ITEM 7. FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 1 - Summary of Significant Accounting Policies
Nature of Operations
The Company is primarily engaged in the fabrication and
marketing of customized optical components and optical
materials. The Company's products and services are used in
optical instrument and laser manufacturing industries, as well
as in the medical industry. Other applications include usage in
the manufacturing of optical lenses and spectrometers. The
Company's products and services are sold throughout the United
States and internationally.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Dynasil Corporation of America and its wholly-
owned subsidiaries, Optometrics Corporation, Dynasil
International Incorporated, Hibshman Corporation, and Evaporated
Metal Films Corp ("EMF"). All significant intercompany
transactions have been eliminated.
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 revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Business Acquisition
On October 2, 2006, the Company completed its acquisition
of all of the outstanding capital stock of EMF in a transaction
accounted for as a purchase. Total cost of the acquisition was
$1,194,890 of which $1.1 million was paid to the seller, and
$94,890 represented acquisition costs incurred. From the
proceeds of the issuance of 710,000 shares of Preferred Stock,
Dynasil paid $580,000 in cash to the seller, incurred stock
issuance costs of $10,000 and incurred acquisition related costs
of approximately $94,890. Also on October 2, 2006, in a
concurrent bank transaction, EMF borrowed $1,050,000 of which
$338,161 was used to retire assumed EMF debt, $520,000 was paid
directly to the seller at settlement, $17,023 was used to pay
transaction costs and the remaining funds of $174,816 were used
for working capital purposes. The total purchase price of
approximately $1,194,890 has been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed
on the basis of their estimated fair values. The results of
operations of EMF have been included in the consolidated
financial statements from October 2, 2006, the effective date of
acquisition. The allocation of purchase price is summarized
below:
Purchase price:
Total consideration to seller $1,100,000
Acquisition costs incurred $ 94,890
----------
$1,194,890
Purchase price allocation:
Cash and cash equivalents $ 45,457
Accounts receivable 282,575
Inventories 75,211
Prepaid expenses and other current assets 65,057
F-7
|
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 1 - Summary of Significant Accounting Policies
Property and equipment 1,789,621
Current Liabilities assumed (443,158)
Other liabilities assumed ( 74,227)
Debt assumed (545,646)
----------
Net fair value of assets acquired $1,194,890
|
The following is the proforma financial information of the
Company for the year ended September 30, 2006, assuming the
transaction had been consummated at the beginning of the year
ended September 30, 2006:
For the year ended
September 30, 2006
(Unaudited)
Statement of Operations:
Revenues $9,781,588
Cost of Sales 6,724,079
Gross Profit $3,057,509
Operating Expenses 2,592,510
Income from Operations 464,999
Interest and other expense (147,352)
Income before taxes 317,647
Income tax benefit 30,712
----------
Net Income $ 348,359
Earnings per share:
Basic $ 0.09
Diluted $ 0.06
|
Revenue Recognition
The Company records sales revenue upon shipment to
customers as the terms are generally FOB shipping point at which
time title and risk of loss have been transferred to the
customer, pricing is fixed or determinable and collection of
the resulting receivable is reasonably assured. Returns of
products shipped are and have historically not been material.
Optometrics and EMF, however, provide an allowance for sales
returns based upon historical experience. The Company also
provides an allowance for doubtful accounts based on historical
experience and a review of its receivables.
Shipping and Handling Costs
The Company includes some shipping and handling fees billed
to customers in sales and shipping and handling costs incurred
in cost of sales.
Inventories
Inventories are stated at the lower of average cost or
market. Cost is determined using the first-in, first-out (FIFO)
method. Inventories consist primarily of raw materials, work-in-
process and finished goods. The Company evaluates inventory
levels and expected usage on a periodic basis and records
adjustments for impairments as required.
F-8
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 1 - Summary of Significant Accounting Policies
Property, Plant and Equipment and Depreciation and Amortization
Property, plant and equipment are recorded at cost.
Depreciation is provided using the straight-line method for
financial reporting purposes and accelerated methods for income
tax purposes 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 10 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.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted
future net cash flows to be generated by the assets. If these
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of
the assets exceeds the fair value of the assets. Based on
these reviews, no asset impairment charges were made to the
carrying value of long-lived assets during the years ended
September 30, 2007 and 2006.
