financial Services Compensation Scheme, the U.K.’s deposit guarantee
scheme, up to £75,000. At September 30, 2018 and 2017, the Company's uninsured bank balances totaled approximately $2.0 million
and $1.9 million, respectively. The Company has not experienced any significant losses on its cash and cash equivalents.
Recent Accounting Pronouncements
Improvements to Employee Share-Based
Payment Accounting.
In March 2016, the FASB issued ASU No. 2016-09, which intends to simplify several aspects of
accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity
or liabilities, a choice to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well
as certain classifications on the statement of cash flows. The Company adopted this ASU in Fiscal 2018 and it did not have a material
impact on the Company’s consolidated financial position, results of operations or cash flows.
Consolidation (Topic 810): Interests
Held through Related Parties That Are under Common Control.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic
810): Interests Held through Related Parties That Are under Common Control, which amends the consolidation guidance on how a reporting
entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that
are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The Company
adopted this ASU in Fiscal 2018 and it did not have an impact on the Company’s consolidated financial position, results of
operations or cash flows.
Service Concession Arrangements (Topic
853): Determining the Customer of the Operation Services.
In May 2017, the FASB issued ASU 2017-10 which provides guidance
for operating entities when they enter into a service concession arrangement with a public-sector grantor. This update is effective
for the Company in the fiscal year beginning October 1, 2018, at the time the Company adopted Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers (Topic 606). The Company implemented this ASU on October 1, 2018 and it is not expected to
have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
Income Taxes (Topic 740): Intra-Entity
Transfers of Assets Other Than Inventory.
In October 2016, the FASB issued ASU 2016-16 which eliminates the exception, other
than for inventory transfers, under current U.S. GAAP under which the tax effects of intra-entity asset transfers (intercompany
sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. Upon adoption of ASU
2016-16, the Company will recognize the tax expense from the sale of that asset in the seller’s tax jurisdiction when the
transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that
arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. Modified retrospective adoption
is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.
The cumulative-effect adjustment, if any, would consist of the net impact from (1) the write-off of any unamortized tax expense
previously deferred and (2) recognition of any previously unrecognized deferred tax assets, net of any necessary valuation allowances.
The impact of the adoption of this standard on future periods will be dependent on future asset transfers, which generally occur
in connection with acquisitions and other business structuring activities. The Company implemented this ASU on October 1, 2018
and it is not expected to have a material impact on the Company’s consolidated financial position, results of operations
or cash flows.
Business Combinations (Topic 805): Clarifying
the Definition of a Business.
In January 2017, the FASB issued ASU 2017-01 which clarifies the definition of a business for
determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is
effective for the Company in the fiscal year beginning October 1, 2018. The adoption of this standard and it is not expected to
have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
Compensation – Stock Compensation
(Topic 718): Scope of Modification Accounting.
In May 2017, the FASB issued ASU No. 2017-09 which was issued to clarify and
reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, “Compensation
– Stock Compensation” to changes in the terms and conditions of a share-based payment award. This update is effective
for the Company in the fiscal year beginning October 1, 2018. The adoption of this standard is not expected to have a material
impact on the Company’s consolidated financial position, results of operations, or cash flows.
Leases (Topic 842).
In February
2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to put most leases on their balance sheets by
recognizing a lessee’s rights and obligations, while expenses will continue to be recognized in a similar manner to today’s
legacy lease accounting guidance. This ASU could also significantly affect the financial ratios used for external reporting and
other purposes, such as debt covenant compliance. This new guidance is effective for the Company beginning in fiscal 2020, with
early adoption permitted. In July 20I8, the FASB issued ASU 20I8-11,
Leases (Topic 842), Targeted Improvements
which provides
an additional transition method that allows entities to recognize a cumulative effect adjustment to the opening balance of retained
earnings in the period of adoption. The Company is currently in the process of assessing the impact of this ASU on its consolidated
financial statements with the intention to adopt this ASU in fiscal year 2020.
Intangibles – Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment
. In January 2017, the FASB issued ASU 2017-04 which simplifies the
test for goodwill impairment by eliminating Step 2 from the Goodwill impairment test. This new guidance is effective for the Company
beginning in fiscal year 2021. The adoption of this standard is not expected to have a material impact on the Company’s financial
statements.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 2 – Summary of Significant
Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
Cash and Cash Equivalents
The Company generally considers all highly
liquid investments with original maturities of three months or less to be cash equivalents.
Reclassifications
Certain prior year balances have been reclassified
to conform to the current year presentation. These reclassifications did not affect previously reported net income or stockholders’
equity.
Note 3 – Xcede Technologies, Inc.
Joint Venture
In October 2013, the Company, through its
subsidiary Dynasil Biomedical (“DBM”), formed Xcede, a joint venture with Mayo Clinic, in order to spin out and separately
fund the development of its hemostatic tissue sealant technology.
Beginning at its inception and through
November 2016, Xcede funded its pre-clinical research activities through the issuance of convertible notes bearing interest at
5% (“the Notes”) pursuant to a note purchase agreement dated October 2013 and most recently amended in November 2016
that provided for the issuance of up to $5.2 million in the aggregate principal amount of the Notes from external investors and
certain directors and officers of the Company. The Notes were convertible into equity of Xcede.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 3 – Xcede Technologies, Inc.
Joint Venture (continued)
Beginning in November 2016, Dynasil invested
$1.2 million of cash into Xcede over the following 18 months in exchange for Series B convertible preferred stock of Xcede (“Series
B Preferred”). The value of the Series B Preferred, as it is wholly owned by DBM, was eliminated in consolidation. In conjunction
with Dynasil’s committed investment, all $5.5 million in existing Notes and accrued interest were converted into 5,394,120
shares of Series A convertible preferred stock of Xcede (“Series A Preferred”) at a 20% discount to the price per share
of the Series B Preferred, in accordance with the amended provisions of the Notes. The original conversion terms of the Notes were
amended to require conversion into Series A Preferred rather than the class of stock issued in conjunction with the financing (Series
B Preferred). Because the original conversion terms of the Notes were amended and as a result of assessing the impact of the rights
and features of the Note amendment and their effect on the value to the issuer and holders, the transaction is recorded at fair
value with a resulting gain on extinguishment of debt. Fair value was determined by management based on an independent valuation
using a market and income approach and an option pricing model to allocate value to the respective shares. The fair value of the
Series A Preferred was approximately $3.6 million on the date of issuance, as compared to the carrying value of the convertible
principal and accrued interest of $5.5 million, resulting in a gain of approximately $1.9 million. Due to the related party nature
of the transaction, this gain was recorded within the equity of Xcede. Of that $1.9 million, approximately $1.6 million was attributed
to DBM and eliminated in consolidation, and approximately $0.3 million was attributed to noncontrolling interest.
Series A Preferred participants include
both outside investors (accounted for as noncontrolling interest) and DBM. The outside investors converted $3.1 million of Notes
and accrued interest into 3,055,551 shares of Series A Preferred. DBM converted the remaining $2.4 million of Notes and accrued
interest into 2,338,569 shares of Series A Preferred, the value of which is eliminated in consolidation.
