Dynasil Corporation of America's (DYSL) CEO Peter Sulick on Q1 2016 Results - Earnings Call Transcript

| About: Dynasil Corporation (DYSL)

Start Time: 17:00

End Time: 17:35

Dynasil Corporation of America (NASDAQ:DYSL)

Q1 2016 Earnings Conference Call

February 11, 2016, 17:00 PM ET

Executives

Peter Sulick - Chairman, President and CEO

Robert Bowdring - CFO

Patty Kehe - Corporate Secretary

Analysts

Joe First - First Associates

Operator

Good day, and welcome to the Dynasil Corporation of America Fiscal 2016 First Quarter Conference Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. There will be an opportunity for questions at the end of the call. [Operator Instructions].

I would now like to turn the call over to Patty Kehe of Dynasil. Ms. Kehe, please go ahead.

Patty Kehe

Thank you, Amy, and good afternoon, everyone. With me are Peter Sulick, Dynasil’s Chairman, CEO and President; and Rob Bowdring, Dynasil’s Chief Financial Officer.

Before we begin, please note that various remarks management makes on today’s conference call that are not historical facts, including but not limited to statements about our expectations, beliefs, plans, designs, objectives, prospects, financial conditions, assumptions and future events or performance are forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties. Actual results may differ materially from those indicated by such forward-looking statements as a result of various important factors, including those discussed in Dynasil’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 filed with the Securities and Exchange Commission. Dynasil’s filings can be accessed on the Investor Relations section of the company’s Web site, www.dynasil.com.

In addition, any forward-looking statements represent the company’s views as of today, February 11, 2016. These statements should not be relied upon as representing the company’s views as of any subsequent date. While Dynasil may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so.

Now, let me turn the call over to Peter Sulick.

Peter Sulick

Thanks, Patty. Good afternoon, everyone. We’re happy to be joining you today to talk about our financial results for the first quarter of our 2016 fiscal year. Earlier this afternoon, we released our press release for our first quarter. We understand that it took a little bit of time before it actually appeared on our Web site, but it should be there now. But if you can’t access it, the EDGAR-ized version of our 10-Q should be there, so you can refer to that.

If you do have access to the press release, we presented a new table highlighting our quarterly results by segment, which separately breaks out our Xcede loss. You may want to refer to it for further details. Rob will go into detail on our results in a few minutes, but with respect to certain first quarter high-level financial metrics, I’m happy to report Dynasil’s consolidated net income was $106,000 or $0.01 per share compared to a loss of $533,000 or $0.03 per share for the quarter ended December 31, 2014.

The quarterly loss for Xcede was approximately $338,000. Excluding the Xcede loss, Dynasil’s net income would have been approximately $450,000 for the quarter, a substantial turnaround from the prior year loss of 304,000. This performance represents a very positive operational turnaround driven by long-term repetitive revenue opportunities.

Our quarterly consolidated revenue has increased almost 1.6 million over the quarter ended December 31, 2014. And broken down by segment; Optics revenues increased 1.3 million to $6.2 million, an increase of 26% compared to the quarter ended December 31, 2014. Contract Research revenues for the quarter ended December 31, 2015 were $5 million, an increase of $300,000 or 7% compared to the same quarter in the prior year.

Revenue growth has been driven by recent long-term customer contracts at both Optometrics and Hilger. The Optometrics contract has settled into a steady daily rate with the possibility of expanding graded-related product offerings to this customer. Hilger is at the early stages of a production ramp, which will continue to increase throughout calendar year 2016 before stabilizing at a steady-state of approximately double the current rate.

EMF has fully integrated the DichroTec business acquired in June 2014. This acquisition now known as EMF Rochester was running at a loss prior to our acquisition and is now marginally profitable. We are very active in bidding on opportunities for coated optics and other substrates to take advantage of the capacity we now control and are hopeful on some good news on that front in the near future.

We have been successful in securing automotive-related heads-up display business, which unfortunately has been offset by losses in the oil and gas area. Across the company, we are continuing our capital expenditure program directly related to revenue opportunities. This has included adding IAD capability in Rochester, doubling our array fabrication capacity at Hilger and expanding product offerings at Optometrics.

Optometrics will be offering a new and exciting hybrid filter line this quarter, which will debut at Photonics West tradeshow next week. This line is being developed in-house and represents an excellent opportunity for continued organic growth.