Other Assets
Other assets include an intangible asset consisting of the
acquired customer base of Optometrics, LLC and are carried at
cost less accumulated amortization. Amortization is computed
using the straight-line method over the economic life of the
respective asset, or seven years. It is the Company's policy to
assess, periodically, the carrying amount of its intangible
assets to determine if there has been an impairment to their
carrying value. There was no impairment at September 30, 2007.
Other assets also include deferred financing costs which are
amortized using the straight-line method over 5, 7 and 20 years.
Advertising
The Company expenses all advertising as incurred.
Advertising expense for the years ended September 30, 2007 and
2006 was $118,713 and $94,960.
Income Taxes
Dynasil Corporation of America and its wholly-owned
subsidiaries file a consolidated federal income tax return.
The Company uses the asset and liability approach to
account for income taxes. Under this approach, deferred income
taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes and net operating loss and tax credit carryforwards.
The amount of deferred taxes on these temporary differences is
determined using the tax rates that are expected to apply to the
period when the asset is realized or the liability is settled,
as applicable, based on tax rates, and tax laws, in the
respective tax jurisdiction then in effect. Valuation
allowances are provided if it is more likely than not that some
or all of
F-9
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 1 - Summary of Significant Accounting Policies
the deferred tax assets will not be realized. The provision for
income taxes includes taxes currently payable, if any, plus the
net change during the year in deferred tax assets and
liabilities recorded by the Company.
Net Income Per Common Share
Basic net income per common share is computed by dividing
the net income applicable to common shares after preferred
dividend requirements, if applicable, by the weighted average
number of common shares outstanding during each period. Diluted
net income per common share adjusts basic net income for the
effects of common stock options, common stock warrants,
convertible preferred stock and other potential dilutive common
shares outstanding during the periods. For periods with a net
loss, diluted net income per common share exclude the impact of
potential shares since they would have resulted in an anti-
dilutive effect.
Common stock options of 281,459 and 261,459,common stock
warrants of 613,627 and 1,200,000 and convertible preferred
stock shares of 710,000 and 700,000 as of September 30, 2007 and
2006 represent common stock equivalents included in the
calculation of the diluted net income per common share. The
computation of basic and diluted net income per common share is
as follows:
2007 2006
--------- ----------
Net income $ 542,010 $460,156
Less: Preferred stock dividends $(101,590) (70,000)
--------- ----------
Income allocable to common shareholders $ 440,420 $390,156
Weighted average shares outstanding
Basic 5,357,285 3,829,198
Effect of dilutive securities
Stock Options 67,292 43,297
Stock Warrants 531,199 862,500
Convertible Preferred Stock 520,352 680,555
--------- ----------
Dilutive 6,479,128 5,415,550
|
Stock Based Compensation
Prior to October 1, 2006, the Company accounted for stock
options issued under the Plan under the recognition and
measurements provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, as
permitted by FASB Statement No. 123, Accounting FOR stock Based
Compensation ("SFAS No. 123").
Effective October 1, 2006, the Company adopted the fair
value recognition provisions of FASB Statement No. 123 (revised
2004), "Share-Based Payment", ("SFAS 123(R)") which requires the
measurement and recognition of compensation expense for all
stock-based awards made to employees and directors, including
employee stock options, based on estimated fair values. We had
previously applied
F-10
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 1 - Summary of Significant Accounting Policies
Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB 25") and related
Interpretations and provided the required pro forma disclosures
of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123") which was
superceded by SFAS 123(R). The Company has also applied the
provisions of Staff Accounting Bulletin No. 107 ("SAB 107") in
the adoption of SFAS 123(R).
We elected to adopt the modified prospective application
transition method as provided by SFAS 123(R). In accordance
with the modified prospective transition method, consolidated
financial statements for prior periods have not been restated to
reflect, and do not include, the impact of SFAS 123(R). Under
that transition method, compensation cost recognized in the year
ended September 30, 2007 includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as
of September 30, 2007, based on the grant date fair value
estimated in accordance with the original provisions of
Statement 123, and (b) compensation cost for all share-based
payments granted subsequent to October 1, 2005, based on the
grant-dated fair value estimated in accordance with the
provisions of Statement 123(R).