Each share of Series A Preferred and Series
B Preferred (together “the Preferred Stock”) shall be convertible, at the option of the holder, into such number of
fully paid and non-assessable shares of Xcede common stock (“Common Stock”) as determined by dividing the original
issue price, as defined, by the conversion price in effect on the date of conversion, which is 1:1. Each holder of the Preferred
Stock shall have one vote for each share of Common Stock that the holder of the Preferred Stock would be entitled to receive upon
the conversion of the holder’s Preferred Stock into Common Stock. Upon any liquidation event, which includes certain change
of control events, following payment of pre-equity distributions, the remaining proceeds or net assets of Xcede would be distributed
in the following amounts and order of priority: (1) to satisfy the liquidation preference payment due to each holder of Series
B Preferred, (2) to satisfy the liquidation preference payment due to each holder of Series A Preferred, (3) payment in full of
any acquisition transaction payment, and (4) the remaining assets available to be distributed ratably among the holders of the
Common Stock. If a liquidation event were to occur, the Series A Preferred’s liquidation value would be $1.016 per share
and Series B Preferred’s liquidation value would be $1.27 per share. As of September 30, 2018, the liquidation value of the
Series B Preferred would be approximately $1.5 million and the Series A Preferred would be approximately $5.5 million, of which
$2.4 million is DBM’s portion and $3.1 million would be attributed to noncontrolling shareholders.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 3 – Xcede Technologies, Inc.
Joint Venture (continued)
As of September 30, 2018, DBM owned approximately
63% of Xcede’s outstanding Common Stock and Preferred Stock and, as a result, Xcede is included in the Company’s consolidated
balance sheets, results of operations and cash flows. Due to the Series A Preferred having a liquidation preference and therefore
not representing a residual interest, cumulative net losses of Xcede are attributed only to common stockholders in accordance with
common stock ownership. Noncontrolling interest represents the value of the Series A Preferred and common stock not owned by DBM
plus 17% of cumulative losses of Xcede based on the 17% common stock ownership held by noncontrolling interests.
Due to the issuance of Preferred Stock,
DBM’s ownership percentage in Xcede decreased to less than 80%. Based on this ownership percentage, beginning in fiscal year
2017, Xcede is no longer included in the Dynasil consolidated federal tax return and the Company is no longer able to offset taxable
income or benefit from net operating losses and other tax attributes related to Xcede.
In January 2016, Xcede signed three agreements
with Cook Biotech Inc. of West Lafayette, Indiana (“CBI”), including a Development Agreement, a License Agreement and
a Supply Agreement, in connection with the development, regulatory approval and production of the Xcede Patch. In November 2016,
Xcede entered into another Services Agreement, a Secured Promissory Note, a Loan Agreement, a Security Agreement and an Intellectual
Property Security Agreement (collectively the “Note Agreement”) with CBI, in which CBI committed to fund the pre-clinical
testing of, and subject to the receipt of applicable regulatory approvals to initiate first in human clinical trials for, the Xcede
Patch. Under the terms of the Note Agreement, in exchange for the services performed by CBI, Xcede committed to a multiple
draw credit facility in the aggregate amount not to exceed $1.5 million, with three draws of principal available, each in the amount
of $500,000, upon satisfaction of conditions identified in the Note Agreement. The principal amounts outstanding bear interest
at a fixed rate of 2% and are secured by all the rights of Xcede under the Development Agreement, Supply Agreement, and License
Agreement, all the rights to the data and work product arising from the clinical trial being performed under the Services Agreement,
all regulatory approvals for the Xcede Patch, all patent and patent applications owned or controlled by Xcede, and all trademark
and service mark registrations and applications. The note was recorded at fair value net of unamortized discount based on an imputed
interest rate of 5.4%. The outstanding principal and unpaid interest are due and payable in full at the earlier of closing of an
acquisition transaction or December 31, 2025. Xcede recognized research and development expense as the related services were performed
by CBI. There was approximately $166,000 and $306,000 of research and development expense recognized during the twelve months ended
September 30, 2018 and 2017, respectively.
On July 20, 2018, Xcede received a notice
of termination from CBI, in which CBI asserted its termination rights under the Note Agreement and Development Agreement, claiming
that the results of a recent animal study showed that it is not commercially reasonable, in CBI’s assessment, to continue
to the next development phase of the Patch. Upon a valid termination, CBI has no obligation to conduct further developmental activities
with respect to the Xcede Patch, including any further in-kind funding under the Note Agreement between Xcede and CBI. In addition,
CBI has asserted that the foregoing study results trigger an immediate repayment of the $500,000 promissory note owed by Xcede
to CBI under the Note Agreement, which otherwise has a stated maturity of December 31, 2025. While Xcede vigorously contests this
assertion, at this time it is unclear how this matter will be resolved between Xcede and CBI. As this is unresolved, the note is
currently classified as short term.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 3 – Xcede Technologies, Inc.
Joint Venture (continued)
As there will be no further R&D services performed
by CBI, research and development expense of $35,000 was recorded to accrete the note to face value of $0.5 million.
In light of the foregoing, Xcede has halted
clinical trial preparations at this time and has curtailed its operations to a minimal level while the Board of Directors of Xcede
evaluates alternatives, including the viability of modifying the Patch to address the shortcomings cited by CBI and/or the possible
sale or license of Xcede IP assets, subject to amending the security interest described above. Additionally, the Company’s
RMD subsidiary has begun an investigation of possible continued development of the Xcede Patch, which could include seeking government
funding of this development. There can be no assurances with respect to any such alternatives or that any additional outside funding
to continue development of Xcede Patch will be available to RMD.
Note 4 – Inventories
Inventories, net of reserves, at September 30, 2018 and 2017,
consisted of the following:
|
|
2018
|
|
|
2017
|
|
Raw Materials
|
|
$
|
2,362,000
|
|
|
$
|
2,540,000
|
|
Work-in-Process
|
|
|
890,000
|
|
|
|
798,000
|
|
Finished Goods
|
|
|
854,000
|
|
|
|
988,000
|
|
|
|
$
|
4,106,000
|
|
|
$
|
4,326,000
|
|
Note 5 - Property, Plant and Equipment
Property, plant and equipment, at September
30, 2018 and 2017, consist of the following:
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
158,000
|
|
|
$
|
161,000
|
|
Building and improvements
|
|
|
3,591,000
|
|
|
|
3,474,000
|
|
Machinery and equipment
|
|
|
14,086,000
|
|
|
|
12,318,000
|
|
Office furniture and fixtures
|
|
|
1,239,000
|
|
|
|
987,000
|
|
Transportation equipment
|
|
|
53,000
|
|
|
|
53,000
|
|
|
|
|
19,127,000
|
|
|
|
16,993,000
|
|
Less accumulated depreciation
|
|
|
(11,029,000
|
)
|
|
|
(9,961,000
|
)
|
|
|
$
|
8,098,000
|
|
|
$
|
7,032,000
|
|
Depreciation expense for the years ended
September 30, 2018 and 2017 was $1,145,000 and $1,135,000, respectively.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 6 – Intangible Assets
Intangible assets, at September 30, 2018 and 2017, consist of
the following:
|
|
Useful
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
September 30, 2018
|
|
Life (years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Acquired Customer Base
|
|
5 to 15
|
|
$
|
719,000
|
|
|
$
|
601,000
|
|
|
$
|
118,000
|
|
Know How
|
|
15
|
|
|
512,000
|
|
|
|
350,000
|
|
|
|
162,000
|
|
Trade Name
|
|
Indefinite
|
|
|
272,000
|
|
|
|
-
|
|
|
|
272,000
|
|
Patents
|
|
20
|
|
|
223,000
|
|
|
|
20,000
|
|
|
|
203,000
|
|
Biomedical Technologies
|
|
5
|
|
|
260,000
|
|
|
|
260,000
|
|
|
|
-
|
|
|
|
|
|
$
|
1,986,000
|
|
|
$
|
1,231,000
|
|
|
$
|
755,000
|
|
|
|
Useful
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
September 30, 2017
|
|
Life (years)
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
Acquired Customer Base
|
|
5 to 15
|
|
$
|
737,000
|
|
|
$
|
551,000
|
|
|
$
|
186,000
|
|
Know How
|
|
15
|
|
|
512,000
|
|
|
|
316,000
|
|
|
|
196,000
|
|
Trade Name
|
|
Indefinite
|
|
|
281,000
|
|
|
|
-
|
|
|
|
281,000
|
|
Patents
|
|
20
|
|
|
333,000
|
|
|
|
9,000
|
|
|
|
324,000
|
|
Biomedical Technologies
|
|
5
|
|
|
260,000
|
|
|
|
260,000
|
|
|
|
-
|
|
|
|
|
|
$
|
2,123,000
|
|
|
$
|
1,136,000
|
|
|
$
|
987,000
|
|
Amortization expense for the years ended September
30, 2018 and 2017 was $112,000 and $104,000, respectively. In fiscal year 2018, the Company recorded an impairment of $182,000.
