DYNASIL CORP OF AMERICA - Quarter Report: 2015 June (Form 10-Q)

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

Commission file number: 000-27503

DYNASIL CORPORATION OF AMERICA

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

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

As of August 6, 2015 there were 16,536,513 shares of common stock, par value $.0005 per share, outstanding.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

INDEX

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED) (Continued)

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)

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

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

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

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

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

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Basis of Presentation

The accompanying consolidated balance sheet as of June 30, 2015, the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended June 30, 2015 and 2014, changes in stockholders’ equity for the nine months ended June 30, 2015 and cash flows for the nine months ended June 30, 2015 and 2014 of Dynasil Corporation of America and subsidiaries (the “Company”), and the related information contained in these notes have been prepared by management and are unaudited. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the financial position, results of operations and cash flows in conformity with generally accepted accounting principles for the periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year.

The preparation of our unaudited consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 2014 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission.

The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of June 30, 2015, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Form 10-Q, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date of the filing of this Quarterly Report on Form 10-Q with the SEC.

Note 2 – Acquisitions and Divestitures

On June 26, 2014, the Company and its wholly owned subsidiary, Evaporated Metal Films Corp. (“EMF”) acquired substantially all the assets of DichroTec Thin Films, LLC (“DichroTec”), a manufacturer of optical thin film coatings. The total purchase price paid of $1.7 million, consisting of approximately $0.5 million in cash and 690,000 shares of Dynasil common stock, was allocated primarily to machinery and equipment. DichroTec reported unaudited revenues of approximately $1.9 million for the twelve months ended December 31, 2013.

The Company sold its Lead Paint Detector and Gamma Medical Probe businesses in the first quarter of fiscal 2014. These businesses constituted substantially all the Company’s Instruments segment but did not qualify to be reported as discontinued operations. The businesses were sold for an aggregate of approximately $4.7 million, including the assumption of certain liabilities of the Company and a possible contingent payment and resulted in a gain of $1.2 million which is included in Income from Operations in the nine months ended June 30, 2014. The Company used $3.9 million of the proceeds from the two transactions to reduce its indebtedness to Santander Bank, N.A., its former lender.

In the three months ended December 31, 2014, the Company recorded a gain of $0.2 million in connection with the sale of a product line in its Optics segment.

Note 3 – Xcede Technologies, Inc. Joint Venture

In October, 2013, the Company formed Xcede Technologies, Inc. (“Xcede”), a joint venture with Mayo Clinic, in order to spin out and separately fund the development of its tissue sealant technology, which formerly comprised the majority of its biomedical segment. Xcede has raised approximately $1.7 million in external funding in the form of Convertible Notes (the “Notes”) from outside investors and to certain officers and directors of the Company. The Notes accrue interest at 5% and, as amended, are due after June 30, 2016, upon the demand of the holders of a majority of the aggregate outstanding principal amount of the Notes.

Upon the closing of a capital stock financing raising at least $3.0 million, inclusive of the Notes and interest, the outstanding principal amount of the Notes plus all accrued interest will be converted into shares of the same capital stock sold in the financing at a 20% discount to the price per share of that capital stock. Alternatively, at any time prior to a capital stock financing the Note holders can convert, at their option, the principal amount of the Notes plus accrued interest into common stock based on a $5 million valuation.

Xcede’s common stock is 90% owned by Dynasil Biomedical and, as a result, is included in the Company’s consolidated balance sheet, results of operations and cash flows. In 2015, Xcede has recognized $21,000 of stock compensation expense related to options to purchase Xcede’s stock granted to its employees and directors.

The Company expects Xcede to require significant additional funding prior to commencing human trials.

Note 4 - Inventories

Inventories, net of reserves, consists of the following:

Note 5 – Intangible Assets

Intangible assets at June 30, 2015 and September 30, 2014 consist of the following:

Amortization expense for the three months ended June 30, 2015 and 2014 was $43,000 and $44,000, respectively. Amortization expense for the nine months ended June 30, 2015 and 2014 was $128,000 and $133,000, respectively.

Estimated amortization expense for each of the next five fiscal years and thereafter is as follows:

Note 6 – Goodwill

Goodwill is subject to an annual impairment test. The Company considers many factors which may indicate the requirement to perform additional, interim impairment tests. These include:

There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of goodwill during the three and nine months ended June 30, 2015.