The fair value of stock options granted was estimated at
the date of grant using the Black-Scholes options pricing model.
The proforma disclosures of net income and net income per share
for the year ended September 30, 2006, as permitted by SFA8
123(R) are presented below:
2006
--------
Net income, as reported $460,156
Add: Stock-based employee compensation
expense included in reported net income -0-
Less: Total stock-based employee
compensation expense determined under
fair value based method for all options ( 4,636)
----------
Pro forma net income $ 455,520
Net income per common share, as reported
Basic $ 0.10
Diluted $ 0.07
Pro forma net income per common share
Basic $ 0.10
Diluted $ 0.07
|
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 amount for
long-term debt approximates fair value because the underlying
instruments are primarily at current market rates.
Financial instruments that potentially subject the Company
to concentrations of credit risk consist of accounts receivable.
In the normal course of business, the Company extends credit to
certain customers. Management performs initial and ongoing
credit evaluations of their customers and generally does not
require collateral.
F-11
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 1 - Summary of Significant Accounting Policies
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,
2007 and 2006, approximately $261,032 and $300,581 or 20% and
28% 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 $100,000. At September 30,
2007, the Company's uninsured bank balances totaled $310,925.
The Company has not experienced any significant losses on its
cash and cash equivalents
Recent Accounting Pronouncements
The following is a summary of recent authoritative
pronouncements that affect accounting, reporting, and disclosure
of financial information by the Company:
In February 2007, the FASB issued SFAS No. 159, "The Fair
Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115" (SFAS 159).
SFAS No. 159 permits entities to choose to measure eligible
items at fair value at specified election dates and report
unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting
date. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. Management is
currently evaluating the impact of the provisions of SFAS 159 on
the Company's results of operations and financial position.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force), the AICPA, and the
SEC did not or are not believed by management to have a material
impact on the Company's present or future consolidated financial
statements.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company
generally considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Note 2 - Inventories
Inventories at September 30, 2007 and 2006 consisted of the
following
2007 2006
----------- ------------
Raw Materials $1,145,249 $600,451
Work-in-Process 336,203 259,425
Finished Goods 351,268 271,772
----------- ------------
1,832,720 $1,131,648
=========== ============
|
F-12
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 3 - Property, Plant and Equipment
Property, plant and equipment at September 30, 2007 and
2006 consist of the following:
2007 2006
----------- ------------
Land $ 40,450 $ 261
Building and improvements 1,674,702 1,053,763
Machinery and equipment 4,300,534 2,886,666
Office furniture and fixtures 237,932 209,479
Transportation equipment 53,419 53,419
----------- ------------
6,307,037 4,203,588
Less accumulated depreciation 3,870,520 3,576,798
----------- ------------
$ 2,436,517 $ 626,790
=========== ============
|
Included in the cost of machinery and equipment at
September 30, 2007 and 2006 is $47,984 representing the cost of
assets under capitalized lease obligations. Accumulated
depreciation at September 30, 2007 and 2006 for the capitalized
leases was $22,338 and $13,691.
Depreciation expense for the years ended September 30, 2007
and 2006 was $352,578 and $207,016 of which $8,647 and $9,846
represents depreciation of assets under capitalized lease
obligations.
Note 4 - Other Assets
Other assets at September 30, 2007 and 2006 consist of the
following:
2007 2006
----------- ------------
Deferred financing costs $ 58,034 $ 41,010
Loan origination fees 6,846 6,846
Intangible asset - acquired customer base 78,414 78,414
Other assets 9,055 -0-
----------- ------------
152,349 126,270
Less accumulated amortization 63,651 47,458
----------- ------------
$ 88,698 $ 78,812
=========== ============
|
Amortization expense for the years ended September 30, 2007
and 2006 was $16,193 and $15,169.