Our Contract Research segment revenues grew modestly for the quarter. All of this growth came from one contract for the delivery of high-speed cameras. Unfortunately, this revenue has limited margin hence RMD profitability was virtually identical to the prior year.

Given the realities of the current government funding climate, we continue to prudently manage costs as well as the utilization of our contract backlog, which stands at 32.5 million as of December 31, 2015. We emphasize bidding on non-SPIR research and have been very active in participating collaborative bidding programs, which include both research and acquisition components. We bid on four of these programs in 2015 with one being granted and the remaining three still under review.

With respect to Xcede, an opportunity many of you are following closely, I’m happy to report the following. Number one, our management team has had its first full quarter under Dr. Linda Zuckerman, the new CEO. Two, we engaged Chardan Capital to complete an institutional fund raising of up to $7 million. This started in mid-December and is ongoing. Three, we signed three agreements with Cook Biotech of West Lafayette, Indiana for development support and manufacture of the Xcede patch. This was a major milestone for Xcede and we are very pleased with CBI as our partner and supplier.

Utilization of the CBI core SIS technology along with our polymer formulation results in a groundbreaking product, which Xcede can now put through the necessary trials to secure regulatory approval. Xcede cannot complete the biocompatibility studies or first-in-human trials until completion of the fund raising. We are hoping to close this during the second or third calendar quarter.

Four, we began the process of technology transfer to Cook, which should be completed by March 31, 2016. And five, Xcede continues with IT development with currently nine separate patents either in review pending or awarded. One additional method patent was filed in December to protect certain production processes.

In summary, there is considerable activity across the company with a significant focus on revenue generation. For this end, we brought in an Executive Vice President, Photonics, Dr. Gary Bishop with our three-core optics companies under him. We are very hopeful this reorganization will result in continued revenue growth, margin improvement and cross-company collaboration.

Now, let me turn the call over to Rob Bowdring, our CFO.

Robert Bowdring

Thank you, Peter, and good afternoon, everyone. Revenues for the first quarter ended December 31, 2015 were $11.2 million, up 17% compared to the 9.6 million we achieved in the first quarter of fiscal 2015, which ended December 31, 2014.

As Peter explained, the 1.6 million increase was a combination of 1.3 million increase in the Optics segment revenues and a $300,000 increase in the Contract Research revenue. Our 1.3 million Optics segment revenue increase was a 26% increase over the same quarter last year, and the $600,000 or 11% increase over the revenues we reported last quarter.

The majority of the increase in the Optics segment revenue was generated in our Hilger Crystals business unit as a result of increasing revenues from its previously announced agreement to supply crystals to a leading global supplier of security inspection equipment. In addition, two of the other three business units in the Optics segment also increased revenues in the current quarter as compared to the same quarter last year.

Our Contract Research business segment revenues were up 300,000 to $5 million in the current quarter ended December 31, 2015 compared to $4.7 million in the same quarter last year. As Peter indicated, the increase was primarily due to the result of the sale of high-speed cameras.

Our backlog has remained steady in the $33 million range at both December 31, 2015 and September 30, 2015. Our research backlog at December 31, 2014 was approximately $28 million or approximately $5 million less than its current level. While our backlog has been relatively steady, we continue to be challenged by government budget pressures in the form of both contract award and contract funding delays.

While we are pleased with the contract wins and the backlog improvement we have seen over the last year, we continue to monitor this business and are prudently managing headcount given the current uncertain market conditions.

Gross profit for the quarter increased 372,000 to $4 million or 35% from 3.6 million or 37% in the same quarter last year. I’m pleased to report that the Optics segment gross profit margin increased to 34% this quarter, up from 30% for the same quarter last year.

Business unit management has been focused on improving productivity over the past year and we are now beginning to see the result of their efforts, which have included new capital equipment investments and reengineering processes to reduce both labor and overhead expenses.

Operating expenses in the first quarter decline $200,000 or 5% to 3.8 million for the first quarter of 2016 from $4 million for the first quarter of last year, primarily due to the $355,000 pension charge we recorded last year in connection with a termination and settlement of a pension plan at one of our Optics segment business units, as well as $185,000 gain on the sale of an Optics business segment product line.