Note 7 – Earnings (Loss) Per Common Share

Basic earnings (loss) per common share is computed by dividing the net income applicable or loss attributable to common shares by the weighted average number of common shares. 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 three and nine months ended June 30, 2015 and 2014, no common stock options were included in the calculation of dilutive shares as all of the 58,212 and 630,532 common stock options outstanding, respectively, had exercise prices above the current quarterly average market price per share and their inclusion would be anti-dilutive. Additionally, for the nine months ended June 30, 2015, no common share equivalents related to stock options or unvested restricted stock were included in the calculation of dilutive shares, since there was a loss from continuing operations and the inclusion of common share equivalents would be anti-dilutive.

The computation of the weighted shares outstanding for the three months ended June 30, 2015 and 2014 is as follows:

The computation of the weighted shares outstanding for the nine months ended June 30, 2015 and 2014 is as follows:

Note 8 - Stock Based Compensation

The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model. The weighted average assumptions for the stock option grant during the nine months ended June 30, 2015 used in the Black-Scholes option pricing model were as follows:

The expected volatility was determined with reference to the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that the options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant. The dividend yield is expected to be 0.00% because historically the Company has not paid dividends on common stock.

During the three months ended June 30, 2015, no stock options were granted. During the nine months ended June 30, 2015, 36,232 stock options were granted at the exercise price of $1.82 per share. These options were granted as a component of Directors’ Compensation for the twelve months ending January 31, 2016 and were fully exercisable when granted, and expire three years from the grant date. The stock-based compensation expense of $25,000 will be recognized over the requisite service period.

A summary of stock option activity for the nine months ended June 30, 2015 is presented below:

A summary of restricted stock activity for the nine months ended June 30, 2015 is presented below:

Stock Compensation Expense for the three and nine months ended June 30, 2015 and 2014 is as follows:

At June 30, 2015 there was approximately $46,000 in unrecognized stock compensation cost, which is expected to be recognized over a weighted average period of two months.

In addition to the above stock compensation expense, the Company’s 90%-owned Xcede subsidiary issued options for its common stock to certain employees and directors that resulted in approximately $7,000 and $21,000 of stock compensation expense in the three and nine months ended June 30, 2015. At June 30, 2015 there was approximately $98,000 in unrecognized Xcede stock compensation cost.

Note 9 – Segment, Customer and Geographical Reporting

Segment Financial Information

Dynasil’s business is comprised of four segments: contract research (“Contract Research”), optics (“Optics”), instruments (“Instruments”) and biomedical (“Biomedical”). Substantially all the operating assets of the Instruments segment were sold in the three months ended December 31, 2013.

Within these segments, there is a segregation of reportable units based upon the organizational structure used to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure. The Contract Research segment is one of the largest small business participants in U.S. government-funded research. The Optics segment manufactures optical materials, components and coatings. The Biomedical segment, through Xcede Technologies, Inc., a majority owned, joint venture, is focused on developing a tissue sealant technology for a wide spectrum of applications though no assurance can be given that this technology will become successfully commercialized. The businesses comprising substantially all the Instruments segment were sold in the first quarter of fiscal 2014 as discussed in Note 2.

The Company’s segment information for the three months ended June 30, 2015 and 2014 is summarized below:

The Company’s segment information for the nine months ended June 30, 2015 and 2014 is summarized below:

Customer Financial Information

For the three and nine months ended June 30, 2015, four customers of the Contract Research segment, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue. For the three and nine months ended June 30, 2014, three customers, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue. For the three months ended June 30, 2015 and 2014, these customers made up 64% and 68%, respectively, of Contract Research revenue. For the nine months ended June 30, 2015 and 2014, these customers made up 68% and 67%, respectively, of Contract Research revenue.

For the three months ended June 30, 2015, two customers in the Optics segment each represented more than 10% of the total segment revenue. For the nine months ended June 30, 2015, no customer made up more than 10% of the segment revenue. For the three and nine months ended June 30, 2014, a single customer in the Optics segment made up 18% and 10%, respectively of the total segment revenue.

Geographic Financial Information

Revenue by geographic location in total and as a percentage of total revenue, for the three months ended June 30, 2015 and 2014 are as follows:

Revenue by geographic location in total and as a percentage of total revenue, for the nine months ended June 30, 2015 and 2014 are as follows:

Note 10 - Income Taxes

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.

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 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.