Note 5 - Debt
On January 5, 2006, Dynasil Corporation of America entered
into loan agreements permitting borrowings up to a total of
$649,345 with Susquehanna Bank ("Susquehanna Bank"). The terms
of the Loan Agreements provide the Company with a $449,345 term
loan (the "Term Loan") and a $200,000 revolving credit facility
(the "Line of Credit"). The proceeds were used to refinance the
term note for the New Jersey real estate and for general working
capital purposes.
On March 8, 2005, Optometrics Corporation ("Optometrics")
entered into loan agreements permitting borrowings up to a total
of $700,000 with Citizens Bank of Massachusetts ("Citizens
Bank") in connection with the acquisition of Optometrics, LLC of
which the initial borrowing was $550,000. The terms of the Loan
Agreements provide the Company with a $300,000 term loan (the
"Citizens Term Loan") and a $400,000 revolving credit facility
(the "Citizens Line of Credit"). The proceeds were used to
payoff the debt of the former Optometrics, LLC, to fund the
acquisition, and for general working capital purposes.
F-13
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 5 - Debt (continued)
Dynasil Corporation of America has guaranteed the debt of
Optometrics to Citizens Bank and those loans are guaranteed and
partially collateralized by a second lien position on the
Company's operating assets in New Jersey. Citizens Bank has
agreed subordinated its second lien position to permit the
Susquehanna Bank loan facilities. Susquehanna Bank also has
modified the standard terms and conditions of its business loan
agreement form to take account of and not conflict with the
terms and provisions of Citizen Bank's loans to Optometrics.
On October 2, 2006, in conjunction with the EMF acquisition, EMF
entered into Mortgage Note and Line of Credit Note Agreements
with Tompkins Trust Company ("TTC") which were guaranteed by
Dynasil. The guaranteed loans include (a) a $1,050,000
principal amount commercial mortgage (the "EMF Mortgage") and
(b) a $215,000 principal amount line of credit facility (the
"EMF Line of Credit"). Proceeds of the EMF Mortgage were used
to repay certain EMF debts, to pay for part of the acquisition
of EMF and for working capital purposes. Proceeds of the EMF
Line of Credit were used for general corporate purposes. The
applicable borrowing documents were entered into at arms-length
between EMF and Dynasil, on the one hand, and TTC, on the other
hand, on commercial lending terms and conditions, including
acceleration rights, events of default, TTC'S rights and
remedies and silimar provisions that Dynasil believes are
customary for commercial loans of this sort. In connection with
the loan transactions, EMF and Dynasil executed and delivered to
TTC customary forms of notes mortgage, security agreement,
assignments of leases and rents, and similar documents. The EMF
Mortgage requires repayment over a 20 year period at a fixed
annual interest rate of 7.80% for the first 5 years, resetting
to a fixed annual interest rate of 2.80 percentage points over
the Federal Home Loan Bank of New York Advance Rate for five-
year maturities at five year intervals. The EMF Mortgage is
secured by a first mortgage on EMF's real estate, equipment, and
fixtures, as well as Dynasil's guarantee. The EMF Line of
Credit has a term running until December 22, 2010 and carries an
annual interest rate of one-half percent over the Wall Street
Journal's Prime Rate of interest, which is adjusted monthly. It
is secured by EMF's real estate, equipment and fixtures, as well
as Dynasil's guarantee.
Notes Payable to Bank
Dynasil has a note payable to Susquehanna Bank that
represents borrowings under the Line of Credit, which bears
interest at a variable rate equal to Susquehanna Bank's prime
rate plus 0.5% (8.25% and 8.75% at September 30, 2007 and 2006).
The amount available under this agreement is $200,000. As of
September 30, 2007 and 2006, there were no outstanding balances.
This note is secured by a second mortgage on the Company's New
Jersey real estate and a third lien on the Company's operating
assets in New Jersey. As part of the credit agreement, the
Company is required to comply with certain financial covenants.