Contract Research segment operating expenses declined $200,000 as a result of cost saving measures, while the Biomedical segment operating expenses increased $100,000 this quarter as compared to last quarter, as our tissue sealant technology business expands as it continues its preclinical testing protocols.

Interest expense decreased by half to $60,000 for the quarter as a result of a $2 million debt repayment near the end of last year, as well as lower interest rate on one of our secured loans.

As Peter stated, the company had net income of 106,000 for the quarter ended December 31, 2015 compared to a net loss of $533,000 for the same quarter last year. As I explained earlier, the results of the quarter ended December 31, '14 included a $355,000 pension charge and $185,000 gain on the sale of a product line. Excluding those unusual amounts, that net loss would have been 363,000.

Finally, I would like to point out that our results include losses of 348,000 in 2016 and 235,000 in 2015 in our Biomedical segment. Most of these expenses in the segment are from the research being conducted by Xcede and our Biomedical joint venture that is being funded by outside investors.

The Xcede losses during these periods were 338,000 and 208,000 in 2016 and 2015, respectively. To that point, I should also mention that Xcede raised an additional 400,000 in convertible notes from those outside investors during the quarter they just completed.

Turning briefly to our balance sheet. Cash at December 31, 2015 was approximately 1.1 million and the company had approximately 1.8 million under availability of its line of credit at Middlesex Savings Bank.

With that, Peter and I will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. Our first question is from Robert Cooper, private investor.

Unidentified Analyst

Hello. Good evening, gentlemen.

Peter Sulick

Good evening.

Robert Bowdring

Hello, Robert.

Unidentified Analyst

How are you? I’ve got a couple of questions if you don’t mind. With the RMD, you purchased that I believe around 2006 for approximately 20 million.

Peter Sulick

We bought it at 2008 for – and we bought both RMD and RMD Instruments. And the acquisition was broken down such that about $12 million of the purchase price was allocated to RMD Instruments and the balance was to RMD. And you probably – I think you follow the company closely, so I think you know that it was RMD Instruments that we were having difficulty with about three of four years ago, and we have since sold off all of the products that we acquired in RMD Instruments and we no longer are in that business. And the balance of whatever purchase price we had allocated to that, we had it written off.

Unidentified Analyst

So that’s part of the Contract Research, correct?

Peter Sulick

The Contract Research is what we have left, yes.

Unidentified Analyst

And then could you put a value on that alone? Would you be able to guess today?

Peter Sulick

Boy, that would be a tough one. When we acquired RMD, the Contract business had about 15 million to 16 million in revenue. Between that point and now, the revenue had gone up to 26 million in 2012 and now it’s going to be in the range of 18 million to 19 million. So it’s very difficult, I think, to put a value on it. It’s a tough business to value. But if I were to guess, I would say it’s approximately the same or slightly more than what we paid for it.

Unidentified Analyst

Okay, and based on 12 million.

Peter Sulick

No. We paid 12 million for the Instruments company. We paid about 8 million or so just for the research company.

Unidentified Analyst

Okay. And as far as how many Ph.D.s are over there?

Peter Sulick

We have right now 35 to 38 Ph.D.s. We have about 80 employees in total. Of the remaining employees, I would say about half have masters degrees or thereabout. And the rest are administrative staff, et cetera.

Unidentified Analyst

The reason why I ask is I’m going back to the last conference call with the gentleman, the analyst, from – I forget the name of the company talking about spinning off the Contract Research.

Peter Sulick

Right.

Unidentified Analyst

With all the talk about the government, the grant and stuff and you have all your Optics segments that are doing very well and improving gross wise or margining, don’t you think maybe it would be beneficial to maybe spin it off or sell it? Is there something that we don’t know, is there something good in the works with all these Ph.D.s? Is there something that could be developed that will benefit us, the shareholders?

Peter Sulick

The answer is that we – at the moment, Robert, I don’t see anything there that has the potential to result in a long-term significant gain. In other words, some kind of technology that might ultimately accrued to the benefit of the shareholders. But I will tell you that we are working on a lot of new formulations, simulation products which you probably know that RMD is the leading research institution in the world on simulation, which is why the government uses RMD for those kinds of products for security-related applications. So, DoD and Department of Energy and Homeland Security and all those various government agencies use RMD specifically for that type of research.