Estimated amortization expense for each of the next
five fiscal years is as follows:
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
Thereafter
|
|
|
Total
|
|
Acquired Customer Base
|
|
$
|
80,000
|
|
|
$
|
38,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
118,000
|
|
Know How
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
34,000
|
|
|
|
26,000
|
|
|
|
-
|
|
|
|
162,000
|
|
Patents
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
128,000
|
|
|
|
203,000
|
|
|
|
$
|
129,000
|
|
|
$
|
87,000
|
|
|
$
|
49,000
|
|
|
$
|
49,000
|
|
|
$
|
41,000
|
|
|
$
|
128,000
|
|
|
$
|
483,000
|
|
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 7 – Goodwill
The changes to goodwill during the years
ended September 30, 2018 and 2017 are summarized as follows:
|
|
Contract
|
|
|
|
|
|
|
|
|
|
Research
|
|
|
Optics
|
|
|
Total
|
|
Goodwill at September 30, 2016
|
|
$
|
4,939,000
|
|
|
$
|
959,000
|
|
|
$
|
5,898,000
|
|
Currency translation on Hilger Crystals
|
|
|
-
|
|
|
|
42,000
|
|
|
|
42,000
|
|
Goodwill at September 30, 2017
|
|
$
|
4,939,000
|
|
|
$
|
1,001,000
|
|
|
$
|
5,940,000
|
|
Currency translation on Hilger Crystals
|
|
|
-
|
|
|
|
(40,000
|
)
|
|
|
(40,000
|
)
|
Goodwill at September 30, 2018
|
|
$
|
4,939,000
|
|
|
$
|
961,000
|
|
|
$
|
5,900,000
|
|
With respect to the Company's annual goodwill
impairment testing performed during the fourth quarter of fiscal year 2018, step one of the testing determined the estimated fair
value of RMD (included in the Innovation and Development segment) and Hilger (included in the Optics segment) reporting units exceeded
their carrying value by more than 20%. Accordingly, the Company concluded that no impairment had occurred and no further testing
was necessary.
The step one test for the RMD reporting unit and
the resulting calculation of the indicated fair value was performed as described above based on certain specific assumptions. The
Company relied on a weighted average cost of capital of approximately 16% for this reporting unit which takes into consideration
certain industry and specific premiums. The Company utilized a long term growth rate of approximately 1.5% for this reporting unit
which considers industry research and management’s expectations as to the prospects for long term growth in this industry.
The step one test for the Hilger reporting
unit and the resulting calculation of the indicated fair value was performed as described above based on certain specific assumptions.
The Company relied on a weighted average cost of capital of 16% for this reporting unit which takes into consideration certain
industry and specific premiums. The Company utilized a long term growth rate of approximately 3% for this reporting unit which
considers industry research and management’s expectations as to the prospects for long term growth in this industry.
Determining the fair value using a discounted
cash flow method requires significant estimates and assumptions, including market conditions, discount rates, and long-term projections
of cash flows. The Company’s estimates are based upon historical experience, current market trends, projected future volumes
and other information. The Company believes that the estimates and assumptions underlying the valuation methodology are reasonable;
however, different estimates and assumptions could result in a different estimate of fair value. In estimating future cash flows,
the Company relies on internally generated projections for a defined time period for revenue and operating profits, including capital
expenditures, changes in net working capital, and adjustments for non-cash items to arrive at the free cash flow available to invested
capital. A terminal value utilizing a constant growth rate of cash flows is used to calculate a terminal value after the explicit
projection period. The future projected cash flows for the discrete projection period and the terminal value are discounted at
a risk adjusted discount rate to determine the fair value of the reporting unit.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 8 – Debt
As of September 30, 2018, the Company is
in compliance with the financial covenants included in its outstanding indebtedness.
Senior Debt
On May 1, 2014, the Company entered into
a loan and security agreement (the “Bank Loan Agreement”) and line of credit note (the “Note”) with Middlesex
Savings Bank, pursuant to which it agreed to provide up to $4.0 million, subject to the availability restrictions described below,
under a revolving line of credit loan to the Company for general corporate purposes. The original Bank Loan Agreement provided
that the loan expired in May of 2017.
The Bank Loan Agreement provides for events
of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation,
breach of covenants, representations and warranties, insolvency and bankruptcy, change of management, as defined, and the occurrence
of a material adverse change, as defined.
The 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, at the close of each fiscal quarter, to maintain a Debt Service Coverage ratio, as defined, of at least 1.20 to 1.00 on
a trailing four quarter basis.
On February 1, 2016, the Company entered
into a $2.0 million Term Note with Middlesex Savings Bank (“Term Note”). The Company converted $2.0 million of outstanding
advances under the Company’s Middlesex Bank Line of Credit Note to a new five-year term note bearing interest at the fixed
annual rate of 4.5%. As of September 30, 2018, the outstanding principal balance of the Term Note is $1.0 million.
The Bank Loan Agreement, the Note and the
Term Note are secured by (i) a security interest in substantially all of the Company’s personal property and (ii) sixty-five
percent (65%) of Dynasil’s equity interests in its U.K. subsidiary, Hilger Crystals, Ltd. Under the Note, the borrowing base
is determined monthly based on eligible billed and unbilled accounts receivable and eligible inventory. The interest rate under
the Note is equal to the Prime Rate, but in no event less than 3.25%. As of September 30, 2018, there were no outstanding borrowings
and the total availability under the Company’s line of credit was $4.0 million.
On May 16, 2017, the Company and Middlesex
Savings Bank entered in an agreement to extend the Company’s existing line of credit through May 2020. Additionally, on May
16, 2017, the Company and Middlesex Savings Bank entered into an annual $1.0 million equipment line of credit agreement with a
one year draw period in which the outstanding balance will be converted into a five year term note on the one year anniversary.
The existing loan agreement was also amended on December 2, 2016 to permit the Company to invest up to $1.2 million in its Xcede
Technologies subsidiary during the period from the quarter ended December 31, 2016 through the quarter ending September 30, 2018.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 8 – Debt (continued)
Senior Debt (continued)
On July 31, 2018, the Company converted
the outstanding balance on the equipment line of credit with Middlesex Savings Bank (“Middlesex”) of approximately
$750,000 into a five year term note with an interest rate of 5.66%. Additionally, on August 9, 2018, the Company’s equipment
line of credit was renewed for $750,000 through April 30, 2019, at which time the outstanding balance will be converted into a
five year term note. As part of the renewal process and due to the additional credit being extended to the Company, the Middlesex
loan and security agreement was amended on August 9, 2018 to change the maximum debt leverage ratio covenant to 2.5x from 3.0x.
On both March 31, 2018 and June 30, 2018,
the Company was in compliance with all but one of the financial covenants contained in the loan agreement with Middlesex that requires
the Company to maintain certain ratios of earnings before interest, taxes, depreciation and amortization to fixed charges and to
total debt and senior debt. On August 9, 2018, Middlesex issued a waiver for these events in the periods ended March 31, 2018 and
June 30, 2018, as this circumstance arose due to the timing of equipment purchases as the Company invests for the future. The Company
is in compliance with this covenant at September 30, 2018.