At September 30, 2007, the Company is in compliance with its
financial covenants related to its credit agreement with
Susquehanna Bank. (See Note 12)
Optometrics has a note payable to Citizens Bank that
represents borrowings under the Line of Credit, which bears
interest at a variable rate equal to Citizens Bank's prime rate
plus 0.5% (8.25% and 8.75% at September 30, 2007 and 2006). The
amount available under this agreement is $400,000. The
outstanding balances at September 30, 2007 and 2006 were
$100,000 and $190,000, respectively. The performance of this
obligation and the Citizens Term Loan are secured by the assets
of Optometrics with a corporate guarantee by the Company and a
second lien on the Company's New Jersey assets other than real
estate. As part of the credit agreement, the Company is
required to comply with certain financial covenants for
Optometrics. At September 30, 2007 and 2006, the Company is in
compliance with its financial covenants related to its credit
agreement with Citizens Bank.
F-14
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 5 - Debt (continued)
EMF has a note payable to Tompkins Trust Company ("TTC")
that represents borrowings under the EMF Line of Credit which
has a term running until December 22, 2010 and carries an annual
interest rate of one-half percent over the Wall Street Journal's
Prime Rate of interest, which is adjusted monthly (8.25% as of
September 30, 2007). The amount available under this agreement
is $215,000. The outstanding balance at September 30, 2007 was
$211,870. It is secured by EMF's real estate, equipment and
fixtures, as well as Dynasil's guarantee.
Long-term Debt
Long-term debt at September 30, 2007 and 2006 consisted of
the following:
2007 2006
Note payable to bank in monthly installments of $3,580
including interest at the rate of 7.25% through February
2011 (after February 2011, the interest rate will adjust
to the United States Treasury Average Weekly Yield
rate plus 3.0%), final payment of $305,181 due January 5,
2016, secured by first mortgage on Berlin, New Jersey
property and substantially all of the New Jersey assets
of the Company $ 431,761 $ 442,529
Capital lease obligations payable in total monthly
installments of $1,409 including interest at rates
ranging from 5.5% to 12.9% due and payable through
June 2007, secured by related equipment -0- 3,848
Note payable to bank in monthly installments of
$8,727 including interest of 7.8% through October 2011
(after October 2011, the interest rate will adjust every
five years to the Federal Home Loan Bank of NY Advance
Rate plus 2.8%), maturing on October 1, 2026, secured by
a mortgage on the Ithaca, New York real estate 1,029,306 -0-
Note payable to bank in monthly installments of
$5,835 including interest at 6.25%, through March
2010, secured by the assets of Optometrics Corporation
with a Corporate guarantee by the Company and a second
lien on New Jersey assets other than real estate 162,233 219,974
Note payable to Ithaca Urban Renewal Agency for
Lease of land in Ithaca, New York for 99 years
with the option to purchase said land for $26,640
after May 2008. 20,457 -0-
Note payable to former owner of EMF/current officer
in connection with EMF acquisition, bears
interest at 7.8% with no scheduled date of
repayment, unsecured 82,460* -0-
----------- ---------
$1,726,217 666,371
Less current portion
----------- ---------
$1,626,980 593,889
=========== =========
|
* Interest expense of $4,157 was accrued and included in
the outstanding balance as September 30, 2007.
