10-Q

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

      ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2016

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

     ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______.

Commission file number: 001-35011

DYNASIL CORPORATION OF AMERICA

(Exact name of registrant as specified in its charter)

Delaware	22-1734088
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

313 Washington Street, Suite 403, Newton, MA	02458
(Address of principal executive offices)	(Zip Code)

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.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company x

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 February 7, 2017 there were 16,960,329 shares of common stock, par value $.0005 per share, outstanding.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

INDEX

		Page
PART 1.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
	CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2016 AND SEPTEMBER 30, 2016	3
	CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE  INCOME (LOSS) FOR THE THREE MONTHS ENDED DECEMBER 31, 2016 AND 2015	5
	CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED DECEMBER 31, 2016	6
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE  MONTHS ENDED DECEMBER 31, 2016 AND 2015	7
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4.	Controls and Procedures	26
PART II.	OTHER INFORMATION	26
Item 1A.	Risk Factors	26
Item 6.	Exhibits	26
Signatures		27

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	December 31,		September 30,
	2016		2016
Current Assets
Cash and cash equivalents	$	1,624,000	$	2,607,000
Accounts receivable, net of allowances of $175,000 and $171,000 at December 31, 2016 and September 30, 2016, respectively		3,835,000		3,502,000
Costs in excess of billings and unbilled receivables		959,000		1,208,000
Inventories, net of reserves		3,916,000		3,726,000
Prepaid expenses and other current assets		1,358,000		1,078,000
Total current assets		11,692,000		12,121,000
Property, Plant and Equipment, net		6,936,000		7,223,000
Other Assets
Intangibles, net		1,033,000		1,067,000
Deferred tax asset		2,726,000		-
Goodwill		5,822,000		5,898,000
Security deposits		43,000		60,000
Total other assets		9,624,000		7,025,000
Total Assets	$	28,252,000	$	26,369,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt	$	1,950,000	$	2,477,000
Capital lease obligations, current		103,000		105,000
Convertible notes		-		3,085,000
Accounts payable		1,513,000		1,627,000
Deferred revenue		240,000		238,000
Accrued expenses and other liabilities		2,079,000		2,955,000
Total current liabilities		5,885,000		10,487,000
Long-term Liabilities
Long-term debt, net of current portion		1,545,000		736,000
Capital lease obligations, net of current portion		147,000		173,000
Deferred tax liability		246,000		263,000
Other long-term liabilities		39,000		43,000
Total long-term liabilities		1,977,000		1,215,000

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

3

 DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED) (Continued)

	December 31,			September 30,
	2016			2016
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)
Stockholders' Equity
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 17,720,215 and 17,677,284 shares issued, 16,910,055 and and 16,867,124 shares outstanding at December 31, 2016 and September 30, 2016, respectively.		9,000			9,000
Additional paid in capital		21,070,000			20,128,000
Accumulated other comprehensive income (loss)		(994,000	)		(699,000	)
Accumulated deficit		(305,000	)		(3,479,000	)
Less 810,160 shares of treasury stock - at cost		(986,000	)		(986,000	)
Total Dynasil stockholders' equity		18,794,000			14,973,000
Noncontrolling interest		1,596,000			(306,000	)
Total stockholders' equity		20,390,000			14,667,000
Total Liabilities and Stockholders' Equity	$	28,252,000		$	26,369,000

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

4

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three Months Ended
	December 31,
	2016			2015
Net revenue	$	9,143,000		$	11,204,000
Cost of revenue		5,618,000			7,239,000
Gross profit		3,525,000			3,965,000
Operating expenses:
Sales and marketing		266,000			334,000
Research and development		196,000			288,000
General and administrative		2,987,000			3,183,000
Gain on sale of assets		-			(4,000	)
Total operating expenses		3,449,000			3,801,000
Income (loss) from operations		76,000			164,000
Interest expense, net		67,000			59,000
Income (loss) before taxes		9,000			105,000
Income taxes (benefit)		(2,730,000	)		36,000
Net income (loss)		2,739,000			69,000
Less: Net loss attributable to noncontrolling interest		(69,000	)		(37,000	)
Net income (loss) attributable to common stockholders	$	2,808,000		$	106,000
Net income (loss)	$	2,739,000		$	69,000
Other comprehensive income (loss):
Foreign currency translation		(295,000	)		(114,000	)
Total comprehensive loss	$	2,444,000		$	(45,000	)
Basic net income (loss) per common share	$	0.17		$	0.01
Diluted net income (loss) per common share	$	0.17		$	0.01
Weighted average shares outstanding
Basic		16,808,729			16,551,197
Diluted		16,808,729			16,578,634

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

5

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

					Additional		Other														Total
	Common		Common		Paid-in		Comprehensive			Accumulated			Treasury Stock					Noncontrolling			Stockholders'
	Shares		Amount		Capital		Income			Deficit			Shares		Amount			Interest			Equity
Balance, September 30, 2016		17,677,284	$	9,000	$	20,128,000	$	(699,000	)	$	(3,479,000	)		810,160	$	(986,000	)	$	(306,000	)	$	14,667,000
Issuance of shares of common stock under employee stock purchase plan		3,790		-		4,000		-			-			-		-			-			4,000
Stock-based compensation costs		39,141		-		72,000		-			-			-		-			17,000			89,000
Stock options issued to settle liabilities		-		-		82,000		-			-			-		-			-			82,000
Recapitalization of Xcede		-		-		784,000		-			366,000			-		-			1,954,000			3,104,000
Foreign currency translation adjustment		-		-		-		(295,000	)		-			-		-			-			(295,000	)
Net income (loss)		-		-		-		-			2,808,000			-		-			(69,000	)		2,739,000
Balance, December 31, 2016		17,720,215	$	9,000	$	21,070,000	$	(994,000	)	$	(305,000	)		810,160	$	(986,000	)	$	1,596,000		$	20,390,000

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

6

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended
	December 31,
	2016			2015
Cash flows from operating activities:
Net income (loss)	$	2,739,000		$	69,000
Adjustments to reconcile net income (loss) to net cash:
Stock compensation expense		89,000			119,000
Foreign exchange loss (gain)		41,000			26,000
Depreciation and amortization		311,000			325,000
Deferred income taxes		(2,730,000	)		(24,000	)
Provision for inventory reserves		(3,000	)		6,000
Other		76,000			34,000
Other changes in assets and liabilities:
Accounts receivable, net		(374,000	)		(1,101,000	)
Inventories		(280,000	)		(218,000	)
Costs in excess of billings and unbilled receivables		249,000			231,000
Prepaid expenses and other assets		189,000			(32,000	)
Accounts payable		(99,000	)		34,000
Accrued expenses and other liabilities		(790,000	)		(303,000	)
Deferred revenue		2,000			136,000
Net cash from operating activities		(580,000	)		(698,000	)
Cash flows from investing activities:
Purchases of property, plant and equipment		(111,000	)		(603,000	)
Net cash from investing activities		(111,000	)		(603,000	)
Cash flows from financing activities:
Proceeds from issuance of common stock		4,000			4,000
Net proceeds from issuance of convertible notes		-			390,000
Principal payments on capital leases		(28,000	)		(46,000	)
Proceeds from (payments of) line of credit, net		-			798,000
Proceeds from (payments of) bank and subordinated debt, net		(219,000	)		(25,000	)
Net cash from financing activities		(243,000	)		1,121,000
Effect of exchange rates on cash and cash equivalents		(49,000	)		(14,000	)
Net change in cash and cash equivalents		(983,000	)		(194,000	)
Cash and cash equivalents, beginning	$	2,607,000		$	1,295,000
Cash and cash equivalents, ending	$	1,624,000		$	1,101,000
Supplemental disclosures of cash flow information:
Non cash activities:
Assets purchased under capital leases	$	-		$	134,000
Recapitalization of Xcede - conversion of non controlling notes payable to preferred stock		3,104,000			-
Subsidiary stock options issued to settle liabilities		82,000			-
Subsidiary debt issued to fund research activities		500,000			-

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

7

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Basis of Presentation

The accompanying consolidated balance sheet as of December 31, 2016, the consolidated statements of operations and comprehensive income (loss) for the three months ended December 31, 2016 and 2015, changes in stockholders’ equity for the three months ended December 31, 2016 and cash flows for the three months ended December 31, 2016 and 2015 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. Xcede Technologies, Inc. (“Xcede”) is a joint venture between Dynasil Biomedical and Mayo Clinic to spin out and separately fund the development of a tissue sealant technology. As of December 31, 2016, Dynasil Biomedical owned 59% of Xcede’s stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. The remaining 41% of Xcede’s stock owned by others and accounted for under the rules applicable to non-controlling interest. Certain prior year balances have been reclassified to conform to the current year presentation. These reclassifications did not affect previously reported net income or stockholders’ equity. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the Company’s 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, 2016 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 December 31, 2016, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Quarterly Report on 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 – Recent Accounting Pronouncements

Effective October 1, 2016, the Company adopted the guidance issued in Accounting Standards Update 2014-12, 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 (“ASU 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 adoption of this ASU did not have an impact on the Company’s financial statements.

Effective October 1, 2016, the Company adopted the guidance issued in Accounting Standards Update 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”), which eliminates the concept of extraordinary items in an entity’s income statement. Extraordinary classification outside of income from continuing operations was previously considered only when evidence clearly supported its classification as an extraordinary item. Extraordinary items were events and transactions that were distinguished by their unusual nature and by the infrequency of their occurrence. The ASU eliminates the need to separately classify, present and disclose extraordinary events. The adoption of this ASU did not have an impact on the Company’s financial statements.

8

Effective October 1, 2016, the Company adopted the guidance issued in Accounting Standards Update 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments (“ASU No. 2015-16”), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer needs to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present, separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The adoption of this ASU did not have an impact on the Company’s financial statements.

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 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. There are two transition methods available under the new standard, either cumulative effect or retrospective. The new guidance is effective for the Company beginning in fiscal 2019. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies the revenue guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which provides technical corrections and improvements to Topic 606 and other Topics amended by ASU 2014-09. The Company is currently in the process of assessing the impact of these ASUs on its consolidated financial statements.

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’s annual reporting for fiscal 2017, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company is assessing the impact of this ASU on its consolidated financial statements and plans to adopt it in the fourth quarter of fiscal year 2017.

Business Combinations (Topic 805): Clarifying the Definition of a Business: In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for the Company beginning October 1, 2018. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued ASU 2017-04, which simplifies the test for goodwill impairment. This new guidance is effective for the Company beginning in fiscal year 2021. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

9

Note 3 – Xcede Technologies, Inc. Joint Venture

In October 2013, the Company, through its subsidiary Dynasil Biomedical (“DBM”) formed Xcede, a joint venture with Mayo Clinic, in order to spin out and separately fund the development of its hemostatic tissue sealant technology, which formerly comprised the majority of its expense within the biomedical segment.

Beginning at its inception and through November 2016, Xcede funded its pre-clinical research activities through the issuance of convertible notes bearing interest at 5% (“the Notes”) pursuant to a note purchase agreement dated October 2013 and most recently amended in November 2016 that provided for the issuance of up to $5.2 million in the aggregate principal amount of the Notes from external investors and certain directors and officers of the Company. The Notes were convertible into equity of Xcede.

In November 2016, Dynasil committed to invest $1.2 million of cash into Xcede over the following 18 months in exchange for Series B convertible preferred stock of Xcede (“Series B Preferred”). The value of the Series B Preferred, as it is wholly owned by DBM, was eliminated in consolidation. In conjunction with Dynasil’s committed investment, all $5.5 million in existing Notes and accrued interest were converted into 5,394,120 shares of Series A convertible preferred stock of Xcede (“Series A Preferred”) at a 20% discount to the price per share of the Series B Preferred, in accordance with the amended provisions of the Notes. The original conversion terms of the Notes were amended to require conversion into Series A Preferred rather than the class of stock issued in conjunction with the financing (Series B Preferred). Because the original conversion terms of the Notes were amended and as a result of assessing the impact of the rights and features of the Note amendment and their effect on the value to the issuer and holders, the transaction is recorded at fair value with a resulting gain on extinguishment of debt. Fair value was determined by management based on an independent valuation using a market and income approach and an option pricing model to allocate value to the respective shares. The fair value of the Series A Preferred was approximately $3.5 million on the date of issuance, as compared to the carrying value of the convertible principal and accrued interest of $5.5 million, resulting in a gain of approximately $2.0 million. Due to the related party nature of the transaction, this gain was recorded within the equity of Xcede. Of that $2.0 million, approximately $1.7 million was attributed to DBM and eliminated in consolidation, and approximately $0.3 million was attributed to noncontrolling interest.

Series A Preferred participants include both outside investors (accounted for as noncontrolling interest) and DBM. The outside investors converted $3.1 million of Notes and accrued interest into 3,055,551 shares of Series A Preferred. DBM converted the remaining $2.4 million of Notes and accrued interest into 2,338,569 shares of Series A Preferred, the value of which is eliminated in consolidation.

Each share of Series A Preferred and Series B Preferred (together “the Preferred Stock”) shall be convertible, at the option of the holder, into such number of fully paid and non-assessable shares of Xcede common stock (“Common Stock”) as determined by dividing the original issue price, as defined, by the conversion price in effect on the date of conversion, which is 1:1. Each holder of the Preferred Stock shall have one vote for each share of Common Stock that the holder of the Preferred Stock would be entitled to receive upon the conversion of the holder’s Preferred Stock into Common Stock. Upon any liquidation event, which includes certain change of control events, following payment of pre-equity distributions, the remaining proceeds or net assets of Xcede shall be paid and distributed in the following amounts and order of priority: (1) to satisfy the liquidation preference payment due to each holder of Series B Preferred, (2) to satisfy the liquidation preference payment due to each holder of Series A Preferred, (3) payment in full of any acquisition transaction payment, and (4) the remaining assets available to be distributed ratably among the holders of the Common Stock. If a liquidation event were to occur, the Series A Preferred’s liquidation value would be $1.016 per share and Series B Preferred’s liquidation value would be $1.27 per share. As of December 31, 2016, the liquidation value of the Series B Preferred would be approximately $0.2 million and the Series A Preferred would be approximately $5.5 million, of which $2.4 million is DBM’s portion and $3.1 million would be attributed to noncontrolling shareholders.

As of December 31, 2016, DBM owned approximately 59% of Xcede’s outstanding Common Stock and Preferred Stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. Due to the Series A Preferred having a liquidation preference and therefore not representing a residual interest, cumulative net losses of Xcede are attributed only to common stockholders in accordance with common stock ownership. Noncontrolling interest represents the value of the Series A Preferred and common stock not owned by DBM plus 17% of cumulative losses of Xcede based on the 17% common stock ownership held by noncontrolling interests.