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. Based upon the Company’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against its U.S. net deferred tax assets.

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. As of June 30, 2015 and September 30, 2014, 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 June 30, 2015 and September 30, 2014, the Company had no accrued interest or penalties related to uncertain tax positions. The Company currently has no federal or state tax examinations in progress.

The effective tax rates were (4.0%) and (2.4%) for the three and nine months ended June 30, 2015, respectively, and (480.0%) and (5.2%) for the three and nine months ended June 30, 2014, respectively. The rates differ from the U.S. federal statutory income tax rate of 34% primarily due to a full valuation allowance against the Company’s U.S. deferred tax asset.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s tax filings for federal and state jurisdictions for the tax years beginning with 2010 are still subject to examination.

Note 11 – Settlement of Pension Liability

On December 1, 2014, the Company terminated and settled its pension liability with each of the remaining participants in the EMF Defined Benefit Plan (the “Plan”). The Plan had been frozen since 2006. The total benefit payments made upon termination were $688,000 and the actual plan assets at the date of termination were $332,000. The Company funded and expensed the difference upon settlement of the Plan.

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

The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto contained herein and in the Dynasil Corporation of America ("Dynasil", the "Company" or "we") Form 10-K for the fiscal year ended September 30, 2014.

General Business Overview

Operations

Revenue for the third quarter of fiscal year 2015, which ended June 30, 2015, was $10.2 million, a decrease of 3.8% compared with revenue of $10.6 million for the quarter ended June 30, 2014. The decrease is attributable to a $0.8 million decline in revenue from the Contracts Research segment due to reductions and slowdowns in the awarding of government research grants that began in 2014 and the funding of those awards, which impacted the segment’s revenue beginning in the third quarter of 2014. Contract Research segment revenues have been relatively unchanged in each of the first three quarters of fiscal 2015 and are expected to increase modestly in the current quarter. The lower Contract Research segment revenues were partially offset by a $0.4 million increase in revenue in the Optics segment as a result of internal revenue growth and the acquisition of the assets of DichroTec Thin Films LLC (“DichroTec”) in June, 2014.

Cost of revenue for the third quarter of 2015 was $6.0 million, a decrease of 11.1% compared with $6.8 million for the quarter ended June 30, 2014 primarily as a result of a $0.7 million decrease in the cost of revenue associated with the Contract Research segment revenue decrease discussed above.

Total operating expenses remained essentially unchanged at $3.7 million for the three month periods ended June 30, 2015 and 2014 as SG&A declined slightly in the Contract Research segment while increasing slightly in the Optics and Biomedical segments.

Income from operations for the quarter ended June 30, 2015 was $0.5 million compared with income of $0.2 million for the quarter ended June 30, 2014. The increase in income from operations was primarily due to higher gross profit in the Optics segment and, to a lesser extent, lower SG&A expenses in both the Contract Research and Optics segment and decreased gross profit in the Contracts Research segment.

Net income was $0.4 million, or $0.02 per share, for the quarter ended June 30, 2015, compared with approximately breakeven income for the quarter ended June 30, 2014.

The assets within our Instruments segment were substantially disposed of in the first quarter of 2014.

Our Biomedical segment primarily consists of the results of our majority owned joint venture, Xcede. We have been and are continuing to incur approximately $1 million annually in research expenses in Xcede as it continues to develop a tissue sealant technology for a wide spectrum of applications. We are funding these research expenses through cash raised from the issuance of Xcede convertible notes to outside investors and to certain officers and directors of the Company. We expect Xcede’s expenses to increase as it prepares for human trials, which are expected to commence in fiscal 2017. Xcede raised approximately $300,000 in the third quarter of 2015 and management is continuing to pursue various financing alternatives to fund these research expenses.

Commercialization of technologies from our extensive research and development portfolio and strategic acquisitions are expected to be key drivers of our future growth and we plan to continue to invest in these growth opportunities, depending upon the availability of capital to fund these endeavors. 

Results of Operations

Revenue for the third quarter of fiscal year 2015, which ended June 30, 2015, declined $0.4 million or 3.8% to $10.2 million. Contract Research segment revenues decreased approximately $0.8 million or 15.3%, compared with the same period in the prior year, primarily as a result of a slowdown in both government research award grants and the funding of awards previously granted that began in 2014. Management believes this slowdown reflects continuing government budget pressure to reduce spending across the majority of the agencies that we contract with. The research backlog for the Contracts Research segment has decreased slightly to approximately $35 million at June 30, 2015 (of which approximately $12 million is currently funded and in process) compared to $36 million at March 31, 2015. At September 30, 2014, research backlog was approximately $30 million.