The aggregate maturities of long-term debt, as of September
30, 2007 are as follows:
September 30, 2009 123,836
September 30, 2010 77,086
September 30, 2011 45,195
September 30, 2012 48,800
September 30, 2013 52,693
Thereafter 1,279,370
----------
Total $1,626,980
F-15
|
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 6 - Income Taxes
The Company's income tax expense (benefit) for the years
ended September 30, 2007 and 2006 are as follows:
2007 2006
--------- ---------
Current
Federal $ 98,700 $150,400
State 57,140 47,375
Utilization of NOL carryforwards (135,600) (160,500)
--------- ---------
$ 20,240 $ 37,275
--------- ---------
Deferred
Federal (91,500) (37,250)
State (37,200) -0-
--------- ---------
$(128,700) $(37,250)
--------- ---------
Income tax expense (benefit) $(108,460) $ 25
======== =======
|
The reasons for the difference between total tax expense
and the amount computed by applying the statutory federal income
tax rates to income before income taxes at September 30, 2007
and 2006 are as follows:
2007 2006
---------- ----------
Taxes at statutory rates applied to income
before income taxes 156,800 $156,700
Increase (reduction) in tax resulting from:
Depreciation ( 35,600) (19,600)
Accounts receivable 29,300 1,800
Inventories (21,700) 10,700
Vacation pay ( 300) 2,400
Unfunded pension liability ( 6,200) -0-
Deferred compensation (19,200) -0-
Other (4,400) (1,600)
State income taxes 57,140 47,375
Benefit of net operating loss carryforwards (135,600) (160,500)
Adjustments to valuation allowance (128,700) (37,250)
---------- ----------
$ (108,460) $ 25
========== ==========
|
Deferred income taxes (benefit) 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 the tax effects of net
operating losses that are available to offset future taxable
income. Significant components of the Company's deferred tax
assets (liabilities) at September 30, 2007 and 2006 are as
follows:
2007 2006
---------- ----------
Inventories $ 122,700 $ 22,700
Vacation pay 10,900 2,800
Unfunded pension liability 23,100 -0-
Deferred compensation 7,100 -0-
Accounts receivable 53,900 2,000
Depreciation 74,500 145,100
Net operating loss carryforwards 276,600 357,600
Less valuation allowance (352,700) (468,700)
---------- ----------
$216,100 $ 61,500
========== ==========
|
F-16
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 6 - Income Taxes (continued)
Based on the Company's history of significant fluctuations
in net earnings, the Company established a full valuation
allowance as of September 30, 2004 and prior due to the
uncertainty as to the realization of certain net operating loss
carryforwards. With the asset acquisition of Optometrics, LLC in
March 2005 and operational improvements, the Company now
believes that some of these carryforwards will be realized, and
has adjusted the valuation allowance accordingly.
At September 30, 2007, the Company has approximately
$674,280 of net operating loss carryforwards to offset future
taxable income for federal tax purposes expiring in various
years through 2021. In addition, the Company has approximately
$585,766 of net operating loss carryforwards to offset certain
future state taxable income, expiring in various years through
2013.
Note 7 - Stockholders' Equity
On September 23, 2004, in a privately negotiated
transaction, the Company entered into a Subscription Agreement
(the "Agreement") with Mr. Craig T. Dunham, an individual,
pursuant to which Mr. Dunham agreed to acquire 1,000,000 shares
of the Company's common stock at a cash purchase price of $.15
per share. The aggregate dollar amount of the transaction was
$150,000. In connection with the Agreement, the Company also
granted to Mr. Dunham a Stock Purchase Warrant (the "Warrant")
pursuant to which he may acquire, at any time prior to January
31, 2008, up to an additional 1,200,000 shares of the Company's
common stock at an exercise price per share of $.225 dependent
upon certain conditions as further described in the Agreement.
Effective October 1, 2004, the Company also entered into an
Employment Agreement with Mr. Dunham pursuant to which Mr.
Dunham became the Company's President and Chief Executive
Officer. During the year ended September 30, 2007, Mr. Dunham
exercised 586,373 warrants at $.225 per share for $131,935. At
September 30, 2007, 613,627 warrants were outstanding. No
warrants were exercised during fiscal year 2006. (See Note 12)
Convertible Preferred Stock
On March 8, 2005, the Company completed a private placement
of 700,000 shares of Series A 10% Cumulative Convertible
Preferred Stock for cash proceeds of $700,000. The stock was
sold at a price of $1.00 per share. Total expenses for the
stock placement were $10,000. Each share of preferred stock
carried a 10% per annum cumulative dividend payable quarterly
and was convertible to 2.2222 shares of common stock at any time
by holders, and was callable starting March 9, 2007 by the
Company at a redemption price of $1.00 per share. On March 9,
2007, the Company issued an aggregate of 1,555,540 shares of its
Common Stock, $.0005 par value per share, as a result of the
exercise of the conversion rights by holders of 700,000 shares
of Dynasil's Series A 10% Cumulative Convertible Preferred Stock
(the "Series A Preferred Shares"). Dynasil had previously
called all of the Series A Preferred Shares for redemption on
March 9, 2007. All of the shares of the Series A Preferred
Shares that were called for redemption were converted to shares
of common stock.