10

Due to the issuance of Preferred Stock, DBM’s ownership percentage in Xcede decreased to less than 80%. Based on this ownership percentage, beginning in fiscal year 2017, Xcede will no longer be included in the Dynasil consolidated federal tax return and the Company will no longer be able to offset taxable income or benefit from net operating losses and other tax attributes related to Xcede. (See Note 11 – Income Taxes.)

As previously disclosed, in January 2016, Xcede announced that it had signed three agreements with Cook Biotech Inc. of West Lafayette, Indiana (“Cook”), including a Development Agreement, a License Agreement and a Supply Agreement, in connection with the development, regulatory approval and production of Xcede’s resorbable hemostatic patch (“Xcede’s Patch”). In November 2016, Xcede entered into another Services Agreement, a Secured Promissory Note, a Loan Agreement, a Security Agreement and an Intellectual Property Security Agreement (collectively the “Note Agreement”) with Cook, in which Cook committed to fund the pre-clinical testing of, and subject to the receipt of applicable regulatory approvals to initiate first in human clinical trials for, the Xcede Patch. Under the terms of the Note Agreement, in exchange for the services performed by Cook, Xcede has committed to a multiple draw credit facility in the aggregate amount not to exceed $1.5 million. Three draws of principal will be available, each in the amount of $500,000, upon satisfaction of conditions identified in the Note Agreement. The principal amounts outstanding bear interest at a fixed rate of 2% and are secured by all the rights of Xcede under the Development Agreement, Supply Agreement, and License Agreement, all the rights to the data and work product arising from the clinical trial being performed under the Services Agreement, all regulatory approvals for the Xcede Patch, all patent and patent applications owned or controlled by Xcede, and all trademark and service mark registrations and applications. The outstanding principal and unpaid interest are due and payable in full at the earlier of closing of an acquisition transaction or December 31, 2025. Xcede will recognize research and development expense as the related services are performed by Cook. There was approximately $38,000 of research and development expense recognized during the three months ended December 31, 2016.

Note 4 - Inventories

Inventories, net of reserves, consists of the following:

	December 31,		September 30,
	2016		2016
Raw Materials	$	2,024,000	$	1,938,000
Work-in-Process		690,000		834,000
Finished Goods		1,202,000		954,000
	$	3,916,000	$	3,726,000

Note 5 – Intangible Assets

Intangible assets at December 31, 2016 and September 30, 2016 consist of the following:

	Useful	Gross		Accumulated
December 31, 2016	Life (years)	Amount		Amortization		Net
Acquired Customer Base	5 to 15	$	683,000	$	467,000	$	216,000
Know How	15		512,000		290,000		222,000
Trade Names	Indefinite		258,000		-		258,000
Patents	20		345,000		8,000		337,000
Biomedical Technologies	5		260,000		260,000		-
		$	2,058,000	$	1,025,000	$	1,033,000

	Useful	Gross		Accumulated
September 30, 2016	Life (years)	Amount		Amortization		Net
Acquired Customer Base	5 to 15	$	718,000	$	473,000	$	245,000
Know How	15		512,000		282,000		230,000
Trade Names	Indefinite		272,000		-		272,000
Patents	20		326,000		6,000		320,000
Biomedical Technologies	5		260,000		260,000		-
		$	2,088,000	$	1,021,000	$	1,067,000

11

Amortization expense for the three months ended December 31, 2016 and 2015 was $26,000 and $44,000, respectively.

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

	2017 (9 months)		2018		2019		2020		2021		Thereafter		Total
Acquired Customer Base	$	60,000	$	80,000	$	76,000	$	-	$	-	$	-	$	216,000
Know How		26,000		34,000		34,000		34,000		34,000		60,000		222,000
Patents		6,000		9,000		9,000		9,000		9,000		79,000		121,000
	$	92,000	$	123,000	$	119,000	$	43,000	$	43,000	$	139,000	$	559,000

As of December 31, 2016, Xcede had $216,000 in patents that have not been granted, therefore, the amortization related to these patents is not included in the five-year amortization table above.

The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its long-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of long-lived assets, during the three months ended December 31, 2016. 

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:

· A significant adverse long term outlook for any of its industries;

· An adverse finding or rejection from a regulatory body involved in new product regulatory approvals;

· Failure of an anticipated commercialization of a product or product line;

· Unanticipated competition or the introduction of a disruptive technology;

· The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit;

· A loss of key personnel; and

· An expectation that a reporting unit carrying goodwill, or a significant portion of a reporting unit, will be sold or otherwise disposed of.

There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of goodwill, during the three months ended December 31, 2016.

Note 7 – Debt

Senior Debt

The Bank Loan Agreement between the Company and Middlesex Savings Bank was amended on December 2, 2016 to permit the Company to invest up to $1.2 million in its Xcede Technologies subsidiary during the period from the quarter ended December 31, 2016 through the quarter ending September 30, 2018.

Subordinated Debt

On December 15, 2016, the Company amended the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the loan and defer principal repayment requirements to November 30, 2017. Such amendment also extended the maturity date from July 31, 2018 to July 31, 2019.

Subsidiary Debt

In November 2016, the Xcede convertible notes along with related accrued interest were converted into 5,394,120 shares of Xcede’s Series A preferred stock. See Note 3 – Xcede Technologies, Inc. Joint Venture.

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Note 8 – Earnings (Loss) Per Common Share

Basic earnings (loss) per common share is computed by dividing the net income or loss attributable to common shares by the weighted average number of common shares outstanding. 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 months ended December 31, 2016 and 2015, no common stock options were included in the calculation of dilutive shares as all of the 123,147 and 58,212 common stock options outstanding, respectively, had exercise prices above the applicable quarterly average market price per share and their inclusion would be anti-dilutive.

For the three months ended December 31, 2016, 90,000 shares of restricted common stock were excluded from the calculation of dilutive shares, as the effect of their inclusion would be anti-dilutive. For the three months ended December 31, 2015, 27,437 restricted common stock were included in the denominator used to calculate diluted earnings per share.

The computation of the weighted shares outstanding for the three months ended December 31 is as follows:

	December 31, 2016		December 31, 2015
Weighted average shares outstanding
Basic		16,808,729		16,551,197
Effect of dilutive securities
Stock Options		-		-
Restricted Stock		-		27,437
Dilutive Average Shares Outstanding		16,808,729		16,578,634

Note 9 - 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 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 zero because historically the Company has not paid dividends on common stock.

The Company’s Xcede joint venture adopted an Equity Incentive Plan in 2013 which provides for, among other incentives, the granting of options to purchase shares in Xcede’s common stock to officers, directors, employees and consultants. The options granted generally vest over a three year period. The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model using assumptions generally consistent with those used for Company stock options. Because Xcede is not publicly traded, the expected volatility is estimated with reference to the average historical volatility of a group of publicly traded companies that are believed to have similar characteristics to Xcede.

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Stock compensation expense for the three months ended December 31, 2016 and 2015 is as follows:

	Three Months Ended		Three Months Ended
Stock Compensation Expense	December 31, 2016		December 31, 2015
Stock Grants	$	39,000	$	83,000
Restricted Stock Grants		13,000		8,000
Option Grants		12,000		6,000
Employee Stock Purchase Plan		1,000		1,000
Subsidiary Option Grants		24,000		21,000
Total	$	89,000	$	119,000

At December 31, 2016, there was approximately $140,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period of fourteen months.

Restricted Stock Grants

A summary of restricted stock activity for the three months ended December 31, 2016 is presented below:

Restricted Stock Activity for the Three Months ended December 31, 2016	Shares			Weighted-Average  Grant-Date Fair Value
Nonvested at September 30, 2016		100,000		$	1.73
Granted		-			-
Vested		(10,000	)	$	1.70
Cancelled		-			-
Nonvested and expected to vest at December 31, 2016		90,000		$	1.73

Stock Option Grants

During the three months ended December 31, 2016, no Dynasil stock options were granted. A summary of stock option activity for the three months ended December 31, 2016 is presented below:

	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2016		123,147	$	2.30		1.69
Outstanding and exercisable at September 30, 2016		123,147	$	2.30		1.69
Granted		-		-
Exercised		-		-
Cancelled		-		-
Balance at December 31, 2016		123,147	$	2.30		1.43
Outstanding and exercisable at December 31, 2016		123,147	$	2.30		1.43

Subsidiary Stock Option Grants

During the three months ended December 31, 2016, 428,000 Xcede stock options were granted at an exercise price of $1.00 per share. Of the stock options granted, 228,000 options were given to satisfy deferred compensation in the amount of $75,000 and vested immediately. The remaining 200,000 stock options granted during the three months ended December 31, 2016 vest over the next three years and expire ten years from the grant date. These options were valued using the Black-Scholes option pricing model and the assumptions for that were as follows:

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Expected term in years	10 years
Risk-free interest rate		2.37	%
Expected volatility		83.12	%
Expected dividend yield		0.00	%

A summary of Xcede stock option activity for the three months ended December 31, 2016 is presented below:

	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2016		613,653		1.00		8.35
Outstanding and exercisable at September 30, 2016		320,586		1.00		8.01
Granted		428,000		1.00
Exercised		-		-
Cancelled		-		-
Balance at December 31, 2016		1,041,653		1.00		8.84
Outstanding and exercisable at December 31, 2016		629,126		1.00		8.74

At December 31, 2016, the Company’s Xcede joint venture had $163,000 of unrecognized stock compensation expense associated with stock options expected to be recognized over a weighted average period of seventeen months.

Note 10 – Segment, Customer and Geographical Reporting

Segment Financial Information

Dynasil reports three reportable segments: contract research (“Contract Research”), optics (“Optics”) and biomedical (“Biomedical”). Within these segments, there is a segregation of operating segments based upon the organizational structure used to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure. The Optics segment aggregates four operating segments – Dynasil Fused Silica, Optometrics, Hilger Crystals, and Evaporated Metal Films – that manufacture commercial products, including optical crystals for sensing in the security and medical imaging markets, as well as optical components, optical coatings and optical materials for scientific instrumentation and other applications. The Contract Research segment is one of the largest small business participants in U.S. government-funded research. The Biomedical segment consists of a single operating segment, Dynasil Biomedical Corporation (“Dynasil Biomedical”), a medical technology incubator which owns rights to certain early stage medical technologies. Dynasil Biomedical holds common and preferred stock in the Xcede joint venture which is developing a tissue sealant technology and currently has no other operations.

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The Company’s segment information for the three months ended December 31, 2016 and 2015 is summarized below: 

Results of Operations for the Three Months Ended December 31,
2016
	Optics			Contract Research			Biomedical			Total
Revenue	$	4,405,000		$	4,738,000		$	-		$	9,143,000
Gross profit		1,574,000			1,951,000			-			3,525,000
GM %		36	%		41	%		-			39	%
SG&A		1,328,000			1,740,000			381,000			3,449,000
Operating income (loss)		246,000			211,000			(381,000	)		76,000
Depreciation and amortization		234,000			74,000			3,000			311,000
Capital expenditures		91,000			-			20,000			111,000
Intangibles, net		474,000			222,000			337,000			1,033,000
Goodwill		883,000			4,939,000			-			5,822,000
Total assets	$	18,785,000		$	8,407,000		$	1,060,000		$	28,252,000

Results of Operations for the Three Months Ended December 31,
2015
	Optics			Contract Research			Biomedical			Total
Revenue	$	6,214,000		$	4,990,000		$	-		$	11,204,000
Gross profit		2,110,000			1,855,000			-			3,965,000
GM %		34	%		37	%		-			35	%
SG&A		1,751,000			1,706,000			348,000			3,805,000
Gain on sale of assets		4,000			-			-			4,000
Operating income (loss)		363,000			149,000			(348,000	)		164,000
Depreciation and amortization		228,000			80,000			17,000			325,000
Capital expenditures		565,000			7,000			31,000			603,000
Intangibles, net		644,000			256,000			297,000			1,197,000
Goodwill		1,155,000			4,939,000			-			6,094,000
Total assets	$	16,506,000		$	8,273,000		$	857,000		$	25,636,000

Customer Financial Information

For the three months ended December 31, 2016, no customer in the Optics segment represented more than 10% of the total segment revenue. For the three months ended December 31, 2015, one customer in the Optics segment represented more than 10% of the total segment revenue.

For the three months ended December 31, 2016, three 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 months ended December 31, 2015, five customers of the Contract Research segment, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue.

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Geographic Financial Information

Revenue by geographic location in total and as a percentage of total revenue, for the three months ended December 31, 2016 and 2015 are as follows:

	Three Months Ended					Three Months Ended
	December 31, 2016					December 31, 2015
Geographic Location	Revenue		% of Total			Revenue		% of Total
United States	$	7,189,000		79	%	$	8,235,000		74	%
Europe		1,086,000		12	%		2,041,000		18	%
Other		868,000		9	%		928,000		8	%
	$	9,143,000		100	%	$	11,204,000		100	%

Note 11 - Income Taxes

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. 

Dynasil Corporation of America and its wholly-owned U.S. subsidiaries file a consolidated federal income tax return and various state returns. The Company’s U.K. subsidiary files tax returns in the U.K. Prior to November 18, 2016, the Company’s subsidiary, Xcede was included in the federal and state tax returns filed by Dynasil. As of November 18, 2016, Dynasil’s ownership in Xcede was reduced to approximately 59%. As a result, Xcede will no longer be included in Dynasil’s federal consolidated tax return and will file a separate federal return. Xcede will continue to be included in the Dynasil consolidated state tax filings pursuant to the respective state tax requirements.

In assessing the ability to realize the net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

As a result of Xcede’s de-consolidation from the Company’s federal tax returns, the Company will no longer be able to offset taxable income with Xcede’s current or cumulative operating losses. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined that it is more likely than not that the federal, deferred tax assets of the new Dynasil federal consolidated group will be realized based upon positive earnings history and expected future profits of the group. As a result, the federal deferred tax asset valuation allowance associated with the Dynasil federal consolidated group has been reversed resulting in an income tax benefit in the amount of $2.7 million during the quarter ending December 31, 2016. Going forward, as the company records income, it will be able to utilize the NOLs (net operating losses) within its deferred tax assets. Based upon the Company’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of the Company’s state and separate Xcede deferred tax assets is sufficient to warrant the continued need for a valuation allowance against these 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 December 31, 2016 and September 30, 2016, the Company has no 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 December 31, 2016 and September 30, 2016, 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 results for the three months ending December 31, 2016 result in an overall effective rate for the quarter of 679% mainly driven by the tax benefit of $2.7 million recorded for the release of the valuation allowance. The effective tax rates excluding the impact of the valuation allowance were (25%) and 34% for the three months ended December 31, 2016 and 2015, respectively. The rates differ from the U.S. federal statutory income tax rate of 34% primarily due to a full valuation allowance against certain U.S. deferred tax assets of the Company.