The Optics segment revenue increased approximately $0.4 million or 8.5% for the three months ended June 30, 2015, compared with the same period in the prior year, as a result of internal growth in a number of the businesses within the segment and the acquisition of the assets of DichroTec in June, 2014.

The Biomedical segment has no revenues as it is currently researching and developing a tissue sealant technology.

The Instruments segment has no revenues, as substantially all of its assets were disposed of in the first quarter of fiscal 2014.

Gross profit for the three months ended June 30, 2015 was $4.2 million, or 41.2% of revenues, compared to $3.9 million or 36.4% of revenues for the three months ended June 30, 2014. Gross profit decreased $0.1 million in the Contract Research segment while gross profit margins improved to 43.8% in 2015 from 38.8% last year primarily as a result of expense reduction actions taken in 2014 to better align expenses with the lower revenue levels. Gross profit for the Optics segment increased $0.5 million to 39.0% of revenues at June 30, 2015 compared to 33.7% of revenues for the quarter ended June 30, 2014 as a result of higher revenues without a corresponding increase in overhead expenses, management actions to improve yields in certain product lines and a reduction in sales of certain low margin products.

The Biomedical segment, through Xcede, is developing a tissue sealant technology which has not been approved for commercial use and consequently has no gross profit.

Total operating expenses were $3.7 million for both the three months ended June 30, 2015 and 2014. Operating expenses for the Contract Research segment decreased $0.1 million due to cost saving measures implemented beginning in the third quarter of 2014, while operating expenses in the Optics and Biomedical segments increased $0.1 million.

As a result of the items discussed above, income from operations for the three months ended June 30, 2015 was $0.5 million compared to income from operations of $0.2 million for the same period in fiscal 2014.

Net interest expense was approximately $0.1 million for the three months ended June 30, 2015 and 2014.

Income tax expense for the three months ended June 30, 2015 consists primarily of state tax expense offset by certain U.K. tax research credits.

Net income for the three months ended June 30, 2015 was $0.4 million, or $0.02 in basic earnings per share, compared with approximately breakeven income for the quarter ended June 30, 2014.

Results of Operations – Year to Date

Revenue for the nine months ended June 30, 2015 was down $2.0 million or 6.3% to $29.7 million compared to $31.8 million for the nine months ended June 30, 2014.

Revenue from our Contract Research segment decreased $3.0 million or 17.4% for the nine months ended June 30, 2015 compared to the same period in 2014, primarily as a result of a drop in government research awards granted to the Contract Research segment beginning in 2014 as well as delays in funding previously granted awards. Contract Research segment revenues have been relatively unchanged in each of the first three quarters of fiscal 2015 and are expected to increase modestly in the current quarter. Management expects government budget pressures on spending and delays in funding subsequent to the granting of awards to add increased variability to the business.

The Optics segment revenue increased $1.7 million or 12.2% for the nine months ended June 30, 2015, compared with the same period in the prior year, as a result of the internal growth and, to a lesser extent, the acquisition of the DichroTec business in June 2014.

Revenue from our Instruments segment decreased $0.8 million for the nine months ended June 30, 2015, primarily as a result of the sale of the lead paint and medical product businesses in the first quarter of fiscal 2014.

The Biomedical segment had no revenue in the nine months ended June 30, 2015.

Gross profit for the nine months ended June 30, 2015 was $11.5 million, or 38.6% of sales, compared to $12.6 million, or 39.7% of sales for the nine months ended June 30, 2014.

Gross profit for the Contract Research segment declined $1.0 million to $6.1 million for the nine months ended June 30, 2015 compared to the nine months ended June 30, 2014 primarily as a result of lower billable hours reflecting the lower level of government research awards. As a result of cost saving measures implemented during 2014 in response to the lower level of government contract awards, the Contract Research segment gross profit as a percent of sales increased to 43.5% for the nine months ended June 30, 2015 compared to 41.9% for the same period in 2014.

Gross profit for the Optics segment increased approximately $0.2 million to $5.4 million for the nine months ended June 30, 2015 compared to the nine months ended June 30, 2014 as a result of changes in the mix of products sold and improved yields on certain products sold.