On October 2, 2006 the Company sold 710,000 shares of a
Series B 10% Cumulative Convertible Preferred Stock in a private
placement. The stock was sold at a price of $1.00 per share.
Total expenses for the stock placement were $10,000. No
underwriting discounts or commissions were paid in connection
with the sale. Each share of preferred stock carries a 10% per
annum dividend and is convertible to 1.33 shares of common stock
at any time by the holders and is callable after two years by
Dynasil at a redemption price of $1.00 per share. Proceeds of
the preferred stock sale were primarily used to acquire the
capital stock of EMF and for related acquisition costs.
Stock Based Compensation
The Company adopted Stock Incentive Plans in 1996 and 1999
which provide for,
F-17
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 7 - Stockholders Equity (continued)
among other incentives, the granting to officers, directors,
employees and consultants options to purchase shares of the
Company's common stock. The Company's 1999 Stock Incentive Plan
was amended on July 25, 2000, with an effective date of January
1, 1999. Options are generally exercisable at the fair market
value or higher on the date of grant over a five year period
currently expiring through 2012.
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 shares of common stock which may be
issued under the Plans are 2,250,000 shares, of which 1,105,614
shares of common stock are available for future purchases under
the Plan at September 30, 2007.
A summary of stock option activity for the years ended
September 30, 2007 and 2006 is presented below:
Options outstanding at September 30, 2005 526,459 $ .40-$1.50
Granted in 2006 130,000 $ .85-$1.50
Exercised in 2006 (120,000) $ .40
Cancelled in 2006 (275,000) $ .65-$1.50
---------
Options outstanding at September 30, 2006 261,459 $ .40-$1.50
Options exercisable at September 30, 2006 261,459 $ .40-$1.50
Granted in 2007 100,000 $1.66-$2.00
Exercised in 2007 ( 80,000) $ .40
Cancelled in 2007 -0-
---------
Options outstanding at September 30, 2007 281,459 $ .40-$2.00
Options exercisable at September 30, 2007 281,459 $ .40- $2.00
=========
|
During the year ended September 30, 2007, 100,000 stock
options were granted at prices ranging from $1.66 to $2.00 per
share and 80,000 options were exercised. 20,000 of the granted
stock options cannot be exercised until January 2, 2008 and
therefore the stock-based compensation expense will be
recognized at that time if they become exercisable. The 80,000
options exercised had an exercise price of $0.40 per share with
$32,000 paid in cash. No options were cancelled during the year
ended September 30, 2007.
For the year ended September 30, 2007, total stock-based
compensation charged to operations for option-based arrangements
amounted to $11,366. At September 30, 2007, there was
approximately $9,620 of total unrecognized compensation expense
related to non-exercisable option-based compensation
arrangements under the Plan.
During the year ended September 30, 2006, 130,000 stock
options were granted at prices ranging from $0.85 to $1.50 per
share and 120,000 options were exercised at the price of $.40
per share totaling $48,000 of which 20,358 shares totaling
$8,143 were issued to the President in partial satisfaction of
his accrued bonus at September 30, 2006.
During the year ended September 30, 2007, the Company
issued 3,289 shares of common stock valued at an average of
$1.52 per share to a director in lieu of director's fees
totaling $5,000. The Company also issued 2,531 shares of common
stock valued at $1.65 per share totaling $4,176 to an employee
as compensation.
F-18
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 7 - Stockholders Equity (continued)
During the year ended September 30, 2006, the Company
issued 2,817 shares of common stock valued at $0.71 per share to
a director in lieu of director's fees totaling $2,000 and 7,954
shares of common stock valued at $0.88 per share totaling $7,000
to an employee as compensation.
The fair value of the stock options granted and warrants
issued were estimated on the date of grant using the Black
Scholes option-pricing model. Based on the assumptions
presented below, the weighted average fair values of the options
granted during the years ended September 30, 2007 and 2006 is
$.14 and $.08 per share, respectively.
2007 2006
Expected life in years 3 5
Risk-free interest rate 4.82% 4.60%
Expected volatility 20.42% 16.00%
Dividend yield 0.00% 0.00%
|
The expected volatility was determined with reference to
the historical volatility of the Company's stock. The Company
uses historical data to estimate option exercise and employee
termination within the valuation model. The expected term of
options granted represents the period of time that 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.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan which
permits substantially all employees to purchase common stock 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 147,400 shares have been issued as of
September 30, 2007.