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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 2013 are still subject to examination.

Note 12 – Subsequent Events

The Company has evaluated subsequent events through the date the financial statements were released.

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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, 2016.

General Business Overview

Operations

Consolidated revenue for the first quarter December 31, 2016 was $9.1 million, compared to revenue of $11.2 million for the first quarter of fiscal year 2016. This 18% decrease in revenue was largely attributable to a $1.8 million decrease in the Optics segment, which was largely the result of a one-time safety stock order to a large U.K. customer shipped in the first quarter of fiscal year 2016. The first quarter of fiscal year 2017 represents a more normalized shipping schedule for the U.K. customer. The remaining $0.3 million decrease in revenue was attributable to the Contract Research segment.

Cost of revenue for the first quarter of 2017 was $5.6 million or 61% of revenue, a decrease of 22% compared to $7.2 million or 65% of revenue for the quarter ended December 31, 2015. The $1.6 million decrease was primarily the result of the lower revenue within the current quarter ended December 31, 2016. Cost as a percent of revenue improved by 4% as the Company continues to improve the components of its revenue and cost structures.

Total operating expenses were $3.4 million for the three month period ended December 31, 2016 as compared to $3.8 million for the same period in fiscal year 2016. Expenses within the first quarter of 2017 were curtailed to be more in line with the reduced fiscal year 2017 revenue.

Our Biomedical segment primarily consists of the results of our majority owned joint venture, Xcede Technologies, Inc. (“Xcede”). Xcede incurred $2.1 million in research expenses in fiscal 2016 and $0.4 million in the current quarter as Xcede continues to develop its hemostatic tissue sealant technology. We expect Xcede will incur similar or increasing amounts of expenses in each quarter in fiscal year 2017 as it continues its development activities. In November 2016, the Company entered into an agreement with Xcede pursuant to which it agreed to invest up to $1.2 million of cash into Xcede over the following 18 months. We expect Xcede will continue to need additional external investor funding in order to pursue clinical trials and regulatory approvals of its tissue sealant technology.

Income from operations for the quarter ended December 31, 2016 was $0.1 million compared with income of $0.2 million for the quarter ended December 31, 2015, as a result of the lower revenue in 2017.

The provision for income taxes for the first quarter of 2017 was a benefit of $2.7 million. As a result of Xcede’s de-consolidation, the Company will no longer be able to offset taxable income with Xcede’s net operating loss results or carryforwards. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined that it is more likely than not that the federal, deferred tax assets, such as NOLs (net operating losses), of the new Dynasil federal consolidated group will be realized based upon positive earnings history and expected future profits of the group. As a result, the valuation allowance associated with the Dynasil federal consolidated group has been reversed resulting in an income tax benefit in the amount of $2.7 million during the quarter ending December 31, 2016. Based upon the Company’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of the Company’s state and separate Xcede deferred tax assets is sufficient to warrant the continued need for a full valuation allowance against these deferred tax assets.

Net income was $2.8 million, or $0.17 per share, for the quarter ended December 31, 2016, compared with net income of approximately $0.1 million or $0.01 per share for the same quarter last year as a result of the U.S. income tax credit.

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Results of Operations

Results of Operations for the Three Months Ended December 31,
2016
	Optics			Contract Research			Biomedical			Total
Revenue	$	4,405,000		$	4,738,000		$	-		$	9,143,000
Gross profit		1,574,000			1,951,000			-			3,525,000
GM %		36	%		41	%		-			39	%
SG&A		1,328,000			1,740,000			381,000			3,449,000
Operating income (loss)		246,000			211,000			(381,000	)		76,000
Depreciation and amortization		234,000			74,000			3,000			311,000
Capital expenditures		91,000			-			20,000			111,000
Intangibles, net		474,000			222,000			337,000			1,033,000
Goodwill		883,000			4,939,000			-			5,822,000
Total assets	$	18,785,000		$	8,407,000		$	1,060,000		$	28,252,000

Results of Operations for the Three Months Ended December 31,
2015
	Optics			Contract Research			Biomedical			Total
Revenue	$	6,214,000		$	4,990,000		$	-		$	11,204,000
Gross profit		2,110,000			1,855,000			-			3,965,000
GM %		34	%		37	%		-			35	%
SG&A		1,751,000			1,706,000			348,000			3,805,000
Gain on sale of assets		4,000			-			-			4,000
Operating income (loss)		363,000			149,000			(348,000	)		164,000
Depreciation and amortization		228,000			80,000			17,000			325,000
Capital expenditures		565,000			7,000			31,000			603,000
Intangibles, net		644,000			256,000			297,000			1,197,000
Goodwill		1,155,000			4,939,000			-			6,094,000
Total assets	$	16,506,000		$	8,273,000		$	857,000		$	25,636,000

Consolidated revenue for the first quarter of fiscal year 2017, which ended December 31, 2016, was $9.1 million, a decrease of 18%, compared with revenue of $11.2 million for the quarter ended December 31, 2015.

The Optics segment revenue decreased $1.8 million, or 29%, for the three months ended December 31, 2016 compared with the same period in the prior year, primarily as a result of a one-time safety stock sale to a large U.K. customer in the first quarter of fiscal year 2016. The first quarter of fiscal year 2017 represented a more normalized shipping schedule for this customer. The devaluation in British currency also had an impact on revenue.

Contract Research segment revenues decreased approximately $0.3 million, or 5%, compared with the same period in the prior year, primarily as a result of fewer billable hours due to holiday and year end schedules. The lower research revenue was somewhat offset by increased commercial product revenue for items originally developed by the research teams. In the current quarter our commercial revenue included shipments of our CLYC scintillation crystals to Thermo Fisher Scientific for use in their RadEye SPRD-GN spectroscopic personal radiation detectors. The research backlog for the Contracts Research segment has increased slightly to approximately $31 million at December 31, 2016, of which approximately $9.0 million is currently funded and in process, compared to $30 million at September 30, 2016.

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The Biomedical segment has no revenues as it is currently developing a hemostatic and sealant product to control bleeding in surgical applications based on Xcede’s innovative adhesive technology.

Cost of revenue for the first quarter of 2017 was 61%, or $5.6 million, a decrease of 22% compared with the 65%, or $7.2 million, for the quarter ended December 31, 2015. The $1.6 million decrease is primarily a result of lower revenues. As stated previously, cost as a percent of revenue improved by 4% as the Company continues to review and improve the components of its revenue and cost structures in most areas.

Gross profit for the three months ended December 31, 2016 was $3.5 million, or 39% of revenues, compared to $4.0 million, or 35% of revenues, for the three months ended December 31, 2015. Gross profit for the Optics segment increased by 2% to 36% of revenue, or $1.6 million, at December 31, 2016 compared to 34% of revenues for the quarter ended December 31, 2015, as a result of a focus within the segment to improve yields and pricing on certain products. Gross profit increased $0.1 million to 41% in the Contract Research segment compared to 37%, or $1.9 million, in the first quarter of 2016, as a result of the mix in business with an increase in the commercial product revenue portion of the contract research business.

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

Total operating expenses decreased to $3.4 million for the three months ended December 31, 2016 from $3.8 million for the same quarter in fiscal year 2016. Operating expenses for the Optics segment decreased $0.4 million due to all business units controlling spending within the quarter. Contract Research segment expenses remained close to the same level of spending in the first quarter of fiscal year 2017 as in the same period last year. Biomedical segment expenses increased slightly in the three months ended December 31, 2016, compared to the three months ended December 31, 2015.

As a result of the items discussed above, income from operations for the three months ended December 31, 2016 was $0.1 million compared to income from operations of $0.2 million for the same period in fiscal year 2016.

Net interest expense was approximately $0.1 million for the three months ended December 31, 2016 and 2015.

The provision for income taxes for the first quarter of 2017 was a benefit of $2.7 million. As a result of Xcede’s de-consolidation for Federal income tax reporting purposes, the Company will no longer be able to offset taxable income with Xcede’s net operating loss results or carryforwards. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined that it is more likely than not that the federal, deferred tax assets (NOLs), such as net operating losses, of the new Dynasil federal consolidated group will be realized based upon positive earnings history and expected future profits of the group. As a result, the valuation allowance associated with the Dynasil federal consolidated group has been reversed resulting in an income tax benefit in the amount of $2.7 million during the quarter ending December 31, 2016. Based upon the Company’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of the Company’s state and separate Xcede deferred tax assets is sufficient to warrant the continued need for a full valuation allowance against these deferred tax assets.

Net income for the three months ended December 31, 2016 was $2.8 million, or $0.17 in basic earnings per share, compared with income of approximately $0.1 million, or $0.01 in basic earnings per share for the quarter ended December 31, 2015.

Liquidity and Capital Resources

Liquidity Overview and Outlook

Net cash as of December 31, 2016 was $1.6 million, or approximately $1.0 million less than the net cash of $2.6 million at September 30, 2016.

As of December 31, 2016, the Company was in compliance with the terms of all its outstanding indebtedness which consisted of $1.7 million of senior debt borrowed under the $2.0 million fixed rate, five-year term note that was established in February 2016 with Middlesex Savings Bank and $0.8 million of subordinated debt owed to the Massachusetts Capital Resources Company.The Company has $4.0 million of additional availability under its Middlesex Savings Bank line of credit based on its collateral calculations as of December 31, 2016. 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.

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On December 15, 2016, the Company amended the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the loan and defer principal repayment requirements to November 30, 2017. Such amendment also extended the maturity date from July 31, 2018 to July 31, 2019.

During the first quarter ended December 31, 2016, the Company’s Xcede subsidiary converted all of its approximately $5.5 million of convertible notes and accrued interest into 5,394,120 shares of Xcede Series A preferred stock (as more fully described in Note 3, “Xcede Technologies, Inc. Joint Venture”).

As of December 31, 2016, Xcede had $0.5 million of outstanding indebtedness, which consisted of a promissory note issued to Cook Biotech Inc. (“Cook”) in November 2016 and due on December 31, 2025. Xcede has agreed to use the proceeds from the note to fund its planned first in human trial for its hemostatic tissue sealant product. Also in November 2016, Dynasil agreed to invest $1.2 million in Xcede over the next two fiscal years to fund Xcede’s non-clinical operations. With the committed resources from the Company and Cook, Xcede’s management believes it has sufficient funding to complete its planned first in human trial, but it is continuing to seek various financing alternatives to fund further development activities and its pursuit of regulatory approval.

Cash From Operating Activities

In total, including the changes in accounts receivable, inventories, pre-paid expenses, accounts payable and accrued expenses, operating activities used cash of $0.6 million for the three months ended December 31, 2016. Approximately $0.3 million of the cash was used for inventory increases to ensure the proper supply of raw materials is available, the remaining $0.3 million was used due to the decrease in the year end accrued expenses and accounts payable.

Cash From Investing and Financing Activities

The Company used cash of approximately $0.1 million for the purchase of property, plant, equipment and patents for the three months ended December 31, 2016.

Total outstanding bank debt as of December 31, 2016 decreased approximately $0.2 million to $2.6 million from $2.8 million at September 30, 2016. Net cash used from financing activities during the three months ended December 31, 2016 was approximately $0.2 million for the three months ended December 31, 2016 as a result of principal payments to both Middlesex Savings Bank and the Massachusetts Capital Resources Corporation.

Critical Accounting Policies and Estimates

There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2016. 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, 2016 as well as the notes to the financial statements contained in this Quarterly Report on 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.

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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:

· A significant adverse long term outlook for any of our industries;

· An adverse finding or rejection from a regulatory body involved in new product regulatory approvals;

· Failure of an anticipated commercialization product line;

· Unanticipated competition or a disruptive technology introduction;

· The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit;

· A loss of key personnel; and

· An expectation that a reporting unit carrying goodwill, or a significant portion of a reporting unit, will be sold or otherwise disposed of.

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 month period ended December 31, 2016 or 2015.

The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its intangible and indefinite-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of intangible and indefinite-lived assets, during the three months ended December 31, 2016.

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 and non-amortizable 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.

The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its long-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of long-lived assets, during the three months ended December 31, 2016.

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Allowance for Doubtful Accounts Receivable

The Company performs ongoing credit evaluations of our customers and adjusts 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

See Note 2, "Recent Accounting Pronouncements" in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our consolidated financial position, results of operations and cash flows.

Forward-Looking Statements

The statements contained in this Quarterly Report on Form 10-Q which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding results of operations, our compliance with the financial covenants under our loan agreements with Middlesex Savings Bank and Massachusetts Capital Resource Company, our expectations regarding results of operations, the commercialization of our technology, including the Xcede patch and our dual mode detectors, the success of efforts to fund Xcede, results of our pre-clinical and planned clinical trials, regulatory approvals, our development of new technologies including at Dynasil Biomedical, the adequacy of our current financing sources to fund our current operations, our growth initiatives, our capital expenditures and the strength of our intellectual property portfolio. These forward-looking statements may be identified by the use of words such as “plans”, “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” “continue” or similar terms, though not all forward-looking statements contain such words. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to develop and commercialize our products, including obtaining regulatory approvals, the size and growth of the potential markets for our products and our ability to serve those markets, the rate and degree of market acceptance of any of our products, general economic conditions, costs and availability of raw materials and management information systems, our ability to obtain and maintain intellectual property protection for our products, Xcede’s ability to produce preclinical data sufficient to enable it to initiate clinical studies of its resorbable hemostatic patch, clinical results of Xcede’s programs which may not support further development, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to comply with our debt obligations, our ability to deleverage our balance sheet, our ability to identify and execute on acquisition opportunities and integrate such acquisitions into our business, and seasonality, as well as the uncertainties set forth in the Company’s Annual Report on Form 10-K, filed on December 21, 2016, including the risk factors contained in Item 1A, and from time to time in the Company's other filings with the Securities and Exchange Commission. The Company disclaims any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 4 Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified under the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2016. Based on this evaluation, our management concluded that as of December 31, 2016, these disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1A.  RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2016, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

ITEM 6 Exhibits

10.01* Second Amendment to Loan and Security Agreement between the Company and Middlesex Savings Bank, dated December 2, 2016.