Subordinated Debt
On July 31, 2012, the Company entered into
a Note Purchase Agreement (the “Agreement”) with Massachusetts Capital Resource Company (“MCRC”). Pursuant
to the terms of the Agreement, the Company issued and sold to MCRC a $3.0 million subordinated note (the “Subordinated Note”)
for a purchase price of $3.0 million.
The Subordinated Note was scheduled to
mature on July 31, 2017, unless accelerated pursuant to an event of default. The Subordinated Note provided for interest at the
rate of ten percent (10%) per annum, with interest to be payable monthly on the last day of each calendar month and principal payments
of $130,000 beginning on September 30, 2015, and on the last day of each calendar month thereafter through and including July 31,
2017.
Effective October 1, 2015, in connection
with a prepayment of $2.0 million of the Subordinated Note, MCRC agreed to adjust the interest rate to 6% per annum and to amend
the principal repayment terms such that beginning on September 30, 2016, the Company would redeem monthly, without premium, $43,478
in principal amount of Subordinated Note together with all accrued and unpaid interest then due on the amount redeemed through
and including July 31, 2018.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 8 – Debt (continued)
Subordinated Debt (continued)
On December 15, 2016, the Company amended
the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of
the loan and defer principal repayment requirements to November 30, 2017. Such amendment also extended the maturity date from July
31, 2018 to July 31, 2019.
On January 3, 2018, the Company amended
the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of
the loan and defer principal repayment requirements to November 30, 2018. Such amendment also increased the interest rate of the
note from six percent (6%) to seven percent (7%) per annum.
On November 27, 2018, the Company amended
the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of
the loan and defer principal repayment requirements to November 30, 2019. Such amendment also extended the maturity date from July
31, 2019 to November 30, 2021.
Other Debt
The Company’s RMD and Optometrics
subsidiaries entered into equipment financing notes payable in connection with the purchase of certain equipment. Optometrics entered
into equipment financing notes payable with two government agencies for up to $0.5 million. The notes bear interest at 5% to 5.25%
and are repayable in monthly installments over a five year period. RMD entered into equipment financing notes payable with a private
equipment funding source. The notes bear interest at 8.7% to 14.59% and are repayable in monthly installments through July 2019.
Since its inception in October of 2013,
the Company’s Xcede joint venture raised $2.9 million through the issuance of convertible notes to external investors, including
certain officers and directors of the Company, which bear interest at 5%, due on demand after June 30, 2017. In November 2016,
the notes and accrued interest were converted into 5,394,120 shares of preferred stock of Xcede at a 20% discount to the price
per share of the investments the Company has committed to make in Xcede, in accordance with the provisions of the notes. See Note
3 – Xcede Technologies, Inc. Joint Venture.
In November 2016, Xcede entered into an
additional Services Agreement, a Secured Promissory Note, a Loan Agreement, a Security Agreement and an Intellectual Property
Security Agreement (collectively the “Note Agreement”) with Cook Biotech, Inc. (CBI), in which CBI committed to fund
the pre-clinical testing of, and subject to the receipt of applicable regulatory approvals to initiate first in human clinical
trials for, the Xcede Patch. Under the terms of the Note Agreement, in exchange for the services performed by CBI, Xcede
has committed to a multiple draw credit facility in the aggregate amount not to exceed $1.5 million, with three draws of
principal available, each in the amount of $500,000, upon satisfaction of conditions identified in the Note Agreement. The
principal amounts outstanding bear interest at a fixed rate of 2% and are secured by all the rights of Xcede under the Development
Agreement, Supply Agreement, and License Agreement, all the rights to the data and work product arising from the clinical trial
being performed under the Services Agreement, all regulatory approvals for the Xcede Patch, all patent and patent applications
owned or controlled by Xcede, and all trademark and service mark registrations and applications. The outstanding principal
and unpaid interest are due and payable in full at the earlier of closing of an acquisition transaction or December 31, 2025.
As of September 30, 2018, Xcede had $0.5 million of outstanding indebtedness owed to CBI. The note was recorded at fair value
at issuance net of unamortized discount based on an imputed interest rate of 5.4%. On July 20, 2018, Xcede received a notice of
termination from CBI, which included CBI’s assertion that the foregoing study results trigger an immediate repayment of
the $500,000 promissory note owed by Xcede to CBI under the Note Agreement and cancelled the remaining availability under the
Note Agreement. While Xcede vigorously contests this assertion, at this time it is unclear how this matter will be resolved between
Xcede and CBI.
The Company carries the promissory note
in short-term debt. Upon termination of the CBI agreements, research and development expense of $35,000 was recorded to accrete
the note to face value. See Note 3 – Xcede Technologies, Inc. Joint Venture.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 8 – Debt (continued)
Debt at September 30, 2018 and 2017 is summarized as follows:
|
|
2018
|
|
|
2017
|
|
Term note payable to Middlesex Savings Bank. The note payable to Middlesex is due in monthly installments of $37,000 for principal and interest through February 2021. The interest rate is 4.52% and the note is secured by an interest in substantially all of the Company's personal property and sixty-five percent of the Company's equity interests in its UK subsidiary, Hilger Crystals, Ltd.
|
|
$
|
1,024,000
|
|
|
$
|
1,415,000
|
|
|
|
|
|
|
|
|
|
|
Equipment term note payable to Middlesex Savings Bank. The note payable to Middlesex is due in monthly installments of $14,000 for principal and interest through July 2023. The interest rate is 5.66% and the note is secured by an interest in substantially all of the Company's personal property and sixty-five percent of the Company's equity interests in its UK subsidiary, Hilger Crystals, Ltd.
|
|
|
742,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to Town of Ayer Industrial Development Finance Authority (Ayer) for an equipment line of credit made with Dynasil subsidiary Optometrics. The note payable to Ayer is due in monthly installments totaling $17,000 per year and will be amortized over ten years with a balloon payment at five years from the date of the note. The interest rate is 5.00%. The note is secured by an interest in the equipment purchased with the line.
|
|
|
122,000
|
|
|
|
141,000
|
|
|
|
|
|
|
|
|
|
|
Note payable to Massachusetts Development Finance Agency (MDFA) for promissory note made with Dynasil subsidiary Optometrics. The note payable to MDFA is due in monthly installments of $6,000 for principal and interest through March, 2019. The interest rate is 5.25%. The note is secured by an interest in substantially all of Optometric's personal property.
|
|
|
36,000
|
|
|
|
107,000
|
|
|
|
|
|
|
|
|
|
|
Subordinated note payable to Massachusetts Capital Resource Company in monthly installments of $5,000 through November 2019 for interest only, followed by monthly payments of $39,000 of interest and principal through November 2021. The interest rate is fixed at 7.00%.
|
|
|
865,000
|
|
|
|
870,000
|
|
|
|
|
|
|
|
|
|
|
Note payable to Leaf Capital Funding, LLC (Leaf) for equipment financing with Dynasil subsidiary RMD. The note payable to Leaf was due in monthly installments of $7,000 for principal and interest through February 2018. The interest rate was 14.59%. The note was secured by an interest in the financed equipment.
|
|
|
-
|
|
|
|
32,000
|
|
|
|
|
|
|
|
|
|
|
Note payable to Leaf Capital Funding, LLC (Leaf) for equipment financing with Dynasil subsidiary RMD. The note payable to Leaf is due in monthly installments of $1,000 for principal and interest through July 2019. The interest rate is 8.70%. The note is secured by an interest in the financed equipment.