The other thing that we’re working on RMD is some high-speed imaging products, which could have commercial applications and we’re also working on augmented reality products, which could very possibly have some very interesting applications. And so some of these are very early stage, they’re developing and I’m hopeful that they will materialize into some significant potential commercial product. What we found at RMD is that it takes a long time for the science that they are working on to ultimately materialize into a commercial product per se. And so we’re thinking through just how meaningful it is to have RMD in our portfolio.

We don’t agree with the prior gentleman from Newport Coast Securities that he believes our companies absent RMD are worth $100 million. We wish that were true, but we’re not sure that it is. RMD absorbs a considerable amount of overhead. So one of the advantages to owning a research company is that the overhead that otherwise would be allocated to our operating companies is absorbed by RMD and included in their Contract Research billing. That has a very beneficial kind of multiplier effect across the company. And that alone, RMD is worth considering keeping in the portfolio.

But I will tell you that you have a responsible management team, you have a responsible Board. If we come to the conclusion that it makes more sense to move in a different direction, then we’d consider those kind of things. So we’re not locked into a mindset where we won’t consider this stuff. And I’d like to comfort you with a thought that we are thinking about that regularly, but we haven’t acted on it yet.

Unidentified Analyst

Okay. I’m just looking here and I’m sure you are yourselves looking to maximize shareholder value. I mean just on the Contract Research, it was equivalent to market cap of the company in whole. As far as the Optics going forward, I know you – this 2016, I’m assuming every quarter the company should be profitable, correct? Is that what you’re forecasting?

Peter Sulick

We don’t talk about guidance but I’m really hopeful that we will be as well. The issue that we have, Robert, is the Xcede consolidated loss. So part of the reason that we’re breaking out Xcede separately on our press release and also in our 10-Q now is so that you can all get a sense of how well we’re doing in the operational part of the company, particularly in commercial operations that have improved significantly. How we’re doing within our research component and what the affect that Xcede is having on the overall company profitability. That’s why we broke out.

Earlier in the talk, we spoke about how the company will be doing absent Xcede. So the issue of driving valuation and profitability is something that we are continually managing. We know that we have in the Xcede patch an asset that we’ve been developing over the past two years that has significant value. But it also doesn’t generate revenue and at the moment it is generating a modest amount of loss. In the last call, we had a chat about the potential for deconsolidating Xcede and I explained that this current financing that we’re doing if we are successful in getting a valuation for Xcede, which is greater than $15 million, we will not be able to deconsolidate Xcede. And if it’s significantly greater than that, we actually will be incurring even higher losses.

So the good news is, we have a valuable asset. The bad news is, it’s going to be flowing through our P&L. And the other news is that as this financing is completed, the money is going to be used for biocompatibility studies and first-in-human clinical trials, which means that Xcede’s level of expense is going to increase quite a bit. And it’s absolutely necessary to get the product approved for ultimate commercialization, and so the loss could go up. So what I really am hoping to do and sort of begging your indulgence a little bit here is explain as best we can that we have some wonderful things going on in the rest of the company but the income is being affected by this consolidation of Xcede, which is an asset that we think has significant value. So we have this sort of dynamic going on between the two. And maybe you can beg our indulgence a little bit as we continue to develop both of these things.

Unidentified Analyst

Well, here’s my two other questions for you and I’ll be off. With Xcede with all the financing, the $7 million that you’re trying to raise, would the Dynasil shareholders – what percent is going to be left when it’s fully diluted and everything? What do you think the shareholders will be left with?

Peter Sulick

Okay, so I’ll try to walk you through this question a little bit. As of today, Dynasil has a 90% interest in Xcede. And Xcede has raised $3 million in a convertible debt. If that debt is converted at a $5 million pre-money valuation, Dynasil will be left with just below a 70% interest in Xcede. Depending upon the amount of money that we raise, whether that’s $5 million or $7 million or $3 million or $10 million, depending upon what that number is and what we’re trying to raise is 7 million, so let’s assume 7 million for a minute.

If the valuation is greater than $15 million, then Dynasil will continue to have an ownership interest, which is greater than 50%. As that number increases, so goes from $15 million to let’s say $30 million, then that ownership interest will go higher. And I don’t have the arithmetic right in front of me, but that’s kind of a range that we’re dealing with here.