10.02* Amendment to Note Purchase Agreement between the Company and Massachusetts Capital Resource Company, dated December 31, 2016.

31.1(a)* Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.1(b)* Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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32.1* Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished but not filed for purposes of the Securities Exchange Act of 1934).

99.1* Press release, dated February 13, 2017 issued by Dynasil Corporation of America announcing its financial results for the quarter ended December 31, 2016.

101* The following materials from Dynasil Corporation of America’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2016 and September 30, 2016, (ii) Consolidated Statements of Operations for the three months ended December 31, 2016 and 2015, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2016; (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2016 and 2015, and (v) Notes to Consolidated Financial Statements.

* Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DYNASIL CORPORATION OF AMERICA

BY:	/s/ Peter Sulick	DATED:	February 13, 2017
	Peter Sulick,
	Chief Executive Officer and President

/s/ Robert J. Bowdring	DATED:	February 13, 2017
Robert J. Bowdring,
Chief Financial Officer

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EX-10.01

Exhibit 10.01

December 2, 2016

Dynasil Corporation of America

44 Hunt Street

Watertown, MA 02472

Attn: Robert Bowdring, Chief Financial Officer

Re:       Second Amendment of Loan Agreement

Gentlemen:

Reference is made to that certain Loan and Security Agreement dated May 1, 2014, as amended by a certain Line of Credit Modification dated September 29, 2015, as further amended from time to time (the “Loan Agreement”) by and between Middlesex Savings Bank (the “Lender”) and Dynasil Corporation of America (the “Borrower”). The Loan Agreement is hereby amended, effective immediately, as follows:

1.       Defined terms used herein and not otherwise defined shall have the meanings ascribed to them in the Loan Agreement.

2.       Sections 3.4 and 4.9 of the Loan Agreement are hereby deleted in their entirety and the following new Sections 3.4 and 4.9 substituted therefor, as follows:

          “3.4      Loans and Investments. Make any loan or advance (other than in the ordinary course of business and other than inter-company loans made to a Guarantor) or declare any dividends or make any distributions to any individual or entity or make any investment in or with any individual or entity, except that (i) Borrower may pay dividends, provided that no Event of Default exists at the time of the proposed dividend and that after giving effect to such dividends, Borrower is in compliance with the financial covenants set forth in Section 4.9 and 4.9(a) of this Agreement, and (ii) Borrower may distribute up to $600,000.00 to Dynasil Biomedical Corp. (‘Biomedical’) in the fiscal quarter ending December 31, 2016 and up to an additional $600,000.00 to Biomedical prior to the end of the fiscal quarter ending September 30, 2018, such distributions to be utilized by Biomedical solely for the purpose of investing in Xcede Technologies (a joint venture between Biomedical and the Mayo Clinic), provided that no Event of Default exists at the time of the proposed distribution or after giving effect thereto and Borrower remains in compliance with the financial covenants contained in this Agreement.”

          “4.9      Debt Service Coverage. At the close of each fiscal quarter of Borrower, maintain a Debt Service Coverage ratio of at least 1.2 to 1.0 for the prior 12 month period. ‘Debt Service Coverage’ as used herein shall be determined for the relevant period, and shall mean (i) EBITDA excluding non-cash and/or non-recurring expenditures or gains as permitted and the operating income or loss of the Xcede Technologies joint venture before inter-company overhead allocation from Borrower to Biomedical and Xcede Technologies, minus unfinanced capital expenditures, minus dividends and distributions (exclusive of the $600,000.00 distribution from the Borrower to Biomedical as of the end of the fiscal quarter ending December 31, 2016, but including any and all subsequent distributions from the Borrower to Biomedical), minus cash taxes paid for ongoing operations, divided by (ii) scheduled interest and principal payments made on all debt.”

Except as specifically amended hereby, the Loan Agreement remains in full force and effect and the Borrower hereby reaffirms all representations and warranties contained therein, as of the date hereof.

Please acknowledge your acceptance of the foregoing by signing this letter in the space provided and returning it to the undersigned, whereupon it shall take effect as an instrument under seal.

Very truly yours,
MIDDLESEX SAVINGS BANK
By:	/s/ Tony Zhang
	Tony Zhang, Senior Vice President

ACCEPTED AND AGREED TO:

DYNASIL CORPORATION OF AMERICA

(Borrower)

By:	/s/ Robert Bowdring
	Robert Bowdring, Chief Financial Officer

ACKNOWLEDGED BY GUARANTORS:

OPTOMETRICS CORPORATION

By:  /s/ Robert Bowdring

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RADIATION MONITORING DEVICES, INC.

By:  /s/ Robert Bowdring

RMD INSTRUMENTS CORP.

By:  /s/ Robert Bowdring

EVAPORATED METAL FILMS CORP.

By: /s/ Robert Bowdring 

DYNASIL BIOMEDICAL CORP.

By: /s/ Robert Bowdring 

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EX-10.02

Exhibit 10.02

AMENDMENT

TO

NOTE PURCHASE AGREEMENT

This Amendment to the Note Purchase Agreement, dated as of July 31, 2012, as amended, (this “Amendment”), is entered into as of December 31, 2016 (subject to the satisfaction of the conditions set forth in Section 3 below, the “Effective Date”), by and between Dynasil Corporation of America, a Delaware corporation (the “Company”), and Massachusetts Capital Resource Company (the “Purchaser”).

WITNESSETH:

WHEREAS, the Company and the Purchaser are parties to that certain Note Purchase Agreement, dated as of July 31, 2012, (as amended to date and as amended hereby and as may be further amended, restated, supplemented or otherwise modified from time to time, the “Purchase Agreement”);

WHEREAS, pursuant to the Purchase Agreement the Company issued and sold to the Purchaser the Company’s Note in the original outstanding principal amount of $3,000,000 (the “Note”);

WHEREAS, the Company has requested the Purchaser to amend certain provisions of the Purchase Agreement and the Note; and

WHEREAS, the Purchaser is willing to make such amendments, all on the terms and subject to the conditions set forth herein;

NOW, THEREFORE, in consideration of the foregoing and for other good and valid consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

1. Defined Terms. Capitalized terms used but not defined herein shall have the respective meanings ascribed to such terms in the Purchase Agreement.

2. Amendment to Purchase Agreement and Notes. Upon satisfaction of the conditions to effectiveness set forth in Section 3 below:

(a)       As of and from the Effective Date of this Amendment, all references in the Purchase Agreement, and all exhibits thereto, to the Notes being “due 2018” are hereby amended to read “due 2019”. Further, all references in the Purchase Agreement, and all exhibits thereto, to the Notes being due on “July 31, 2018” are hereby amended to read “July 31, 2019”.

(b)       As of and from the Effective Date of this Amendment, Section 1.04(a) of the Purchase Agreement is amended in its entirety to read as follows:

“(a)   Required Redemptions. Beginning on and with November 30, 2017, and on the last day of each calendar month thereafter through and including July 31, 2019, the Company will redeem, without premium, $41,380.95 in principal amount of the Notes, or such lesser amount as may be then outstanding, together with all accrued and unpaid interest then due on the amount so redeemed. On the stated or accelerated maturity of the Notes, the Company will pay the principal amount of the Notes then outstanding together with all accrued and unpaid interest then due thereon. No optional redemption of less than all of the Notes shall affect the obligation of the Company to make the redemptions required by this subsection.”

(c)       As of and from the Effective Date of this Amendment, all references in the Notes to being “due 2018” are hereby amended to read “due 2019”. Further, all references in the Notes to being due on “July 31, 2018” are hereby amended to read “July 31, 2019”.

3. Conditions. The effectiveness of this Amendment is subject to the following conditions:

(a)       the execution and delivery of this Amendment by the Company and the Purchaser;

(b)       Middlesex Savings Bank shall have consented to this Amendment and the provisions contained herein;

(c)       the execution of the acknowledgement of this Amendment by each guarantor whose name appears at the end of this Amendment;

(d)       the Puvrchaser shall have received a certificate of the Company certifying certified copies of all documents evidencing other necessary corporate or other action and governmental approvals, if any, with respect to this Amendment and the Note; and

(e)       the Company shall have paid the Purchaser all fees, costs and expenses of the Purchaser in connection with this Amendment, including, without limitation, reasonable fees, costs and expenses of counsel.

4. Representations and Warranties. The Company hereby represents and warrants to the Purchaser as follows:

(a)       the Company is a corporation, duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation;

(b)       the Company has the power and authority to execute, deliver and perform its obligations under this Amendment, the Purchase Agreement and the Note;

2

(c)       the execution, delivery and performance by the Company of this Amendment, the Purchase Agreement and the Note have been duly authorized by all necessary corporate action and does not and will not require any registration with, consent or approval of, notice to or action by, any Person (including any governmental agency);

(d)       this Amendment, the Purchase Agreement, the Note, and any other loan documents executed in connection herewith and therewith (the “Loan Documents”) to which the Company or any of its subsidiaries or affiliates is a party, as each Loan Document is amended by this Amendment, constitute the legal, valid and binding obligation of the Company and such subsidiaries and affiliates, enforceable against such person in accordance with its terms;

(e)       after giving effect to this Amendment, (i) no Event of Default exists or shall exist under the Purchase Agreement, and (ii) no event of default exists or shall exist under the Company’s or any of its subsidiaries’ or affiliates’ loan agreements with any bank or financial institution;

(f)       after giving effect to this Amendment, all representations and warranties by the Company contained in the Purchase Agreement and the Note are true and correct in all material respects as of the date hereof, except to the extent made as of a specific date, in which case each such representation and warranty shall be true and correct as of such date; and

(g)       by its signature below, the Company agrees that it shall constitute an Event of Default if any representation or warranty made herein is untrue or incorrect in any material respect as of the date when made or deemed made.

5. Agreement in Full Force and Effect as Amended. Except as specifically amended hereunder, the Purchase Agreement, the Note, and other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed as so amended. Except as expressly set forth herein, this Amendment shall not be deemed to be a waiver, amendment or modification of any provisions of the Purchase Agreement or any other Loan Document or any right, power or remedy of the Purchaser, nor constitute a waiver of any provision of the Purchase Agreement or any other Loan Document, or any other document, instrument and/or agreement executed or delivered in connection therewith or of any Event of Default under any of the foregoing, in each case, whether arising before or after the date hereof or as a result of performance hereunder or thereunder. This Amendment also shall not preclude the future exercise of any right, remedy, power, or privilege available to the Purchaser whether under the Purchase Agreement, the Note, the other Loan Documents, at law or otherwise and nothing contained herein shall constitute a course of conduct or dealing among the parties hereto. All references to the Purchase Agreement shall be deemed to mean the Purchase Agreement as amended hereby. This Amendment shall not constitute a novation or satisfaction and accord of the Purchase Agreement and/or other Loan Documents, but shall constitute an amendment thereof. The parties hereto agree to be bound by the terms and conditions of the Purchase Agreement, the Note, and Loan Documents as amended by this Amendment, as though such terms and conditions were set forth herein. Each reference in the Purchase Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of similar import shall mean and be a reference to the Purchase Agreement as amended by this Amendment, and each reference herein or in any other Loan Document to the “Purchase Agreement” shall mean and be a reference to the Purchase Agreement as amended and modified by this Amendment.

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6. Counterparts. This Amendment may be executed by one or more of the parties to this Amendment and any number of separate counterparts, each of which when so executed, shall be deemed an original and all said counterparts when taken together shall be deemed to constitute but one and the same instrument.

7. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Company and its successors and assigns and the Purchaser and its successors and assigns.

8. Further Assurance. The Company hereby agrees from time to time, as and when requested by the Purchaser, to execute and deliver or cause to be executed and delivered, all such documents, instruments and agreements and to take or cause to be taken such further or other action as the Purchaser may reasonably deem necessary or desirable in order to carry out the intent and purposes of this Amendment, the Purchase Agreement, the Note, and the Loan Documents.

9. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

10. Severability. Wherever possible, each provision of this Amendment shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Amendment.

[Remainder of Page Intentionally Left Blank; Signature Page Follows]

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IN WITNESS WHEREOF, each of the undersigned has executed this Amendment as of the date set forth above.

DYNASIL CORPORATION OF AMERICA
By:	/s/ Robert J. Bowdring
	Chief Financial Officer
MASSACHUSETTS CAPITAL RESOURCE COMPANY
By:	/s/ Suzanne L. Dwyer
	Suzanne L. Dwyer, Managing Director

Each of the undersigned, hereby agrees to the foregoing changes and hereby confirms its Unconditional Guaranty, dated July 31, 2012 as amended, issued by the undersigned in favor of Massachusetts Capital Resource Company.

DYNASIL BIOMEDICAL CORPORATION
By:	/s/ Robert J. Bowdring
	Treasurer
EVAPORATED METAL FILMS CORPORATION
By:	/s/ Robert J. Bowdring
	Treasurer
OPTOMETRICS CORPORATION
By:	/s/ Robert J. Bowdring
	Treasurer
RADIATION MONITORING DEVICES, INC.
By:	/s/ Robert J. Bowdring
	Treasurer
RMD INSTRUMENTS CORPORATION
By:	/s/ Robert J. Bowdring
	Treasurer

[Signature Page to the Amendment to Note Purchase Agreement]

EX-31.1(A)

EXHIBIT 31.1 (a)

CERTIFICATION PURSUANT TO RULE 13a–14(a)/15d-14(a) and SECTION 302 OF THE SARBANES-OXLEY ACT

I, Peter Sulick, certify that:

1. I have reviewed this Form 10-Q of Dynasil Corporation of America;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f))for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 13, 2017	/s/ Peter Sulick
	Peter Sulick
	Chief Executive Officer and President

EX-31.1(B)

EXHIBIT 31.1 (b)

CERTIFICATION PURSUANT TO RULE 13a–14(a)/15d-14(a) and SECTION 302 OF THE SARBANES-OXLEY ACT

I, Robert Bowdring, certify that:

1. I have reviewed this Form 10-Q of Dynasil Corporation of America;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15 d-15(f))for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  February 13, 2017	/s/ Robert J. Bowdring
	Robert J. Bowdring
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of DYNASIL CORPORATION OF AMERICA (the "Company") on Form 10-Q for the period ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Peter Sulick, Chief Executive Officer and President of the Company and Robert J. Bowdring, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 /s/ Peter Sulick

Peter Sulick

Chief Executive Officer and President

/s/ Robert J. Bowdring

Robert J. Bowdring

Chief Financial Officer

February 13, 2017

EX-99.1

Exhibit 99.1

Contact:

Patty Kehe

Corporate Secretary

Dynasil Corporation of America

Phone: 617.668.6855
pkehe@dynasil.com

Dynasil Corporation of America Reports
First Quarter Fiscal 2017 Recognition of Deferred Tax Asset

Benefit of $2.7 million

Newton, MA, February 13, 2017 – Dynasil Corporation of America (NASDAQ: DYSL), a developer and manufacturer of optics and photonics products, optical detection and analysis technology and components for the homeland security, medical and industrial markets, today announced earnings attributable to common stockholders of $2.8 million or $0.17 per common share for the first quarter of the 2017 fiscal year, largely as the result of a U.S. income tax benefit resulting from the deconsolidation for tax purposes of Xcede Technologies, Inc., the Company’s tissue sealant technology development joint venture.