|
|
|
14,000
|
|
|
|
29,000
|
|
|
|
|
|
|
|
|
|
|
Xcede Note agreement with Cook Biotech Inc. to fund pre-clinical testing
for Xcede. Credit draw not to exceed $1.5 million, in three draws of $500,000 upon satisfaction of conditions in Note
Agreement. Upon termination of the CBI note the remaining $1.0 million is no longer available. Note bears interest at a rate
of 2% and is secured by all the rights of Xcede under the Development Agreement, Supply Agreement, and License
Agreement. The note was recorded at inception at fair value net of unamortized discount based on an imputed interest rate of
5.4%. During the year ended September 30, 2018, R&D expense of $35,000 was recorded to accrete the note to face
value.
|
|
|
518,000
|
|
|
|
458,000
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
3,321,000
|
|
|
$
|
3,052,000
|
|
Less current portion
|
|
|
(1,246,000
|
)
|
|
|
(2,007,000
|
)
|
Long term portion
|
|
$
|
2,075,000
|
|
|
$
|
1,045,000
|
|
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 8 – Debt (continued)
The aggregate maturities of debt based on the payment terms
of the agreement are as follows:
For the years ending on September 30:
|
|
|
|
2019
|
|
$
|
1,246,000
|
|
2020
|
|
|
932,000
|
|
2021
|
|
|
769,000
|
|
2022
|
|
|
233,000
|
|
2023
|
|
|
141,000
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
3,321,000
|
|
Unamortized debt issuance costs of $64,000
are net of accumulated amortization of $64,000 at September 30, 2018 and 2017. There was no amortization expense for the year ended
September 30, 2018. Amortization expense for the year ended September 30, 2017 was $3,000 and is included in interest expense.
Note 9 – Income Taxes
Income (loss) before the provision (benefit)
for income taxes consists of the following:
|
|
2018
|
|
|
2017
|
|
US
|
|
$
|
(67,000
|
)
|
|
$
|
(626,000
|
)
|
Foreign
|
|
|
49,000
|
|
|
|
(168,000
|
)
|
Total
|
|
$
|
(18,000
|
)
|
|
$
|
(794,000
|
)
|
The provision (benefit) for income taxes in the accompanying
consolidated financial statements consists of the following:
|
|
2018
|
|
|
2017
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
124,000
|
|
|
$
|
6,000
|
|
State
|
|
|
15,000
|
|
|
|
13,000
|
|
Foreign
|
|
|
(32,000
|
)
|
|
|
(83,000
|
)
|
|
|
$
|
107,000
|
|
|
$
|
(64,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(183,000
|
)
|
|
$
|
(2,642,000
|
)
|
State
|
|
|
(1,508,000
|
)
|
|
|
-
|
|
Foreign
|
|
|
(24,000
|
)
|
|
|
(35,000
|
)
|
|
|
|
(1,715,000
|
)
|
|
|
(2,677,000
|
)
|
Income tax expense (benefit)
|
|
$
|
(1,608,000
|
)
|
|
$
|
(2,741,000
|
)
|
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 9 – Income Taxes (continued)
A reconciliation of the federal statutory rate to the Company's
effective tax rate is as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Tax due at statutory rate
|
|
|
24.28
|
%
|
|
|
34.00
|
%
|
|
|
|
|
|
|
|
|
|
State tax provision, net of federal
|
|
|
-9.29
|
%
|
|
|
-3.49
|
%
|
Valuation allowance
|
|
|
**
|
|
|
|
-78.87
|
%
|
Valuation allowance release
|
|
|
**
|
|
|
|
380.61
|
%
|
Foreign tax credits
|
|
|
**
|
|
|
|
29.34
|
%
|
Permanently non-deductible expenses
|
|
|
**
|
|
|
|
0.00
|
%
|
Federal rate change under TCJA
|
|
|
**
|
|
|
|
0.00
|
%
|
Research credit study
|
|
|
**
|
|
|
|
0.00
|
%
|
Foreign rate differential and other
|
|
|
**
|
|
|
|
-16.54
|
%
|
Total
|
|
|
8703.64
|
%
|
|
|
345.05
|
%
|
** These values are not meaningful. Please see the
subsequent paragraphs of this note for more detailed explanation.
Net deferred tax assets (liabilities) consisted of the following
at September 30, 2018:
|
|
Domestic
|
|
|
Foreign
|
|
|
Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
Credits
|
|
$
|
3,530,000
|
|
|
$
|
-
|
|
|
$
|
3,530,000
|
|
NOLs
|
|
|
3,235,000
|
|
|
|
25,000
|
|
|
|
3,260,000
|
|
Stock compensation
|
|
|
203,000
|
|
|
|
-
|
|
|
|
203,000
|
|
Accruals
|
|
|
209,000
|
|
|
|
-
|
|
|
|
209,000
|
|
Other
|
|
|
109,000
|
|
|
|
-
|
|
|
|
109,000
|
|
Gross deferred tax assets
|
|
|
7,286,000
|
|
|
|
25,000
|
|
|
|
7,311,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(1,777,000
|
)
|
|
|
-
|
|
|
|
(1,777,000
|
)
|
Deferred tax assets, net
|
|
|
5,509,000
|
|
|
|
25,000
|
|
|
|
5,534,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,168,000
|
)
|
|
|
(164,000
|
)
|
|
|
(1,332,000
|
)
|
Intangibles
|
|
|
(7,000
|
)
|
|
|
(66,000
|
)
|
|
|
(73,000
|
)
|
Gross deferred tax liabilities
|
|
|
(1,175,000
|
)
|
|
|
(230,000
|
)
|
|
|
(1,405,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
4,334,000
|
|
|
$
|
(205,000
|
)
|
|
$
|
4,129,000
|
|
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 9 – Income Taxes (continued)
Net deferred tax assets (liabilities) consisted of the following
at September 30, 2017:
|
|
Domestic
|
|
|
Foreign
|
|
|
Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
Credits
|
|
$
|
1,456,000
|
|
|
$
|
-
|
|
|
$
|
1,456,000
|
|
NOLs
|
|
|
3,750,000
|
|
|
|
26,000
|
|
|
|
3,776,000
|
|
Stock compensation
|
|
|
205,000
|
|
|
|
-
|
|
|
|
205,000
|
|
Accruals
|
|
|
352,000
|
|
|
|
-
|
|
|
|
352,000
|
|
Intangibles
|
|
|
5,000
|
|
|
|
-
|
|
|
|
5,000
|
|
Other
|
|
|
140,000
|
|
|
|
-
|
|
|
|
140,000
|
|
Gross deferred tax assets
|
|
|
5,908,000
|
|
|
|
26,000
|
|
|
|
5,934,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(2,342,000
|
)
|
|
|
-
|
|
|
|
(2,342,000
|
)
|
Deferred tax assets, net
|
|
|
3,566,000
|
|
|
|
26,000
|
|
|
|
3,592,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(902,000
|
)
|
|
|
(181,000
|
)
|
|
|
(1,083,000
|
)
|
Intangibles
|
|
|
(22,000
|
)
|
|
|
(79,000
|
)
|
|
|
(101,000
|
)
|
Gross deferred tax liabilities
|
|
|
(924,000
|
)
|
|
|
(260,000
|
)
|
|
|
(1,184,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
2,642,000
|
|
|
$
|
(234,000
|
)
|
|
$
|
2,408,000
|
|
In assessing the ability to realize the
net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of
existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether
it is more likely than not that some portion or all of the net deferred tax assets will not be realized.
As a result of the conversion of the Xcede
convertible notes and accrued interest to preferred stock in November 2016 (see Note 3), the Company’s ownership percentage
in Xcede decreased to less than 80%. Xcede, therefore, is no longer included in Dynasil’s federal consolidated tax return
and files a separate federal return. Xcede will continue to be included in the Dynasil consolidated state tax filings pursuant
to the respective state tax requirements.