There was no gross profit associated with the Instruments segment in fiscal 2015 due to the sales of the businesses comprising substantially all the Instrument segment in fiscal year 2014.

The Biomedical segment, through Xcede, is developing a tissue sealant technology which has not been approved for commercial use and consequently has no gross profit.

Total operating expenses were flat at $11.6 million for the nine months ended June 30, 2015 compared to the same period in 2014 as decreased expenses in the Contract Research and Instruments segments were substantially offset by increased expenses in the Optics segment due to the acquisition of DichroTec in June 2014 and a $0.4 million expense associated with the termination and settlement of a pension plan.

Income from operations for the nine months ended June 30, 2015 was $0.1 million compared to income from operations of $2.2 million for the prior year comparable period. The decrease in income of $2.1 million is primarily a result of the $1.2 million gain on the sale of the businesses in the Instruments segment recorded in the first nine months of fiscal 2014 as well as a $1.0 million reduction in income from operations associated with the Instruments segment businesses that were sold in 2014. The Contract Research and Optics segments had decreases in income from operations for the nine months ended June 30, 2015 compared to the nine months ended June 30, 2014 of $0.3 million and $0.7 million, respectively. The Contract Research segment decrease is a result of the decreased revenues partially offset by the decreased costs discussed above. The Optics segment decrease is a result of a $350,000 nonrefundable payment recorded in 2014 for which the associated costs had been previously recognized, the DichroTec acquisition and the pension plan settlement discussed previously.

Net interest expense for the nine months ended June 30, 2015 decreased to $0.4 million from $0.6 million for the same period in 2014 as a result of the elimination of default interest due to our subordinated lender prior to May 2014, partially offset by the accrual of interest on the Xcede convertible notes issued in 2014 and 2015.

Income tax expense for the nine months ended June 30, 2015 consisted primarily of state tax expense offset by certain U.K. tax research credits.

Net income (loss) for the nine months ended June 30, 2015 was ($0.3) million or ($0.01) per share, compared with income of $1.8 million or $0.12 per share for the nine months ended June 30, 2014.

Liquidity and Capital Resources

Liquidity Overview and Outlook

Net cash as of June 30, 2015 was $3.5 million or approximately $0.3 million less than the net cash of $3.8 million at September 30, 2014.

As of June 30, 2015, the Company was in compliance with the terms of all its outstanding indebtedness which consisted of $2.3 million of senior debt borrowed under a revolving line of credit with Middlesex Savings Bank and $3.0 million of subordinated debt owed to Massachusetts Capital Resources Company. The Company has $1.7 million of additional availability under its Middlesex Savings Bank line of credit based on its collateral calculations as of June 30, 2015. Management believes that the cash and availability under the line of credit discussed above are adequate to meet the Company’s current liquidity requirements for the next twelve months.

The Company’s Xcede subsidiary currently has $0.5 million of cash remaining from its convertible notes financings. In May 2015, the terms of the convertible notes were amended to provide for an additional $1 million of convertible notes issuances (of which approximately $0.3 million was issued in the third quarter of 2015) and to extend the notes maturity date. The terms of the convertible notes now provide that the notes are payable upon the demand of the holders of a majority of the aggregate outstanding amount of the notes, after June 30, 2016.

Management believes that Xcede has sufficient cash on hand to fund Xcede’s operations for at least the next three months. Management is continuing to pursue various financing alternatives.

Cash From Operating Activities

In total, including the changes in accounts receivable, prepaid expenses, accounts payable and accrued expenses, operating activities used cash of $0.1 million for the nine months ended June 30, 2015. Approximately $1.2 million of the cash used is a result of deposits for new equipment purchases and balance sheet changes as a result of normal cyclical billing and payment activity.

Cash From Investing and Financing Activities

The Company generated $0.2 million from the sale of a product line and used cash of approximately $0.7 million for the purchase of property, plant and equipment for the nine months ended June 30, 2015.

Total outstanding bank debt for the nine months ended June 30, 2015 increased approximately $0.1 million to $5.7 million from $5.6 million at September 30, 2014. Net cash generated from financing activities was approximately $0.3 million for the nine months ended June 30, 2015 and include the issuance of approximately $0.3 million of Xcede convertible notes.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2014. We have not adopted any accounting policies since September 30, 2014 that have or will have a material impact on our consolidated financial statements. For further discussion of our accounting policies see the “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 as well as the notes to the financial statements contained in this Form 10-Q.