As previously announced, in November 2016, Dynasil committed to invest $1.2 million of cash into Xcede over the following 18 months in exchange for Series B preferred stock of Xcede. In connection with Dynasil’s committed investment, all $5.5 million of Xcede’s convertible notes and accrued interest were converted into shares of Series A preferred stock of Xcede at a 20% discount to the price per share of the Series B preferred, in accordance with the amended provisions of the convertible notes. As of December 31, 2016, Dynasil Biomedical owned 59% of the Xcede’s outstanding common and preferred stock and, as a result, Xcede’s results remain included in the Company’s consolidated financial statements, but as the Company’s overall ownership percentage in Xcede decreased to less than 80%, beginning in fiscal year 2017, Dynasil will no longer include Xcede in its consolidated federal tax return. Therefore, Dynasil will no longer be able to offset taxable income or share net operating losses (NOLs) with Xcede. Furthermore, upon review of relevant tax criteria for the new Dynasil federal consolidated group, Dynasil determined that it is more likely than not that it will use its existing federal net operating losses (NOLs), deferred tax assets based upon its positive earnings history and expected future profits. As a result, a portion of the deferred tax valuation allowance has been reversed resulting in an income tax benefit in the amount of $2.7 million for the quarter ended December 31, 2016.

“In addition to the unusual tax circumstances described above, I am happy to report that both of our operating segments were once again profitable for the quarter and generated almost $460,000 of net income,” said CEO Peter Sulick. “Including Xcede, which comprises substantially all our Biomedical segment, we were profitable at the net income line. I continue to be encouraged by the improvements in gross profit margin in the Optics segment as we see the positive results of the investments made to improve yields and productivity. For the quarter, the Company realized a 4% overall improvement in margin despite an overall reduction in revenue from the prior year. The revenue reduction is the result of certain one-time revenue opportunities the Company was able to take advantage of in the first quarter of 2016, the effect of the devaluation in the British currency and a softening of revenue in project revenue at RMD. Despite this, the company’s profitability was roughly equivalent to the prior year before the realized tax credit.”

Certain key metrics by segment for the current quarter and the same quarter last year are presented below:

Results of Operations for the Three Months Ended December 31, 2016
	Optics			Contract Research			Biomedical			Total
Revenue	$	4,405,000		$	4,738,000		$	-		$	9,143,000
Gross profit		1,574,000			1,951,000			-			3,525,000
GM %		36	%		41	%		-			39	%
Operating expenses		1,328,000			1,740,000			381,000			3,449,000
Operating income (loss)	$	246,000		$	211,000		$	(381,000	)	$	76,000

Results of Operations for the Three Months Ended December 31, 2015
	Optics			Contract Research			Biomedical			Total
Revenue	$	6,214,000		$	4,990,000		$	-		$	11,204,000
Gross profit		2,110,000			1,855,000			-			3,965,000
GM %		34	%		37	%		-			35	%
Operating expenses		1,747,000			1,706,000			348,000			3,801,000
Operating income (loss)	$	363,000		$	149,000		$	(348,000	)	$	164,000

“Our Optics segment revenue decreased $1.8 million in the first quarter of 2017 as compared to the same period last year. This decrease was largely attributable to a one-time safety stock order to a large U.K. customer in the first quarter of the prior year, fiscal year 2016. The first quarter of fiscal year 2017 represents a more normalized shipping schedule for the U.K. customer,” continued Mr. Sulick. “Our Contract Research segment revenues decreased approximately $0.3 million or 5% primarily as a result of lower billable hours within the current quarter. The lower research revenue was somewhat offset by increased commercial revenue, including shipments of our CLYC scintillation crystals to Thermo Fisher Scientific for use in their RadEye SPRD-GN spectroscopic personal radiation detectors.”

Dynasil generated net income of $2.8 million, or $0.17 in basic earnings per share, in the first quarter of 2017 compared with net income of approximately $0.1 million for the quarter ended December 31, 2015.

Conference Call Information

Dynasil will host a conference call for investors and analysts at 5:00 p.m. ET tomorrow, Tuesday, February 14, 2017. The call will be hosted by Chairman, CEO and President Peter Sulick and Chief Financial Officer Robert Bowdring. Those who wish to listen to the conference call can go to the event page at or visit the Investor Information section of the Company’s website at www.dynasil.com. The call also may be accessed by dialing (888) 346-2613 or (412) 902-4252. For interested individuals unable to join the live conference call, a webcast replay will be available on the Company’s website for one year.

About Dynasil

Dynasil Corporation of America (NASDAQ: DYSL) develops and manufactures optics and photonics products, optical detection and analysis technology and components for the homeland security, medical and industrial markets. Combining world-class expertise in research and materials science with extensive experience in manufacturing and product development, Dynasil is commercializing products including dual-mode radiation detection solutions for Homeland Security and commercial applications and sensors for non-destructive testing. Dynasil has an impressive and growing portfolio of issued and pending U.S. patents. The Company is based in Newton, MA, with additional operations in MA, MN, NY, NJ and the United Kingdom. More information about the Company is available at www.dynasil.com.

Forward-Looking Statements

This press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding results of operations and the strength of our intellectual property portfolio. These forward-looking statements may be identified by the use of words such as “plans”, “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” “continue” or similar terms, though not all forward-looking statements contain such words. Actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements due to a number of important factors, including without limitation, our ability to develop and commercialize our products, including obtaining regulatory approvals, the size and growth of the potential markets for our products and our ability to serve those markets, the rate and degree of market acceptance of any of our products, general economic conditions, costs and availability of raw materials and management information systems, our ability to obtain and maintain intellectual property protection for our products, Xcede’s ability to produce preclinical data sufficient to enable it to initiate clinical studies of its resorbable hemostatic patch, clinical results of Xcede’s programs which may not support further development, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to deleverage our balance sheet, our ability to identify and execute on acquisition opportunities and integrate such acquisitions into our business, and seasonality, as well as the uncertainties set forth in the Company's Annual Report on Form 10-K and from time to time in the Company's other filings with the Securities and Exchange Commission. The Company disclaims any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Dynasil Corporation of America and Subsidiaries

Consolidated Balance Sheets (Unaudited)

	December 31, 2016		September 30, 2016
ASSETS
Current Assets
Cash and cash equivalents	$	1,624,000	$	2,607,000
Accounts receivable, net		3,835,000		3,502,000
Costs in excess of billings and unbilled receivables		959,000		1,208,000
Inventories, net of reserves		3,916,000		3,726,000
Prepaid expenses and other current assets		1,358,000		1,078,000
Total current assets		11,692,000		12,121,000
Property, Plant and Equipment, net		6,936,000		7,223,000
Other Assets
Intangibles, net		1,033,000		1,067,000
Deferred tax asset		2,726,000		-
Goodwill		5,822,000		5,898,000
Security deposits		43,000		60,000
Total other assets		9,624,000		7,025,000
Total Assets	$	28,252,000	$	26,369,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt	$	1,950,000	$	2,477,000
Capital lease obligations, current		103,000		105,000
Convertible notes		-		3,085,000
Accounts payable		1,513,000		1,627,000
Deferred revenue		240,000		238,000
Accrued expenses and other liabilities		2,079,000		2,955,000
Total current liabilities		5,885,000		10,487,000
Long-term Liabilities
Long-term debt, net of current portion		1,545,000		736,000
Capital lease obligations, net of current portion		147,000		173,000
Deferred tax liability		246,000		263,000
Other long-term liabilities		39,000		43,000
Total long-term liabilities		1,977,000		1,215,000
Stockholders' Equity
Dynasil stockholders' equity		18,794,000		14,973,000
Noncontrolling interest		1,596,000		(306,000	)
Total stockholders' equity		20,390,000		14,667,000
Total Liabilities and Stockholders' Equity	$	28,252,000	$	26,369,000

Dynasil Corporation of America

Consolidated Statement of Operations and Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended
	December 31,
	2016			2015
Net revenue	$	9,143,000		$	11,204,000
Cost of revenue		5,618,000			7,239,000
Gross profit		3,525,000			3,965,000
Operating expenses:
Sales and marketing		266,000			334,000
Research and development		196,000			288,000
General and administrative		2,987,000			3,183,000
Gain on sale of assets		-			(4,000	)
Total operating expenses		3,449,000			3,801,000
Income (loss) from operations		76,000			164,000
Interest expense, net		67,000			59,000
Income (loss) before taxes		9,000			105,000
Income taxes (benefit)		(2,730,000	)		36,000
Net income (loss)		2,739,000			69,000
Less: Net loss attributable to noncontrolling interest		(69,000	)		(37,000	)
Net income (loss) attributable to common stockholders	$	2,808,000		$	106,000
Net income (loss)	$	2,739,000		$	69,000
Other comprehensive income (loss):
Foreign currency translation		(295,000	)		(114,000	)
Total comprehensive loss	$	2,444,000		$	(45,000	)
Basic net income (loss) per common share	$	0.17		$	0.01
Diluted net income (loss) per common share	$	0.17		$	0.01
Weighted average shares outstanding
Basic		16,808,729			16,551,197
Diluted		16,808,729			16,578,634

XML

Document And Entity Information - shares	3 Months Ended
	Dec. 31, 2016	Feb. 07, 2017
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Dec. 31, 2016
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1
Entity Registrant Name	DYNASIL CORP OF AMERICA
Entity Central Index Key	0000030831
Current Fiscal Year End Date	--09-30
Entity Filer Category	Smaller Reporting Company
Trading Symbol	DYSL
Entity Common Stock, Shares Outstanding		16,960,329

XML

CONSOLIDATED BALANCE SHEETS - USD ($)	Dec. 31, 2016	Sep. 30, 2016
Current Assets
Cash and cash equivalents	$ 1,624,000	$ 2,607,000
Accounts receivable, net of allowances of $175,000 and $171,000 at December 31, 2016 and September 30, 2016, respectively	3,835,000	3,502,000
Costs in excess of billings and unbilled receivables	959,000	1,208,000
Inventories, net of reserves	3,916,000	3,726,000
Prepaid expenses and other current assets	1,358,000	1,078,000
Total current assets	11,692,000	12,121,000
Property, Plant and Equipment, net	6,936,000	7,223,000
Other Assets
Intangibles, net	1,033,000	1,067,000
Deferred tax asset	2,726,000	0
Goodwill	5,822,000	5,898,000
Security deposits	43,000	60,000
Total other assets	9,624,000	7,025,000
Total Assets	28,252,000	26,369,000
Current Liabilities
Current portion of long-term debt	1,950,000	2,477,000
Capital lease obligations, current	103,000	105,000
Convertible notes	0	3,085,000
Accounts payable	1,513,000	1,627,000
Deferred revenue	240,000	238,000
Accrued expenses and other liabilities	2,079,000	2,955,000
Total current liabilities	5,885,000	10,487,000
Long-term Liabilities
Long-term debt, net of current portion	1,545,000	736,000
Capital lease obligations, net of current portion	147,000	173,000
Deferred tax liability	246,000	263,000
Other long-term liabilities	39,000	43,000
Total long-term liabilities	1,977,000	1,215,000
Stockholders' Equity
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 17,720,215 and 17,677,284 shares issued, 16,910,055 and and 16,867,124 shares outstanding at December 31, 2016 and September 30, 2016, respectively.	9,000	9,000
Additional paid in capital	21,070,000	20,128,000
Accumulated other comprehensive income (loss)	(994,000)	(699,000)
Accumulated deficit	(305,000)	(3,479,000)
Less 810,160 shares of treasury stock - at cost	(986,000)	(986,000)
Total Dynasil stockholders' equity	18,794,000	14,973,000
Noncontrolling interest	1,596,000	(306,000)
Total stockholders' equity	20,390,000	14,667,000
Total Liabilities and Stockholders' Equity	$ 28,252,000	$ 26,369,000

XML

CONSOLIDATED BALANCE SHEETS [Parenthetical] - USD ($)	Dec. 31, 2016	Sep. 30, 2016
Allowance for doubtful accounts (in dollars)	$ 175,000	$ 171,000
Common stock, par value (in dollars per share)	$ 0.0005	$ 0.0005
Common stock, shares authorized	40,000,000	40,000,000
Common stock, shares issued	17,720,215	17,677,284
Common stock, shares outstanding	16,910,055	16,867,124
Treasury stock, shares	810,160	810,160

XML

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Net revenue	$ 9,143,000	$ 11,204,000
Cost of revenue	5,618,000	7,239,000
Gross profit	3,525,000	3,965,000
Operating expenses:
Sales and marketing	266,000	334,000
Research and development	196,000	288,000
General and administrative	2,987,000	3,183,000
Gain on sale of assets	0	(4,000)
Total operating expenses	3,449,000	3,801,000
Income (loss) from operations	76,000	164,000
Interest expense, net	67,000	59,000
Income (loss) before taxes	9,000	105,000
Income taxes (benefit)	(2,730,000)	36,000
Net income (loss)	2,739,000	69,000
Less: Net loss attributable to noncontrolling interest	(69,000)	(37,000)
Net income (loss) attributable to common stockholders	2,808,000	106,000
Net income (loss)	2,739,000	69,000
Other comprehensive income (loss):
Foreign currency translation	(295,000)	(114,000)
Total comprehensive loss	$ 2,444,000	$ (45,000)
Basic net income (loss) per common share	$ 0.17	$ 0.01
Diluted net income (loss) per common share	$ 0.17	$ 0.01
Weighted average shares outstanding
Basic	16,808,729	16,551,197
Diluted	16,808,729	16,578,634