As a result of Xcede’s de-consolidation
from the Company’s federal tax returns, the Company is no longer able to offset taxable income with Xcede’s current
or cumulative net operating losses. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined
that it is more likely than not that the federal, deferred tax assets of the new Dynasil federal consolidated group will be realized
based upon positive earnings history and expected future profits of the group. As a result, the federal deferred tax asset
valuation allowance associated with the Dynasil federal consolidated group was reversed resulting in an income tax benefit in the
amount of $2.7 million during the twelve months ended September 30, 2017. Going forward, as the Company records income, it
will be able to utilize the NOLs (net operating losses) within its deferred tax assets.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 9 – Income Taxes (continued)
As a result of Xcede’s decision to
halt clinical trial preparations and curtail operations to a minimal level while the Board of Directors of Xcede evaluates alternative
avenues to develop the Xcede Patch, following the July 2018 notice of termination from Cook Biotech Inc. (“CBI”) claiming
that the results of a recent animal study showed that it is not commercially reasonable, in CBI’s assessment, to continue
to the next development phase of the Xcede Patch, the Company has concluded that it is more likely than not that the deferred tax
assets associated with the Company’s unitary state filings will be realized based on future profit for the group and thus
has reversed the related valuation allowance on the Company’s NOLs of approximately $0.6 million. In addition, the Company
conducted a research and experimentation study which released the tax valuation allowance and increased deferred tax assets by
$0.6 million. The reversal results in an income tax benefit of approximately $1.2 million recorded during the year ended September
30, 2018.
The valuation allowance will continue to
be addressed independently for the Company and Xcede, instead of on a consolidated basis. The net change in the valuation allowances
for the years ending September 30, 2018 and 2017 was ($0.6) million and ($2.4) million, respectively.
On December 22, 2017, the 2017 Tax Act
was signed into law. The 2017 Tax Act, which was effective on December 22, 2017, significantly revised the U.S. tax code by, among
other changes, lowering the corporate income tax rate from 35% to 21%, requiring a one-time transition tax on accumulated foreign
earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings.
At September 30, 2018, the Company has completed its accounting for the tax effects of the 2017 Tax Act.
The Company re-measured certain U.S. deferred
tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and
recorded an income tax expense of $0.7 million related to such re-measurement in 2018.
The one-time transition tax is based on
the total unremitted earnings of the Company’s foreign subsidiary, Hilger, which has previously been deferred from U.S.
income taxes. The Company recorded a provision for its one-time transition liability of its foreign subsidiary resulting in additional
income tax expense of $0.2 million in 2018.
As of September 30, 2018 and 2017,
the Company has federal net operating losses of $9.0 million and $8.1 million, respectively. As of September 30, 2018 and
2017, the Company has state net operating losses of $19.3 million and $16.9 million, respectively. The federal and state net
operating losses begin expiring in 2033 and 2026, respectively. At September 30, 2018 and 2017, the Company has foreign net
operating loss carryforwards of approximately $147,000 and $151,000, respectively which can be carried forward
indefinitely.
As of September 30, 2018 and 2017, the
Company has federal research credits of $2.9 million and $1.4 million, respectively. The $2.9 million primarily resulted from
a benefit in the second quarter related to R&E tax credits for the years ended 2013 through 2016. The federal credits begin
expiring in fiscal year 2030. As of September 30, 2018 and 2017, the Company has state research credits of $852,000 and $70,000,
respectively. The state credits begin expiring in fiscal year 2027.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 9 – Income Taxes (continued)
As of September 30, 2018 and 2017, the
Company has no unrecorded liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax
positions would be classified as income tax expense in the accompanying consolidated statement of operations. As of September 30,
2018 and 2017, the Company has no accrued interest or penalties related to uncertain tax positions.
The Company is subject to taxation in the
United States, various states, and the United Kingdom. At September 30, 2018, domestic tax years from fiscal 2011 through fiscal
2017 remain open to examination by the United States taxing authorities and tax years 2015 through 2018 remain open in the United
Kingdom.
Note 10 – Stockholders’
Equity
Stock Based Compensation
The Company adopted Stock Incentive Plans
in 1996, 1999 and 2010 (the “Plans”) which provide for, among other incentives, the granting to officers, directors,
employees and consultants options to purchase shares of the Company’s common stock. The Plans also allow eligible persons
to be issued shares of the Company’s common stock either through the purchase of such shares or as a bonus for services rendered
to the Company. Shares are generally issued at the fair market value on the date of issuance. The maximum number of shares of common
stock which may be issued under the 2010 Stock Incentive Plan is 6,000,000, of which 3,166,698 and 3,372,881 shares of common stock
are available for future purchases under the plan, at September 30, 2018 and 2017, respectively. Options are generally exercisable
at the fair market value or higher on the date of grant over a three to five year period currently expiring through 2020.
The fair value of the stock options granted
is estimated at the date of grant using the Black-Scholes option pricing model. The expected volatility was determined with reference
to the historical volatility of the Company's stock. The Company uses historical data to estimate option exercises and employee
terminations within the valuation model. The expected term of options granted represents the period of time that the options granted
are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the
U.S. Treasury rate in effect at the time of grant. The dividend yield is expected to be 0.0% because historically the Company has
not paid dividends on common stock.
The Company’s Xcede joint venture
adopted an Equity Incentive Plan in 2013 which provides for, among other incentives, the granting to officers, directors, employees
and consultants options to purchase shares in Xcede’s common stock. The options granted generally vest over a 3 year period.
The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model using
assumptions generally consistent with those used for Company stock options. Because Xcede is not publicly traded, the expected
volatility is estimated with reference to the average historical volatility of a group of publicly traded
companies that are believed to have similar characteristics to Xcede. As of September 30, 2018, 1,699,044 options remained in this
plan.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 10 – Stockholders’
Equity (continued)
Stock Based Compensation (continued)
Stock compensation expense is recorded
in general and administrative expenses and is presented below for the years ended September 30, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Stock Grants
|
|
$
|
287,000
|
|
|
$
|
241,000
|
|
Restricted Stock Grants
|
|
|
55,000
|
|
|
|
52,000
|
|
Option Grants
|
|
|
17,000
|
|
|
|
50,000
|
|
Employee Stock Purchase Plan
|
|
|
3,000
|
|
|
|
3,000
|
|
Subsidiary Option Grants
|
|
|
95,000
|
|
|
|
110,000
|
|
Total
|
|
$
|
457,000
|
|
|
$
|
456,000
|
|
At September 30, 2018 there was approximately
$56,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period
of twelve months. At September 30, 2018, the Company’s Xcede joint venture had $43,000 of unrecognized stock compensation
expense associated with stock options expected to be recognized over a weighted average period of five months.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 10 – Stockholders’
Equity (continued)
Restricted Stock Grants
A summary of restricted stock activity
for the years ended September 30, 2018 and 2017 is presented below:
Restricted Stock Activity for the Year ended
September 30, 2018
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Nonvested at September 30, 2017