During any twelve month period, employees may not purchase
more than the number of shares for which the total purchase
price exceeds $5,000. During the years ended September 30, 2007
and 2006, 497 shares, and 739 shares of common stock were issued
under the Plan for aggregate purchase prices of $529, and $531,
respectively.
Note 8 - Retirement Plans
401(k) Plans
The Company has three 401(k) Plans for the benefit of its
employees. The Company made contributions to the plans during
the years ended September 30, 2007 and 2006 of $49,330 and
$36,183, respectively.
Defined Benefit Pension Plan
EMF has a defined benefit pension plan covering hourly
employees. The plan provides defined benefits based on years of
service and final average salary. As of September 30, 2006, the
plan was frozen. The following relates to the Company's defined
pension plan as of September 30, 2007:
F-19
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 8 - Retirement Plans (continued)
2007
Pension benefit obligation as of September 30 $349,493*
Fair value of plan assets as of September 30 (291,644)
Excess of benefit obligation over plan assets $ 57,849
Amounts recognized on the balance sheet as:
Accrued benefit costs (in accrued expenses) $ 57,849
|
* The current liability was used since the plan is frozen.
Discount rate on the benefit obligation 5.79%
Rate of expected return on the plan assets 5.50%
Pension expense $ 8,806
Company contributions $26,946
|
Note 9 - Related Party Transactions
During the years ended September 30, 2007 and 2006, the
Company made sales of $9,968 and $21,572, respectively, to a
company in which a former member of the board of directors is
also an officer. As of September 30, 2007 and 2006, amounts
due from this customer included in accounts receivable were
$1,199 and $1,612, respectively. During the years ended
September 30, 2007 and 2006, building lease payments of
$114,000, were paid to Optometrics Holdings, LLC in which the
Company's Chief Financial Officer has an interest.
Note 10 - Vendor Concentration
The Company purchased $1,557,846 and $1,228,021 of its raw
materials from one supplier during the years ended September 30,
2007 and 2006. As of September 30, 2007 and 2006, amounts due to
that supplier included in accounts payable were $379,940 and
$192,071.
Note 11 - Supplemental Disclosure of Cash Flow Information:
2007 2006
Cash paid during the year for:
Interest $150,253 70,592
======== =======
Income taxes $72,951 $23,667
======== =======
|
Non-cash investing and financing activities:
In January 2006, the Company refinanced its mortgage note
payable in the amount of $449,346 with another bank.
F-20
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006
Note 11 - Supplemental Disclosure of Cash Flow Information:
(continued)
Acquisition of Assets of EMF Corporation on October 2, 2006:
Fair market value of current assets acquired $ 468,300
Property, plant and equipment 1,789,621
Fair market value of liabilities assumed (1,063,031)
---------
Total cost of acquisition 1,194,890
Debt incurred to pay seller (520,000)
---------
Net cash paid for EMF Corporation $ 674,890
|
To partially fund the acquisition of EMF Corporation, the
Company issued 710,000 shares of Series B preferred stock,
valued at $1.00 per share, incurred stock issuance costs of
$10,000 and received net proceeds of $700,000.
On October 2, 2006, concurrently with the acquisition of
EMF Corporation, EMF borrowed $1,050,000. The proceeds were
used as follows: (1) repayment of assumed liabilities of
$338,161 at closing, (2) payment of the balance due seller of
$520,000 directly by the bank at closing, (3) payment of
transaction costs of $17,023 at closing, and (4) remaining
balance of $174,816 was used for working capital purposes.
Note 12 - Subsequent Events
On December 13, 2007, Dynasil's available line of credit
with Susquehanna Patriot Bank was increased to $475,000. The
interest charged on advances was reduced to the prime rate. All
other terms, remained unchanged. (See Note 5)
On December 14, 2007, Mr. Dunham communicated his
intention to exercise his remaining warrants prior to their
expiration on January 31, 2008. (See Note 7)
F-21