If on the other hand, the valuation is below 15 million, then Dynasil interest will tip below 50%. We will not be required to consolidate Xcede. And you’ll have a sense of what the valuation of Xcede is at that point in time. So that’s the dynamic of how this is going to work. It really depends on the amount of money that we end up raising and what the valuation of Xcede is in conjunction with that financing.

Unidentified Analyst

All right. And with the Xcede human clinical trials that’s scheduled I believe the first quarter of 2017, is that still the target date?

Peter Sulick

That’s correct. That’s still the target date.

Unidentified Analyst

All right. And my last question for you is, is there any way we could do something with the Web site where it could be updated? Every time I look at it, I think it’s 2012.

Peter Sulick

We are updating the Web site right now. The current plan and in fact we spent time on it today, I think it’s going to be exciting. I’ve been looking at the prototypes a little bit. The current plan is that we will actually go live with a new Web site in June. So it’s going to take us a little bit of time to get there and hopefully we can do it sooner. But I think you’re going to be happy with the new Web site once we get it released.

Unidentified Analyst

Let me ask you one more. How do you feel about the valuated company right now?

Peter Sulick

Not good.

Unidentified Analyst

Something that might be a little beneficial to everyone is maybe if the company could be a little more news friendly. Any projects that are coming --

Peter Sulick

I’ll tell you, Robert, I try. We do have limitations on what we can and can’t talk about as a public company. I wish I could talk about more things, but we have these – unfortunately, we have SEC regulations, we have NASDAQ regulations. We issue press releases when we have something substantive to talk about, and we’re very proactive in doing that. As an example, when we signed up the Cook Biotech deal, which we worked on for a year, we were very, very excited about it once we finally got it done. We released it immediately.

When we signed up agreements for security-related products at Hilger and things of that nature, we actually released those. And very often we can’t release the names of our customers in those things, but we still actually released the fact that we signed a substantive deal. So, I’m aware that investors would like me to be a little more proactive in what we can talk about and we do. We try to put out there something substantive when we have some good news. But we don’t have good news every day. We have good news when we have it, unfortunately.

Unidentified Analyst

Understood. I appreciate you taking the time answering my questions. Please continue the good work.

Peter Sulick

Feel free to call if you have any other questions, happy to reach out to you at any time. You don’t have to just call me during these calls, feel free to call me anytime.

Unidentified Analyst

All right, I appreciate it. Have a good evening. Take care.

Peter Sulick

You too.

Operator

[Operator Instructions]. Our next question is from Joe First at First Associates.

Joe First

Hi. Good afternoon, Peter. Congratulations on the progress you’ve been making with the company, it’s really nice to see. With this Xcede, maybe I’m missing something, but would one option be after you do this financing to just spin Xcede off into its own company and then there would be no losses in the Dynasil income statement and the new company, Xcede, would trade on its own merits because of that nature and it would be given some valuation. And the two parts would probably do better than Dynasil will do alone with Xcede as part of it.

Peter Sulick

Absolutely correct, Joe. There is that option. And one of the things we looked at prior to considering a private offering was spinning off Xcede. And so it would be effectively a dividend out to our shareholders. And when we priced out the cost of doing that, it came in at somewhere in the range of $1 million to $2 million, just the necessary legal paperwork, getting NASDAQ approval, whatever the ultimate company ended up whenever exchanged and the mechanics and the legal work, et cetera, et cetera to do it.

So we felt that it was more in our interest to put money into, let’s say, staff, product development and that kind of thing before we put money into spinning off the company and then trying to raise money. But you’re absolutely right. It may very well make sense once we bring in some private equity that we consider doing that again. Now, we obviously have to get a buy-in from whoever our private equity partner is on this thing. And we’re really talking more to venture funds than we are to crossover funds or people like that to sort of fund these kinds of transactions. So, it’s always an option. Joe, we’ll consider all of these kinds of options. We’re not adverse to any of this kind of stuff and it may very well make sense.

Joe First

Well, that’s a good explanation of why you’re choosing the path you’re going right now.

Peter Sulick

Yes.

Joe First

Thank you.

Peter Sulick

Sure.

Operator

I’m seeing no further questions. I would like to turn the conference back over to Mr. Sulick for closing remarks.

Peter Sulick

All right. Hopefully, our press release is now up there, you guys have found it. Thank you all for participating in our first quarter analyst call. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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