|
|
|
70,000
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
20,000
|
|
|
$
|
1.37
|
|
Vested
|
|
|
(30,000
|
)
|
|
$
|
1.73
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Nonvested and expected to vest at September 30, 2018
|
|
|
60,000
|
|
|
$
|
1.61
|
|
Restricted Stock Activity for the Year ended
September 30, 2017
|
|
Shares
|
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Nonvested at September 30, 2016
|
|
|
100,000
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(30,000
|
)
|
|
$
|
1.73
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
Nonvested and expected to vest at September 30, 2017
|
|
|
70,000
|
|
|
$
|
1.73
|
|
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 10 – Stockholders’
Equity (continued)
Stock Option Grants
A summary of stock option activity for the years ended September
30, 2018 and 2017 is presented below:
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price per
Share ($)
|
|
|
Weighted Average
Remaining
Contractual Term
(in Years)
|
|
Balance at September 30, 2016
|
|
|
123,147
|
|
|
|
2.30
|
|
|
|
1.69
|
|
Outstanding and exercisable at September 30, 2016
|
|
|
123,147
|
|
|
|
2.30
|
|
|
|
1.69
|
|
Granted
|
|
|
95,602
|
|
|
|
1.80
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
(21,980
|
)
|
|
|
3.03
|
|
|
|
|
|
Balance at September 30, 2017
|
|
|
196,769
|
|
|
|
1.98
|
|
|
|
1.64
|
|
Outstanding and exercisable at September 30, 2017
|
|
|
196,769
|
|
|
|
1.98
|
|
|
|
1.64
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
(36,232
|
)
|
|
|
1.82
|
|
|
|
|
|
Balance at September 30, 2018
|
|
|
160,537
|
|
|
|
2.01
|
|
|
|
0.93
|
|
Outstanding and exercisable at September 30, 2018
|
|
|
160,537
|
|
|
|
2.01
|
|
|
|
0.93
|
|
Stock options outstanding at September 30, 2018 are described
as follows:
Outstanding Stock Options at September 30, 2018
|
|
Range of
Exercise
Prices
|
|
|
Options
Outstanding
|
|
|
Weighted
Average
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
1.80
- 1.99
|
|
|
|
95,602
|
|
|
|
1.34
|
|
|
$
|
1.80
|
|
|
|
95,602
|
|
|
$
|
1.80
|
|
|
2.00 - 2.33
|
|
|
|
64,935
|
|
|
|
0.34
|
|
|
|
2.33
|
|
|
|
64,935
|
|
|
|
2.33
|
|
$
|
1.80
- 2.33
|
|
|
|
160,537
|
|
|
|
0.93
|
|
|
$
|
2.01
|
|
|
|
160,537
|
|
|
$
|
2.01
|
|
During the year ended September 30, 2018,
no stock options were granted. During the year ended September 30, 2017, 95,602 stock options were granted with a grant date fair
value of $1.35 and an exercise price of $1.80. All options granted in the year ended September 30, 2017 vested on the grant dates
and no stock options were exercised in either the year ended September 30, 2018 or 2017.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 10 – Stockholders’
Equity (continued)
Subsidiary Stock Option Grants
A summary of Xcede stock option activity for the years ended
September 30, 2018 and 2017 is presented below:
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price per
Share ($)
|
|
|
Weighted Average
Remaining
Contractual Term
(in Years)
|
|
Balance, expected to vest, at September 30, 2016
|
|
|
613,653
|
|
|
|
1.00
|
|
|
|
8.35
|
|
Outstanding and exercisable at September 30, 2016
|
|
|
320,586
|
|
|
|
1.00
|
|
|
|
8.01
|
|
Granted
|
|
|
810,500
|
|
|
|
1.00
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
(48,197
|
)
|
|
|
1.00
|
|
|
|
|
|
Balance, expected to vest, at September 30, 2017
|
|
|
1,375,956
|
|
|
|
1.00
|
|
|
|
8.70
|
|
Outstanding and exercisable at September 30, 2017
|
|
|
923,617
|
|
|
|
1.00
|
|
|
|
8.30
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Cancelled
|
|
|
(75,000
|
)
|
|
|
1.00
|
|
|
|
|
|
Balance, expected to vest, at September 30, 2018
|
|
|
1,300,956
|
|
|
|
1.00
|
|
|
|
7.31
|
|
Outstanding and exercisable at September 30, 2018
|
|
|
1,229,685
|
|
|
|
1.00
|
|
|
|
7.11
|
|
Employee Stock Purchase Plan
On December 13, 2018, the Company
adopted a Second Amended and Restated Employee Stock Purchase Plan. The existing plan was amended to extend the termination
date to September 30, 2030. The Employee Stock Purchase Plan permits substantially all employees to purchase up to $20,000 of
common stock per calender year at a purchase price of 85% of the fair market value of the shares. Under the Plan, a total of
450,000 shares have been reserved for issuance of which 350,751 and 334,855 shares have been issued as of September 30, 2018
and 2017, respectively.
During the years ended September 30, 2018
and 2017, 15,896 shares and 16,058 shares of common stock were issued under the Plan for aggregate purchase prices of $17,480 and
$17,118, respectively.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 11– Retirement Plans
Defined Contribution Plans
The Company has retirement savings plans
available to substantially all full time employees which are intended to qualify as deferred compensation plans under Section 401(k)
of the Internal Revenue Code (the “401k Plans”) or similar laws in the United Kingdom. The Company made contributions
to these plans during both the years ended September 30, 2018 and 2017 of approximately $179,000 and $187,000, respectively.
Note 12 – Lease Agreements
Capital Leases
The Company has entered into long-term
capital lease agreements for purchases of various computer and telephone equipment at a weighted average interest rate of 7.7%.
At September 30, 2018 and 2017, the remaining principal payments due under all capital leases were $92,000 and $172,000, respectively.
Aggregate minimum annual principal and interest obligations at September 30, 2018, under non-cancelable leases are as follows:
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Obligations
|
|
$
|
45,000
|
|
|
$
|
35,000
|
|
|
$
|
21,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
101,000
|
|
Property Leases
The Company has non-cancelable operating
lease agreements, primarily for property, that expire through 2025. One of the Company’s facilities is leased from a company
controlled by the estate of the former owner of RMD. This building is leased as a month-to-month tenancy and will continue until
terminated by either the Company, with not less than six months’ prior written notice, or the facility’s owner, with
not less than three years’ prior written notice (see Note 13). Rent expense for both the years ended September 30, 2018 and
2017 amounted to $1.6 million. Future non-cancelable minimum lease payments under property leases as of September 30, 2018 are
as follows:
Years ending September 30,
2019
|
|
$
|
962,000
|
|
2020
|
|
|
385,000
|
|
2021
|
|
|
325,000
|
|
2022
|
|
|
204,000
|
|
2023
|
|
|
100,000
|
|
thereafter
|
|
|
146,000
|
|
Total
|
|
$
|
2,122,000
|
|
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 13 - Related Party Transactions
During the years ended September 30, 2018
and 2017, building lease payments of $1,071,000 and $1,040,000, respectively were paid to Charles River Realty, dba Bachrach, Inc.,
which is owned by The Gerald Entine 1988 Family Trust (the “Entine Trust”). The late Dr. Entine was a former director
and employee of the Company, as well as a greater than 5% beneficial owner of the Company’s stock until his death in May
of 2018. The Entine Trust retains a greater than 5% beneficial ownership in the Company’s stock.
In October 2013, the Company’s subsidiary,
Dynasil Biomedical, formed Xcede Technologies, Inc., a joint venture with Mayo Clinic, to spin out and separately fund the development
of its tissue sealant technology. Xcede issued $5.1 million of convertible promissory notes in order to fund its operations, including
$2.2 million to the Company, which were eliminated in the consolidated financial statements. Peter Sulick (Dynasil President, CEO
and Director) and family members invested $1,065,000, Mr. Lawrence Fox (Dynasil Director) invested, $150,000, Dr. Zuckerman (Xcede
CEO and director) and family invested $125,000, Dr. Hagan (Dynasil Director) invested $25,000, Kanai Shah (RMD President) invested
$25,000 and the Entine Trust invested $100,000 in Xcede and were issued convertible promissory notes in those original principal
amounts. In November 2016, the Company converted these promissory notes into preferred stock.
As of September 30, 2018, Mr. Sulick and
family own the equivalent of 11.4% of Xcede’s outstanding common stock, Mr. Fox owns the equivalent of 1.7% of Xcede’s
outstanding common stock, Dr. Zuckerman and family own the equivalent of 1.3% of Xcede’s outstanding common stock, Dr. Hagan
owns the equivalent of 0.3% of Xcede’s outstanding common stock, Dr. Shah owns the equivalent of 0.3% of Xcede’s outstanding
common stock and the Entine Trust owns the equivalent of 1.1% of Xcede’s outstanding common stock.