XML

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY - 3 months ended Dec. 31, 2016 - USD ($)	Total	Common Stock [Member]	Additional Paid-in Capital [Member]	Other Comprehensive Income (Loss) [Member]	Accumulated Deficit [Member]	Treasury Stock [Member]	Noncontrolling Interest [Member]
Balance at Sep. 30, 2016	$ 14,667,000	$ 9,000	$ 20,128,000	$ (699,000)	$ (3,479,000)	$ (986,000)	$ (306,000)
Balance (in shares) at Sep. 30, 2016		17,677,284				810,160
Issuance of shares of common stock under employee stock purchase plan	4,000	$ 0	4,000	0	0	$ 0	0
Issuance of shares of common stock under employee stock purchase plan (in shares)		3,790				0
Stock-based compensation costs	89,000	$ 0	72,000	0	0	$ 0	17,000
Stock-based compensation costs (in shares)		39,141				0
Stock options issued to settle liabilities	82,000	$ 0	82,000	0	0	$ 0	0
Recapitalization of Xcede	3,104,000	0	784,000	0	366,000	0	1,954,000
Foreign currency translation adjustment	(295,000)	0	0	(295,000)	0	0	0
Net income (loss)	2,739,000	0	0	0	2,808,000	0	(69,000)
Balance at Dec. 31, 2016	$ 20,390,000	$ 9,000	$ 21,070,000	$ (994,000)	$ (305,000)	$ (986,000)	$ 1,596,000
Balance (in shares) at Dec. 31, 2016		17,720,215				810,160

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Cash flows from operating activities:
Net income (loss)	$ 2,739,000	$ 69,000
Adjustments to reconcile net income (loss) to net cash:
Stock compensation expense	89,000	119,000
Foreign exchange loss (gain)	41,000	26,000
Depreciation and amortization	311,000	325,000
Deferred income taxes	(2,730,000)	(24,000)
Provision for inventory reserves	(3,000)	6,000
Other	76,000	34,000
Other changes in assets and liabilities:
Accounts receivable, net	(374,000)	(1,101,000)
Inventories	(280,000)	(218,000)
Costs in excess of billings and unbilled receivables	249,000	231,000
Prepaid expenses and other assets	189,000	(32,000)
Accounts payable	(99,000)	34,000
Accrued expenses and other liabilities	(790,000)	(303,000)
Deferred revenue	2,000	136,000
Net cash from operating activities	(580,000)	(698,000)
Cash flows from investing activities:
Purchases of property, plant and equipment	(111,000)	(603,000)
Net cash from investing activities	(111,000)	(603,000)
Cash flows from financing activities:
Proceeds from issuance of common stock	4,000	4,000
Net proceeds from issuance of convertible notes	0	390,000
Principal payments on capital leases	(28,000)	(46,000)
Proceeds from (payments of) line of credit, net	0	798,000
Proceeds from (payments of) bank and subordinated debt, net	(219,000)	(25,000)
Net cash from financing activities	(243,000)	1,121,000
Effect of exchange rates on cash and cash equivalents	(49,000)	(14,000)
Net change in cash and cash equivalents	(983,000)	(194,000)
Cash and cash equivalents, beginning	2,607,000	1,295,000
Cash and cash equivalents, ending	1,624,000	1,101,000
Non cash activities:
Assets purchased under capital leases	0	134,000
Recapitalization of Xcede - conversion of non controlling notes payable to preferred stock	3,104,000	0
Subsidiary stock options issued to settle liabilities	82,000	0
Subsidiary debt issued to fund research activities	$ 500,000	$ 0

XML

Basis of Presentation

3 Months Ended

Dec. 31, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation and Significant Accounting Policies [Text Block]

Note 1 - Basis of Presentation

The accompanying consolidated balance sheet as of December 31, 2016, the consolidated statements of operations and comprehensive income (loss) for the three months ended December 31, 2016 and 2015, changes in stockholders’ equity for the three months ended December 31, 2016 and cash flows for the three months ended December 31, 2016 and 2015 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. Xcede Technologies, Inc. (“Xcede”) is a joint venture between Dynasil Biomedical and Mayo Clinic to spin out and separately fund the development of a tissue sealant technology. As of December 31, 2016, Dynasil Biomedical owned 59% of Xcede’s stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. The remaining 41% of Xcede’s stock owned by others and accounted for under the rules applicable to non-controlling interest. Certain prior year balances have been reclassified to conform to the current year presentation. These reclassifications did not affect previously reported net income or stockholders’ equity. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the Company’s 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, 2016 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 December 31, 2016, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Quarterly Report on 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.

XML

Recent Accounting Pronouncements

3 Months Ended

Dec. 31, 2016

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

Note 2 – Recent Accounting Pronouncements

Effective October 1, 2016, the Company adopted the guidance issued in Accounting Standards Update 2014-12, 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 (“ASU 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 adoption of this ASU did not have an impact on the Company’s financial statements.

Effective October 1, 2016, the Company adopted the guidance issued in Accounting Standards Update 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”), which eliminates the concept of extraordinary items in an entity’s income statement. Extraordinary classification outside of income from continuing operations was previously considered only when evidence clearly supported its classification as an extraordinary item. Extraordinary items were events and transactions that were distinguished by their unusual nature and by the infrequency of their occurrence. The ASU eliminates the need to separately classify, present and disclose extraordinary events. The adoption of this ASU did not have an impact on the Company’s financial statements.

Effective October 1, 2016, the Company adopted the guidance issued in Accounting Standards Update 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments (“ASU No. 2015-16”), which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer needs to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present, separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The adoption of this ASU did not have an impact on the Company’s financial statements.

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 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. There are two transition methods available under the new standard, either cumulative effect or retrospective. The new guidance is effective for the Company beginning in fiscal 2019. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies the revenue guidance. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which provides technical corrections and improvements to Topic 606 and other Topics amended by ASU 2014-09. The Company is currently in the process of assessing the impact of these ASUs on its consolidated financial statements.

 

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’s annual reporting for fiscal 2017, and for annual periods and interim periods thereafter. Early adoption is permitted. The Company is assessing the impact of this ASU on its consolidated financial statements and plans to adopt it in the fourth quarter of fiscal year 2017.

Business Combinations (Topic 805): Clarifying the Definition of a Business: In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for the Company beginning October 1, 2018. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued ASU 2017-04, which simplifies the test for goodwill impairment. This new guidance is effective for the Company beginning in fiscal year 2021. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

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Xcede Technologies, Inc. Joint Venture

3 Months Ended

Dec. 31, 2016

Equity Method Investments and Joint Ventures [Abstract]

Equity Method Investments and Joint Ventures Disclosure [Text Block]

Note 3 – Xcede Technologies, Inc. Joint Venture

In October 2013, the Company, through its subsidiary Dynasil Biomedical (“DBM”) formed Xcede, a joint venture with Mayo Clinic, in order to spin out and separately fund the development of its hemostatic tissue sealant technology, which formerly comprised the majority of its expense within the biomedical segment.

Beginning at its inception and through November 2016, Xcede funded its pre-clinical research activities through the issuance of convertible notes bearing interest at 5% (“the Notes”) pursuant to a note purchase agreement dated October 2013 and most recently amended in November 2016 that provided for the issuance of up to $5.2 million in the aggregate principal amount of the Notes from external investors and certain directors and officers of the Company. The Notes were convertible into equity of Xcede.

In November 2016, Dynasil committed to invest $1.2 million of cash into Xcede over the following 18 months in exchange for Series B convertible preferred stock of Xcede (“Series B Preferred”). The value of the Series B Preferred, as it is wholly owned by DBM, was eliminated in consolidation. In conjunction with Dynasil’s committed investment, all $5.5 million in existing Notes and accrued interest were converted into 5,394,120 shares of Series A convertible preferred stock of Xcede (“Series A Preferred”) at a 20% discount to the price per share of the Series B Preferred, in accordance with the amended provisions of the Notes. The original conversion terms of the Notes were amended to require conversion into Series A Preferred rather than the class of stock issued in conjunction with the financing (Series B Preferred). Because the original conversion terms of the Notes were amended and as a result of assessing the impact of the rights and features of the Note amendment and their effect on the value to the issuer and holders, the transaction is recorded at fair value with a resulting gain on extinguishment of debt. Fair value was determined by management based on an independent valuation using a market and income approach and an option pricing model to allocate value to the respective shares. The fair value of the Series A Preferred was approximately $3.5 million on the date of issuance, as compared to the carrying value of the convertible principal and accrued interest of $5.5 million, resulting in a gain of approximately $2.0 million. Due to the related party nature of the transaction, this gain was recorded within the equity of Xcede. Of that $2.0 million, approximately $1.7 million was attributed to DBM and eliminated in consolidation, and approximately $0.3 million was attributed to noncontrolling interest.

Series A Preferred participants include both outside investors (accounted for as noncontrolling interest) and DBM. The outside investors converted $3.1 million of Notes and accrued interest into 3,055,551 shares of Series A Preferred. DBM converted the remaining $2.4 million of Notes and accrued interest into 2,338,569 shares of Series A Preferred, the value of which is eliminated in consolidation.

Each share of Series A Preferred and Series B Preferred (together “the Preferred Stock”) shall be convertible, at the option of the holder, into such number of fully paid and non-assessable shares of Xcede common stock (“Common Stock”) as determined by dividing the original issue price, as defined, by the conversion price in effect on the date of conversion, which is 1:1. Each holder of the Preferred Stock shall have one vote for each share of Common Stock that the holder of the Preferred Stock would be entitled to receive upon the conversion of the holder’s Preferred Stock into Common Stock. Upon any liquidation event, which includes certain change of control events, following payment of pre-equity distributions, the remaining proceeds or net assets of Xcede shall be paid and distributed in the following amounts and order of priority: (1) to satisfy the liquidation preference payment due to each holder of Series B Preferred, (2) to satisfy the liquidation preference payment due to each holder of Series A Preferred, (3) payment in full of any acquisition transaction payment, and (4) the remaining assets available to be distributed ratably among the holders of the Common Stock. If a liquidation event were to occur, the Series A Preferred’s liquidation value would be $1.016 per share and Series B Preferred’s liquidation value would be $1.27 per share. As of December 31, 2016, the liquidation value of the Series B Preferred would be approximately $0.2 million and the Series A Preferred would be approximately $5.5 million, of which $2.4 million is DBM’s portion and $3.1 million would be attributed to noncontrolling shareholders.

As of December 31, 2016, DBM owned approximately 59% of Xcede’s outstanding Common Stock and Preferred Stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. Due to the Series A Preferred having a liquidation preference and therefore not representing a residual interest, cumulative net losses of Xcede are attributed only to common stockholders in accordance with common stock ownership. Noncontrolling interest represents the value of the Series A Preferred and common stock not owned by DBM plus 17% of cumulative losses of Xcede based on the 17% common stock ownership held by noncontrolling interests.

Due to the issuance of Preferred Stock, DBM’s ownership percentage in Xcede decreased to less than 80%. Based on this ownership percentage, beginning in fiscal year 2017, Xcede will no longer be included in the Dynasil consolidated federal tax return and the Company will no longer be able to offset taxable income or benefit from net operating losses and other tax attributes related to Xcede. (See Note 11 – Income Taxes.)

As previously disclosed, in January 2016, Xcede announced that it had signed three agreements with Cook Biotech Inc. of West Lafayette, Indiana (“Cook”), including a Development Agreement, a License Agreement and a Supply Agreement, in connection with the development, regulatory approval and production of Xcede’s resorbable hemostatic patch (“Xcede’s Patch”). In November 2016, Xcede entered into another Services Agreement, a Secured Promissory Note, a Loan Agreement, a Security Agreement and an Intellectual Property Security Agreement (collectively the “Note Agreement”) with Cook, in which Cook committed to fund the pre-clinical testing of, and subject to the receipt of applicable regulatory approvals to initiate first in human clinical trials for, the Xcede Patch. Under the terms of the Note Agreement, in exchange for the services performed by Cook, Xcede has committed to a multiple draw credit facility in the aggregate amount not to exceed $1.5 million. Three draws of principal will be available, each in the amount of $500,000, upon satisfaction of conditions identified in the Note Agreement. The principal amounts outstanding bear interest at a fixed rate of 2% and are secured by all the rights of Xcede under the Development Agreement, Supply Agreement, and License Agreement, all the rights to the data and work product arising from the clinical trial being performed under the Services Agreement, all regulatory approvals for the Xcede Patch, all patent and patent applications owned or controlled by Xcede, and all trademark and service mark registrations and applications. The outstanding principal and unpaid interest are due and payable in full at the earlier of closing of an acquisition transaction or December 31, 2025. Xcede will recognize research and development expense as the related services are performed by Cook. There was approximately $38,000 of research and development expense recognized during the three months ended December 31, 2016.

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Inventories

3 Months Ended

Dec. 31, 2016

Inventory Disclosure [Abstract]

Inventory Disclosure [Text Block]

Note 4 - Inventories

Inventories, net of reserves, consists of the following:

	December 31,		September 30,
	2016		2016
Raw Materials	$	2,024,000	$	1,938,000
Work-in-Process		690,000		834,000
Finished Goods		1,202,000		954,000
	$	3,916,000	$	3,726,000

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Intangible Assets

3 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets Disclosure [Text Block]

Note 5 – Intangible Assets

Intangible assets at December 31, 2016 and September 30, 2016 consist of the following:

	Useful	Gross		Accumulated
December 31, 2016	Life (years)	Amount		Amortization		Net
Acquired Customer Base	5 to 15	$	683,000	$	467,000	$	216,000
Know How	15		512,000		290,000		222,000
Trade Names	Indefinite		258,000		-		258,000
Patents	20		345,000		8,000		337,000
Biomedical Technologies	5		260,000		260,000		-
		$	2,058,000	$	1,025,000	$	1,033,000

	Useful	Gross		Accumulated
September 30, 2016	Life (years)	Amount		Amortization		Net
Acquired Customer Base	5 to 15	$	718,000	$	473,000	$	245,000
Know How	15		512,000		282,000		230,000
Trade Names	Indefinite		272,000		-		272,000
Patents	20		326,000		6,000		320,000
Biomedical Technologies	5		260,000		260,000		-
		$	2,088,000	$	1,021,000	$	1,067,000

Amortization expense for the three months ended December 31, 2016 and 2015 was $26,000 and $44,000, respectively.

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

	2017 (9 months)		2018		2019		2020		2021		Thereafter		Total
Acquired Customer Base	$	60,000	$	80,000	$	76,000	$	-	$	-	$	-	$	216,000
Know How		26,000		34,000		34,000		34,000		34,000		60,000		222,000
Patents		6,000		9,000		9,000		9,000		9,000		79,000		121,000
	$	92,000	$	123,000	$	119,000	$	43,000	$	43,000	$	139,000	$	559,000

As of December 31, 2016, Xcede had $216,000 in patents that have not been granted, therefore, the amortization related to these patents is not included in the five-year amortization table above.