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

Revenue Recognition

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

Government funded services revenues from cost plus contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the contracts’ fixed fees. Revenue from fixed-type contracts is recognized under the percentage of completion method with estimated costs and profits included in contract revenue as work is performed. Revenues from time and materials contracts are recognized as costs are incurred at amounts 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 contract research revenue is derived from the United States government and government related contracts. Such contracts have certain risks which include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under United States government contracts are subject to audit. The Company believes that the results of such audits will not have a material adverse effect on its financial position or its results of operations.

Goodwill

Goodwill is subject to an annual impairment test. We consider many factors which may indicate the requirement to perform additional, interim impairment tests. These include:

Goodwill is tested by reviewing the carrying value compared to the fair value at the reporting unit level. Fair value for the reporting unit is derived using the income approach. Under the income approach, fair value is calculated based on the present value of estimated future cash flows. Assumptions by management are necessary to evaluate the impact of operating and economic changes and to estimate future cash flows. Management’s evaluation includes assumptions on future growth rates and cost of capital that are consistent with internal projections and operating plans.

The Company generally performs its annual impairment testing of goodwill during the fourth quarter of its fiscal year, or more frequently if events or changes in circumstances indicate that the assets might be impaired. The Company tests impairment at the reporting unit level using the two-step process. The Company’s primary reporting units tested for impairment are Radiation Monitoring Devices, which comprises our Contract Research segment, and Hilger Crystals, a component of our Optics segment.

Intangible Assets

The Company’s intangible assets consist of acquired customer relationships and trade names of Hilger Crystals, Ltd., acquired know-how of Radiation Monitoring Devices, Inc. and purchased and patented biomedical technologies within the Biomedical segment. 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. No impairment charge was recorded during the three or nine month periods ended June 30, 2015 or 2014.

Impairment of Long-Lived Assets

The Company’s long-lived assets include property, plant and equipment and intangible assets subject to amortization. The Company evaluates long-lived assets for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized.

Allowance for Doubtful Accounts Receivable

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

Stock-Based Compensation

The Company accounts for stock-based compensation using fair value. Compensation costs are recognized for stock-based compensation granted to employees and directors. Options and restricted stock awards are recorded as an expense over the requisite service period based on the grant date estimated fair value of the grant, which in the case of options is determined using the Black-Scholes option pricing model.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse.

RECENT ACCOUNTING PRONOUNCEMENTS

Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, which provides new guidance on reporting discontinued operations and disclosures of disposals. Under the new guidance, only disposals representing a strategic shift in operations will be presented as discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of the company that does not qualify for discontinued operations reporting. This guidance is effective for the Company beginning in fiscal 2016. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Revenue from Contracts with Customers (Topic 606) Section A—Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). In May 2014, the FASB issued ASU No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new guidance is effective for the Company beginning in fiscal 2018. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

Compensation—Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU No. 2014-12, which clarifies the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Under the new guidance, a performance target that affects vesting and could be achieved after completion of the service period should be treated as a performance condition under FASB Accounting Standards Codification (ASC) 718 and, as a result, should not be included in the estimation of the grant-date fair value of the award. An entity should recognize compensation cost for the award when it becomes probable that the performance target will be achieved. In the event that an entity determines that it is probable that a performance target will be achieved before the end of the service period, the compensation cost of the award should be recognized prospectively over the remaining service period. The new guidance is effective for the Company beginning in fiscal 2016. Early adoption is permitted. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In August 2014, the FASB issued ASU No. 2014-15, which states that under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this ASU should be followed to determine whether to disclose information about the relevant conditions and events. The new guidance is effective for the Company beginning in fiscal 2017, and for annual periods and interim periods thereafter. Early application is permitted. The Company will evaluate the going concern considerations in this ASU; however, management does not currently believe that the Company will meet the conditions that would subject its financial statements to additional disclosure.

Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. In January 2015, the FASB issued ASU No. 2015-01, which eliminates from GAAP the concept of extraordinary items. The ASU retains and expands the existing presentation and disclosure guidance for items that are unusual in nature or occur infrequently to also include items that are both unusual in nature and infrequently occurring. The provisions of this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted, provided that presentation applied to the beginning of the fiscal year of adoption. This amendment is applicable to us beginning in the first quarter of 2017. The adoption of this standard is not expected to have a material impact on our financial statements.