Note 14 - Vendor Concentration
The Company purchased $2.1 million and
$1.4 million respectively, of its raw materials from one supplier during the years ended September 30, 2018 and 2017. As of September
30, 2018 and 2017, amounts due to this supplier included in accounts payable were $258,000 and $160,000, respectively.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 15 – Supplemental Disclosure
of Cash Flow Information
|
|
2018
|
|
|
2017
|
|
Cash Paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
148,000
|
|
|
$
|
174,000
|
|
|
|
|
|
|
|
|
|
|
Income taxes (refunds)
|
|
$
|
(78,000
|
)
|
|
$
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
Non cash activities:
|
|
|
|
|
|
|
|
|
Assets purchased under capital leases
|
|
$
|
12,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Recapitalization of Xcede - conversion of non controlling notes payable to preferred stock
|
|
$
|
-
|
|
|
$
|
(3,103,000
|
)
|
Subsidiary stock options issued to settle liabilities
|
|
|
-
|
|
|
|
75,000
|
|
Subsidiary debt issued to fund research activities
|
|
|
-
|
|
|
|
500,000
|
|
Note 16 – Segment, Customer and Geographical Reporting
Segment Financial Information
Operating segments are based upon Dynasil’s
internal organizational structure, the manner in which the operations are managed, the criteria used by the Chief Operating Decision
Makers (CODM) to evaluate segment performance and the availability of separate financial information. Dynasil reports three reportable
segments: optics (“Optics”), innovation and development (formerly Contract Research, now “Innovation and Development”),
and biomedical (“Biomedical”). Within these segments, there is a segregation of operating segments 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. Dynasil’s Optics segment aggregates four operating segments – Dynasil
Fused Silica, Optometrics, Hilger Crystals, and Evaporated Metal Films – that manufacture commercial products, including
optical crystals for sensing in the security and medical imaging markets, as well as optical components, optical coatings and optical
materials for scientific instrumentation and other applications. The Innovation and Development segment is one of the largest small
business participants in U.S. government-funded research. The Biomedical segment consists of a single operating segment, Dynasil
Biomedical Corporation (“Dynasil Biomedical”), a medical technology incubator which owns rights to certain early stage
medical technologies. Dynasil Biomedical holds the Company’s stock of the Xcede joint venture which is developing a tissue
sealant technology and currently has no other operations.
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 16 – Segment, Customer and Geographical Reporting
(continued)
The Company’s segment information
is summarized below:
Results of Operations for the Fiscal Year Ended September 30,
|
2018
|
|
|
Optics
|
|
|
Innovation and
Development
(formerly
Contract
Research)
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
23,053,000
|
|
|
$
|
17,628,000
|
|
|
$
|
-
|
|
|
$
|
40,681,000
|
|
Gross profit
|
|
|
7,667,000
|
|
|
|
7,569,000
|
|
|
|
-
|
|
|
|
15,236,000
|
|
GM %
|
|
|
33
|
%
|
|
|
43
|
%
|
|
|
-
|
|
|
|
37
|
%
|
Operating expenses
|
|
|
7,003,000
|
|
|
|
7,072,000
|
|
|
|
817,000
|
|
|
|
14,892,000
|
|
(Gain) loss on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Impairment of long-lived assets
|
|
|
-
|
|
|
|
-
|
|
|
|
182,000
|
|
|
|
182,000
|
|
Operating income (loss)
|
|
|
664,000
|
|
|
|
497,000
|
|
|
|
(999,000
|
)
|
|
|
162,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,006,000
|
|
|
|
237,000
|
|
|
|
14,000
|
|
|
|
1,257,000
|
|
Capital expenditures
|
|
|
2,033,000
|
|
|
|
211,000
|
|
|
|
73,000
|
|
|
|
2,317,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
390,000
|
|
|
|
162,000
|
|
|
|
203,000
|
|
|
|
755,000
|
|
Goodwill
|
|
|
961,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
5,900,000
|
|
Total assets
|
|
$
|
22,946,000
|
|
|
$
|
8,376,000
|
|
|
$
|
210,000
|
|
|
$
|
31,532,000
|
|
Results of Operations for the Fiscal Year Ended September 30,
|
2017
|
|
|
Optics
|
|
|
Innovation and
Development
(formerly
Contract
Research)
|
|
|
Biomedical
|
|
|
Total
|
|
Revenue
|
|
$
|
19,282,000
|
|
|
$
|
18,002,000
|
|
|
$
|
-
|
|
|
$
|
37,284,000
|
|
Gross profit
|
|
|
6,562,000
|
|
|
|
7,336,000
|
|
|
|
-
|
|
|
|
13,898,000
|
|
GM %
|
|
|
34
|
%
|
|
|
41
|
%
|
|
|
-
|
|
|
|
37
|
%
|
Operating expenses
|
|
|
6,183,000
|
|
|
|
6,856,000
|
|
|
|
1,381,000
|
|
|
|
14,420,000
|
|
(Gain) loss on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
60,000
|
|
|
|
60,000
|
|
Impairment of long-lived assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Operating income (loss)
|
|
|
379,000
|
|
|
|
480,000
|
|
|
|
(1,441,000
|
)
|
|
|
(582,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
970,000
|
|
|
|
257,000
|
|
|
|
11,000
|
|
|
|
1,238,000
|
|
Capital expenditures
|
|
|
575,000
|
|
|
|
338,000
|
|
|
|
69,000
|
|
|
|
982,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles, net
|
|
|
467,000
|
|
|
|
196,000
|
|
|
|
324,000
|
|
|
|
987,000
|
|
Goodwill
|
|
|
1,001,000
|
|
|
|
4,939,000
|
|
|
|
-
|
|
|
|
5,940,000
|
|
Total assets
|
|
$
|
20,445,000
|
|
|
$
|
8,078,000
|
|
|
$
|
574,000
|
|
|
$
|
29,097,000
|
|
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 and 2017
Note 16 – Segment, Customer and
Geographical Reporting (continued)
Customer Financial Information
For the year ended September 30, 2018,
there was one customer that represented 10% of the total Optics segment revenue. For the year ended September 30, 2017, there were
no customers that represented more than 10% of the total Optics segment revenue.
For the years ended September 30, 2018
and 2017, the top three customers for the Innovation and Development segment were each various agencies of the U.S. Government.
For the years ended September 30, 2018 and 2017, these customers made up 60% and 55%, respectively, of Innovation and Development
revenue.
The Biomedical segment did not have any
revenue in the years ending September 30, 2018 and 2017.
Geographic Financial Information
Revenue by geographic location in total
and as a percentage of total revenue, for the years ended September 30, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Geographic Location
|
|
Revenue
|
|
|
% of Total
|
|
|
Revenue
|
|
|
% of Total
|
|
United States
|
|
$
|
30,765,000
|
|
|
|
76
|
%
|
|
$
|
29,154,000
|
|
|
|
78
|
%
|
Europe
|
|
|
6,491,000
|
|
|
|
16
|
%
|
|
|
4,397,000
|
|
|
|
12
|
%
|
Other
|
|
|
3,425,000
|
|
|
|
8
|
%
|
|
|
3,733,000
|
|
|
|
10
|
%
|
|
|
$
|
40,681,000
|
|
|
|
100
|
%
|
|
$
|
37,284,000
|
|
|
|
100
|
%
|
Note 17 – Subsequent Events
On November 27, 2018, the Company amended
the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of
the loan and defer principal repayment requirements to November 30, 2019. Such amendment also extended the maturity date from July
31, 2019 to November 30, 2021.
The Company has evaluated subsequent events
through the date the financial statements were released.