The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its long-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of long-lived assets, during the three months ended December 31, 2016. 

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Goodwill

3 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill Disclosure [Text Block]

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:

· A significant adverse long term outlook for any of its industries;

· An adverse finding or rejection from a regulatory body involved in new product regulatory approvals;

· Failure of an anticipated commercialization of a product or product line;

· Unanticipated competition or the introduction of a disruptive technology;

· The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit;

· A loss of key personnel; and

· An expectation that a reporting unit carrying goodwill, or a significant portion of a reporting unit, will be sold or otherwise disposed of.

There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of goodwill, during the three months ended December 31, 2016.

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Debt

3 Months Ended

Dec. 31, 2016

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

Note 7 – Debt

Senior Debt

The Bank Loan Agreement between the Company and Middlesex Savings Bank was amended on December 2, 2016 to permit the Company to invest up to $1.2 million in its Xcede Technologies subsidiary during the period from the quarter ended December 31, 2016 through the quarter ending September 30, 2018.

Subordinated Debt

On December 15, 2016, the Company amended the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the loan and defer principal repayment requirements to November 30, 2017. Such amendment also extended the maturity date from July 31, 2018 to July 31, 2019.

Subsidiary Debt

In November 2016, the Xcede convertible notes along with related accrued interest were converted into 5,394,120 shares of Xcede’s Series A preferred stock. See Note 3 – Xcede Technologies, Inc. Joint Venture.

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Earnings (Loss) Per Common Share

3 Months Ended

Dec. 31, 2016

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

Note 8 – Earnings (Loss) Per Common Share

Basic earnings (loss) per common share is computed by dividing the net income or loss attributable to common shares by the weighted average number of common shares outstanding. 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 months ended December 31, 2016 and 2015, no common stock options were included in the calculation of dilutive shares as all of the 123,147 and 58,212 common stock options outstanding, respectively, had exercise prices above the applicable quarterly average market price per share and their inclusion would be anti-dilutive.

For the three months ended December 31, 2016, 90,000 shares of restricted common stock were excluded from the calculation of dilutive shares, as the effect of their inclusion would be anti-dilutive. For the three months ended December 31, 2015, 27,437 restricted common stock were included in the denominator used to calculate diluted earnings per share.

The computation of the weighted shares outstanding for the three months ended December 31 is as follows:

	December 31, 2016		December 31, 2015
Weighted average shares outstanding
Basic		16,808,729		16,551,197
Effect of dilutive securities
Stock Options		-		-
Restricted Stock		-		27,437
Dilutive Average Shares Outstanding		16,808,729		16,578,634

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Stock Based Compensation

3 Months Ended

Dec. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

Note 9 - 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 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 zero because historically the Company has not paid dividends on common stock.

The Company’s Xcede joint venture adopted an Equity Incentive Plan in 2013 which provides for, among other incentives, the granting of options to purchase shares in Xcede’s common stock to officers, directors, employees and consultants. The options granted generally vest over a three year period. The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model using assumptions generally consistent with those used for Company stock options. Because Xcede is not publicly traded, the expected volatility is estimated with reference to the average historical volatility of a group of publicly traded companies that are believed to have similar characteristics to Xcede.

Stock compensation expense for the three months ended December 31, 2016 and 2015 is as follows:

	Three Months Ended		Three Months Ended
Stock Compensation Expense	December 31, 2016		December 31, 2015
Stock Grants	$	39,000	$	83,000
Restricted Stock Grants		13,000		8,000
Option Grants		12,000		6,000
Employee Stock Purchase Plan		1,000		1,000
Subsidiary Option Grants		24,000		21,000
Total	$	89,000	$	119,000

At December 31, 2016, there was approximately $140,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period of fourteen months.

 

Restricted Stock Grants

A summary of restricted stock activity for the three months ended December 31, 2016 is presented below:

Restricted Stock Activity for the Three Months ended			Weighted-Average
December 31, 2016	Shares		Grant-Date Fair Value
Nonvested at September 30, 2016		100,000	$	1.73
Granted		-		-
Vested		(10,000)	$	1.70
Cancelled		-		-
Nonvested and expected to vest at December 31, 2016		90,000	$	1.73

Stock Option Grants

During the three months ended December 31, 2016, no Dynasil stock options were granted. A summary of stock option activity for the three months ended December 31, 2016 is presented below:

			Weighted Average		Weighted Average
	Options		Exercise Price per		Remain Contractual
	Outstanding		Share		Term (in Years)
Balance at September 30, 2016		123,147	$	2.30		1.69
Outstanding and exercisable at September 30, 2016		123,147	$	2.30		1.69
Granted		-		-
Exercised		-		-
Cancelled		-		-
Balance at December 31, 2016		123,147	$	2.30		1.43
Outstanding and exercisable at December 31, 2016		123,147	$	2.30		1.43

Subsidiary Stock Option Grants

During the three months ended December 31, 2016, 428,000 Xcede stock options were granted at an exercise price of $1.00 per share. Of the stock options granted, 228,000 options were given to satisfy deferred compensation in the amount of $75,000 and vested immediately. The remaining 200,000 stock options granted during the three months ended December 31, 2016 vest over the next three years and expire ten years from the grant date. These options were valued using the Black-Scholes option pricing model and the assumptions for that were as follows:

Expected term in years	10 years
Risk-free interest rate		2.37	%
Expected volatility		83.12	%
Expected dividend yield		0.00	%

 

A summary of Xcede stock option activity for the three months ended December 31, 2016 is presented below:

			Weighted Average		Weighted Average
	Options		Exercise Price per		Remain Contractual
	Outstanding		Share		Term (in Years)
Balance at September 30, 2016		613,653		1.00		8.35
Outstanding and exercisable at September 30, 2016		320,586		1.00		8.01
Granted		428,000		1.00
Exercised		-		-
Cancelled		-		-
Balance at December 31, 2016		1,041,653		1.00		8.84
Outstanding and exercisable at December 31, 2016		629,126		1.00		8.74

At December 31, 2016, the Company’s Xcede joint venture had $163,000 of unrecognized stock compensation expense associated with stock options expected to be recognized over a weighted average period of seventeen months.

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Segment, Customer and Geographical Reporting

3 Months Ended

Dec. 31, 2016

Segment Reporting [Abstract]

Segment Reporting Disclosure [Text Block]

Note 10 – Segment, Customer and Geographical Reporting

Segment Financial Information

Dynasil reports three reportable segments: contract research (“Contract Research”), optics (“Optics”) and biomedical (“Biomedical”). Within these segments, there is a segregation of operating segments based upon the organizational structure used to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure. The Optics segment aggregates four operating segments – Dynasil Fused Silica, Optometrics, Hilger Crystals, and Evaporated Metal Films – that manufacture commercial products, including optical crystals for sensing in the security and medical imaging markets, as well as optical components, optical coatings and optical materials for scientific instrumentation and other applications. The Contract Research segment is one of the largest small business participants in U.S. government-funded research. The Biomedical segment consists of a single operating segment, Dynasil Biomedical Corporation (“Dynasil Biomedical”), a medical technology incubator which owns rights to certain early stage medical technologies. Dynasil Biomedical holds common and preferred stock in the Xcede joint venture which is developing a tissue sealant technology and currently has no other operations.

The Company’s segment information for the three months ended December 31, 2016 and 2015 is summarized below:

Results of Operations for the Three Months Ended December 31,
2016
				Contract
	Optics			Research			Biomedical		Total
Revenue	$	4,405,000		$	4,738,000		$	-	$	9,143,000
Gross profit		1,574,000			1,951,000			-		3,525,000
GM %		36	%		41	%		-		39	%
SG&A		1,328,000			1,740,000			381,000		3,449,000
Operating income (loss)		246,000			211,000			(381,000)		76,000
Depreciation and amortization		234,000			74,000			3,000		311,000
Capital expenditures		91,000			-			20,000		111,000
Intangibles, net		474,000			222,000			337,000		1,033,000
Goodwill		883,000			4,939,000			-		5,822,000
Total assets	$	18,785,000		$	8,407,000		$	1,060,000	$	28,252,000

Results of Operations for the Three Months Ended December 31,
2015
				Contract
	Optics			Research			Biomedical		Total
Revenue	$	6,214,000		$	4,990,000		$	-	$	11,204,000
Gross profit		2,110,000			1,855,000			-		3,965,000
GM %		34	%		37	%		-		35	%
SG&A		1,751,000			1,706,000			348,000		3,805,000
Gain on sale of assets		4,000			-			-		4,000
Operating income (loss)		363,000			149,000			(348,000)		164,000
Depreciation and amortization		228,000			80,000			17,000		325,000
Capital expenditures		565,000			7,000			31,000		603,000
Intangibles, net		644,000			256,000			297,000		1,197,000
Goodwill		1,155,000			4,939,000			-		6,094,000
Total assets	$	16,506,000		$	8,273,000		$	857,000	$	25,636,000

Customer Financial Information

For the three months ended December 31, 2016, no customer in the Optics segment represented more than 10% of the total segment revenue. For the three months ended December 31, 2015, one customer in the Optics segment represented more than 10% of the total segment revenue.

For the three months ended December 31, 2016, three 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 months ended December 31, 2015, five customers of the Contract Research segment, all various agencies of the U.S. Government, each represented more than 10% 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 December 31, 2016 and 2015 are as follows:

	Three Months Ended					Three Months Ended
	December 31, 2016					December 31, 2015
Geographic Location	Revenue		% of Total			Revenue		% of Total
United States	$	7,189,000		79	%	$	8,235,000		74	%
Europe		1,086,000		12	%		2,041,000		18	%
Other		868,000		9	%		928,000		8	%
	$	9,143,000		100	%	$	11,204,000		100	%

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Income Taxes

3 Months Ended

Dec. 31, 2016

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

Note 11 - Income Taxes

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. 

Dynasil Corporation of America and its wholly-owned U.S. subsidiaries file a consolidated federal income tax return and various state returns. The Company’s U.K. subsidiary files tax returns in the U.K. Prior to November 18, 2016, the Company’s subsidiary, Xcede was included in the federal and state tax returns filed by Dynasil. As of November 18, 2016, Dynasil’s ownership in Xcede was reduced to approximately 59%. As a result, Xcede will no longer be included in Dynasil’s federal consolidated tax return and will file a separate federal return. Xcede will continue to be included in the Dynasil consolidated state tax filings pursuant to the respective state tax requirements.

In assessing the ability to realize the net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

As a result of Xcede’s de-consolidation from the Company’s federal tax returns, the Company will no longer be able to offset taxable income with Xcede’s current or cumulative operating losses. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined that it is more likely than not that the federal, deferred tax assets of the new Dynasil federal consolidated group will be realized based upon positive earnings history and expected future profits of the group. As a result, the federal deferred tax asset valuation allowance associated with the Dynasil federal consolidated group has been reversed resulting in an income tax benefit in the amount of $2.7 million during the quarter ending December 31, 2016. Going forward, as the company records income, it will be able to utilize the NOLs (net operating losses) within its deferred tax assets. Based upon the Company’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of the Company’s state and separate Xcede deferred tax assets is sufficient to warrant the continued need for a valuation allowance against these 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 December 31, 2016 and September 30, 2016, the Company has no 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 December 31, 2016 and September 30, 2016, 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 results for the three months ending December 31, 2016 result in an overall effective rate for the quarter of 679% mainly driven by the tax benefit of $2.7 million recorded for the release of the valuation allowance. The effective tax rates excluding the impact of the valuation allowance were (25%) and 34% for the three months ended December 31, 2016 and 2015, respectively. The rates differ from the U.S. federal statutory income tax rate of 34% primarily due to a full valuation allowance against certain U.S. deferred tax assets of the Company.

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 2013 are still subject to examination.

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Subsequent Events

3 Months Ended

Dec. 31, 2016

Subsequent Events [Abstract]

Subsequent Events [Text Block]

Note 12 – Subsequent Events

The Company has evaluated subsequent events through the date the financial statements were released.

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Inventories (Tables)

3 Months Ended

Dec. 31, 2016

Inventory Disclosure [Abstract]

Schedule of Inventory, Current [Table Text Block]

Inventories, net of reserves, consists of the following:

	December 31,		September 30,
	2016		2016
Raw Materials	$	2,024,000	$	1,938,000
Work-in-Process		690,000		834,000
Finished Goods		1,202,000		954,000
	$	3,916,000	$	3,726,000

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Intangible Assets (Tables)

3 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Finite-Lived Intangible Assets [Table Text Block]

Intangible assets at December 31, 2016 and September 30, 2016 consist of the following:

	Useful	Gross		Accumulated
December 31, 2016	Life (years)	Amount		Amortization		Net
Acquired Customer Base	5 to 15	$	683,000	$	467,000	$	216,000
Know How	15		512,000		290,000		222,000
Trade Names	Indefinite		258,000		-		258,000
Patents	20		345,000		8,000		337,000
Biomedical Technologies	5		260,000		260,000		-
		$	2,058,000	$	1,025,000	$	1,033,000

	Useful	Gross		Accumulated
September 30, 2016	Life (years)	Amount		Amortization		Net
Acquired Customer Base	5 to 15	$	718,000	$	473,000	$	245,000
Know How	15		512,000		282,000		230,000
Trade Names	Indefinite		272,000		-		272,000
Patents	20		326,000		6,000		320,000
Biomedical Technologies	5		260,000		260,000		-
		$	2,088,000	$	1,021,000	$	1,067,000

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense [Table Text Block]

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

	2017 (9 months)		2018		2019		2020		2021		Thereafter		Total
Acquired Customer Base	$	60,000	$	80,000	$	76,000	$	-	$	-	$	-	$	216,000
Know How		26,000		34,000		34,000		34,000		34,000		60,000		222,000
Patents		6,000		9,000		9,000		9,000		9,000		79,000		121,000
	$	92,000	$	123,000	$	119,000	$	43,000	$	43,000	$	139,000	$	559,000

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Earnings (Loss) Per Common Share (Tables)

3 Months Ended

Dec. 31, 2016

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

The computation of the weighted shares outstanding for the three months ended December 31 is as follows:

	December 31, 2016		December 31, 2015
Weighted average shares outstanding
Basic		16,808,729		16,551,197
Effect of dilutive securities
Stock Options		-		-
Restricted Stock		-		27,437
Dilutive Average Shares Outstanding		16,808,729		16,578,634

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Stock Based Compensation (Tables)

3 Months Ended

Dec. 31, 2016

Schedule Of Stock Compensation Expense [Table Text Block]

Stock compensation expense for the three months ended December 31, 2016 and 2015 is as follows:

	Three Months Ended		Three Months Ended
Stock Compensation Expense	December 31, 2016		December 31, 2015
Stock Grants	$	39,000	$	83,000
Restricted Stock Grants		13,000		8,000
Option Grants		12,000		6,000
Employee Stock Purchase Plan		1,000		1,000
Subsidiary Option Grants		24,000		21,000
Total	$	89,000	$	119,000

Schedule of Nonvested Restricted Stock Units Activity [Table Text Block]

A summary of restricted stock activity for the three months ended December 31, 2016 is presented below:

Restricted Stock Activity for the Three Months ended			Weighted-Average
December 31, 2016	Shares		Grant-Date Fair Value
Nonvested at September 30, 2016		100,000	$	1.73
Granted		-		-
Vested		(10,000)	$	1.70
Cancelled		-		-
Nonvested and expected to vest at December 31, 2016		90,000	$	1.73

Stock Option Grants [Member]

Disclosure of Share-based Compensation Arrangements by Share-based Payment Award [Table Text Block]

A summary of stock option activity for the three months ended December 31, 2016 is presented below:

			Weighted Average		Weighted Average
	Options		Exercise Price per		Remain Contractual
	Outstanding		Share		Term (in Years)
Balance at September 30, 2016		123,147	$	2.30		1.69
Outstanding and exercisable at September 30, 2016		123,147	$	2.30		1.69
Granted		-		-
Exercised		-		-
Cancelled		-		-
Balance at December 31, 2016		123,147	$	2.30		1.43
Outstanding and exercisable at December 31, 2016		123,147	$	2.30		1.43

Subsidiary Option Grants [Member]

Disclosure of Share-based Compensation Arrangements by Share-based Payment Award [Table Text Block]

A summary of Xcede stock option activity for the three months ended December 31, 2016 is presented below:

			Weighted Average		Weighted Average
	Options		Exercise Price per		Remain Contractual
	Outstanding		Share		Term (in Years)
Balance at September 30, 2016		613,653		1.00		8.35
Outstanding and exercisable at September 30, 2016		320,586		1.00		8.01
Granted		428,000		1.00
Exercised		-		-
Cancelled		-		-
Balance at December 31, 2016		1,041,653		1.00		8.84
Outstanding and exercisable at December 31, 2016		629,126		1.00		8.74

Schedule of Share-based Compensation, Shares Authorized under Stock Option Plans, by Exercise Price Range [Table Text Block]

These options were valued using the Black-Scholes option pricing model and the assumptions for that were as follows:

Expected term in years	10 years
Risk-free interest rate	2.37%
Expected volatility	83.12%
Expected dividend yield	0.00%

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Segment, Customer and Geographical Reporting (Tables)

3 Months Ended

Dec. 31, 2016

Segment Reporting [Abstract]

Schedule of Segment Reporting Information, by Segment [Table Text Block]

The Company’s segment information for the three months ended December 31, 2016 and 2015 is summarized below:

Results of Operations for the Three Months Ended December 31,
2016
				Contract
	Optics			Research			Biomedical		Total
Revenue	$	4,405,000		$	4,738,000		$	-	$	9,143,000
Gross profit		1,574,000			1,951,000			-		3,525,000
GM %		36	%		41	%		-		39	%
SG&A		1,328,000			1,740,000			381,000		3,449,000
Operating income (loss)		246,000			211,000			(381,000)		76,000
Depreciation and amortization		234,000			74,000			3,000		311,000
Capital expenditures		91,000			-			20,000		111,000
Intangibles, net		474,000			222,000			337,000		1,033,000
Goodwill		883,000			4,939,000			-		5,822,000
Total assets	$	18,785,000		$	8,407,000		$	1,060,000	$	28,252,000

Results of Operations for the Three Months Ended December 31,
2015
				Contract
	Optics			Research			Biomedical		Total
Revenue	$	6,214,000		$	4,990,000		$	-	$	11,204,000
Gross profit		2,110,000			1,855,000			-		3,965,000
GM %		34	%		37	%		-		35	%
SG&A		1,751,000			1,706,000			348,000		3,805,000
Gain on sale of assets		4,000			-			-		4,000
Operating income (loss)		363,000			149,000			(348,000)		164,000
Depreciation and amortization		228,000			80,000			17,000		325,000
Capital expenditures		565,000			7,000			31,000		603,000
Intangibles, net		644,000			256,000			297,000		1,197,000
Goodwill		1,155,000			4,939,000			-		6,094,000
Total assets	$	16,506,000		$	8,273,000		$	857,000	$	25,636,000

Schedule Of Segment Revenue By Geographical Location [Table Text Block]

Revenue by geographic location in total and as a percentage of total revenue, for the three months ended December 31, 2016 and 2015 are as follows:

	Three Months Ended					Three Months Ended
	December 31, 2016					December 31, 2015
Geographic Location	Revenue		% of Total			Revenue		% of Total
United States	$	7,189,000		79	%	$	8,235,000		74	%
Europe		1,086,000		12	%		2,041,000		18	%
Other		868,000		9	%		928,000		8	%
	$	9,143,000		100	%	$	11,204,000		100	%

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Basis of Presentation (Details Textual)	Dec. 31, 2016	Nov. 18, 2016
Noncontrolling Interest, Ownership Percentage by Noncontrolling Owners	41.00%
Xcede Technologies inc [Member]
Noncontrolling Interest, Ownership Percentage by Parent	59.00%	59.00%

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Xcede Technologies, Inc. Joint Venture (Details Textual) - USD ($)		1 Months Ended	3 Months Ended
	Nov. 30, 2016	Nov. 30, 2016	Dec. 31, 2016	Dec. 31, 2015	Nov. 18, 2016
Debt Conversion, Converted Instrument, Amount			$ 3,500,000
Extinguishment of Debt, Amount			5,500,000
Gain (Loss) on Extinguishment of Debt			2,000,000
Research and Development Expense, Total			196,000	$ 288,000
Noncontrolling Interest [Member]
Debt Conversion, Original Debt, Amount		$ 3,100,000
Debt Conversion, Converted Instrument, Shares Issued		3,055,551
Gain (Loss) on Extinguishment of Debt			$ 300,000
Xcede Technologies inc [Member]
Debt Instrument, Interest Rate, Stated Percentage	5.00%	5.00%
Debt Instrument, Face Amount	$ 5,500,000	$ 5,500,000
Committed Investment In Cash	$ 1,200,000	$ 1,200,000
Debt Conversion, Converted Instrument, Shares Issued		5,394,120
Capital Stock Financing Discount Percentage	20.00%	20.00%
Noncontrolling Interest, Ownership Percentage by Parent			59.00%		59.00%
Noncontrolling Interest, Description			Noncontrolling interest represents the value of the Series A Preferred and common stock not owned by DBM plus 17% of cumulative losses of Xcede based on the 17% common stock ownership held by noncontrolling interests.
Research and Development Expense, Total			$ 38,000
Dynasil Biomedical [Member]
Debt Conversion, Original Debt, Amount		$ 2,400,000
Debt Conversion, Converted Instrument, Shares Issued		2,338,569
Gain (Loss) on Extinguishment of Debt			$ 1,700,000
External Funding [Member] | Convertible Debt [Member]
Proceeds from Convertible Debt		$ 5,200,000
Secured Promissory Note [Member] | Xcede Technologies inc [Member]
Debt Instrument, Interest Rate, Stated Percentage	2.00%	2.00%
Debt Instrument, Maturity Date	Dec. 31, 2025
Line of Credit Facility, Maximum Borrowing Capacity	$ 1,500,000	$ 1,500,000
Line of Credit Facility, Current Borrowing Capacity	$ 500,000	$ 500,000
Series B Preferred Stock [Member]
Preferred Stock, Liquidation Preference Per Share			$ 1.27
Preferred Stock, Liquidation Preference, Value			$ 200,000
Series A Preferred Stock [Member]
Preferred Stock, Liquidation Preference Per Share			$ 1.016
Preferred Stock, Liquidation Preference, Value			$ 5,500,000
Series A Preferred Stock [Member] | Noncontrolling Shareholders [Member]
Preferred Stock, Liquidation Preference, Value			3,100,000
Series A Preferred Stock [Member] | Dynasil Biomedical [Member]
Preferred Stock, Liquidation Preference, Value			$ 2,400,000

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Inventories (Details) - USD ($)	Dec. 31, 2016	Sep. 30, 2016
Inventory Current [Line Items]
Raw Materials	$ 2,024,000	$ 1,938,000
Work-in-Process	690,000	834,000
Finished Goods	1,202,000	954,000
Inventory, Net, Total	$ 3,916,000	$ 3,726,000

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Intangible Assets (Details) - USD ($)	3 Months Ended	12 Months Ended
	Dec. 31, 2016	Sep. 30, 2016	Dec. 31, 2015
Finite-Lived Intangible Assets [Line Items]
Gross Amount	$ 2,058,000	$ 2,088,000
Accumulated Amortization	1,025,000	1,021,000
Net	1,033,000	1,067,000	$ 1,197,000
Acquired Customer Base [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Amount	683,000	718,000
Accumulated Amortization	467,000	473,000
Net	$ 216,000	$ 245,000
Acquired Customer Base [Member] | Minimum [Member]
Finite-Lived Intangible Assets [Line Items]
Useful Life (years)	5 years	5 years
Acquired Customer Base [Member] | Maximum [Member]
Finite-Lived Intangible Assets [Line Items]
Useful Life (years)	15 years	15 years
Know How [Member]
Finite-Lived Intangible Assets [Line Items]
Useful Life (years)	15 years	15 years
Gross Amount	$ 512,000	$ 512,000
Accumulated Amortization	290,000	282,000
Net	222,000	230,000
Trade Name [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Amount	258,000	272,000
Accumulated Amortization	0	0
Net	$ 258,000	$ 272,000
Patents [Member]
Finite-Lived Intangible Assets [Line Items]
Useful Life (years)	20 years	20 years
Gross Amount	$ 345,000	$ 326,000
Accumulated Amortization	8,000	6,000
Net	$ 337,000	$ 320,000
Biomedical Technologies [Member]
Finite-Lived Intangible Assets [Line Items]
Useful Life (years)	5 years	5 years
Gross Amount	$ 260,000	$ 260,000
Accumulated Amortization	260,000	260,000
Net	$ 0	$ 0

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Intangible Assets (Details 1)	Dec. 31, 2016 USD ($)
Finite-Lived Intangible Assets [Line Items]
2017 (9 months)	$ 92,000
2018	123,000
2019	119,000
2020	43,000
2021	43,000
Thereafter	139,000
Total	559,000
Acquired Customer Base [Member]
Finite-Lived Intangible Assets [Line Items]
2017 (9 months)	60,000
2018	80,000
2019	76,000
2020	0
2021	0
Thereafter	0
Total	216,000
Know How [Member]
Finite-Lived Intangible Assets [Line Items]
2017 (9 months)	26,000
2018	34,000
2019	34,000
2020	34,000
2021	34,000
Thereafter	60,000
Total	222,000
Patents [Member]
Finite-Lived Intangible Assets [Line Items]
2017 (9 months)	6,000
2018	9,000
2019	9,000
2020	9,000
2021	9,000
Thereafter	79,000
Total	$ 121,000

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Intangible Assets (Details Textual) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Sep. 30, 2016
Finite-Lived Intangible Assets [Line Items]
Amortization of Intangible Assets	$ 26,000	$ 44,000
Finite-Lived Intangible Assets, Gross	2,058,000		$ 2,088,000
Parent [Member]
Finite-Lived Intangible Assets [Line Items]
Finite-Lived Intangible Assets, Gross	$ 216,000

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Debt (Details Textual) - Xcede Technologies inc [Member] - USD ($) $ in Millions	1 Months Ended
	Nov. 30, 2016	Dec. 31, 2016
Debt [Line Items]
Debt Conversion, Converted Instrument, Shares Issued	5,394,120
Senior Debt [Member]
Debt [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity		$ 1.2

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Earnings (Loss) Per Common Share (Details) - shares	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Weighted average shares outstanding
Basic	16,808,729	16,551,197
Effect of dilutive securities
Dilutive Average Shares Outstanding	16,808,729	16,578,634
Employee Stock Option [Member]
Effect of dilutive securities
Incremental Common Shares Attributable to Dilutive Effect of Share-based Payment Arrangements	0	0
Restricted Stock [Member]
Effect of dilutive securities
Incremental Common Shares Attributable to Dilutive Effect of Share-based Payment Arrangements	0	27,437

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Earnings (Loss) Per Common Share (Details Textual) - shares	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Earnings Loss Per Common Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	123,147	58,212
Restricted Stock [Member]
Earnings Loss Per Common Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	90,000
Incremental Common Shares Attributable to Dilutive Effect of Share-based Payment Arrangements	0	27,437

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Stock Based Compensation (Details) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Stock Based Compensation [Line Items]
Stock Compensation Expense	$ 89,000	$ 119,000
Stock Grants [Member]
Stock Based Compensation [Line Items]
Stock Compensation Expense	39,000	83,000
Restricted Stock Grants [Member]
Stock Based Compensation [Line Items]
Stock Compensation Expense	13,000	8,000
Option Grants [Member]
Stock Based Compensation [Line Items]
Stock Compensation Expense	12,000	6,000
Employee Stock Purchase Plan [Member]
Stock Based Compensation [Line Items]
Stock Compensation Expense	1,000	1,000
Subsidiary Option Grants [Member]
Stock Based Compensation [Line Items]
Stock Compensation Expense	$ 24,000	$ 21,000

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Stock Based Compensation (Details 1) - Restricted Stock [Member]	3 Months Ended
	Dec. 31, 2016 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares Nonvested, Beginning Balance | shares	100,000
Shares, Granted | shares	0
Shares, Vested | shares	(10,000)
Shares, Cancelled | shares	0
Shares, Nonvested and expected to vest, Ending Balance | shares	90,000
Weighted-Average Grant-Date Fair Value, Nonvested, Beginning Balance | $ / shares	$ 1.73
Weighted-Average Grant-Date Fair Value, Granted | $ / shares	0
Weighted-Average Grant-Date Fair Value, Vested | $ / shares	1.7
Weighted-Average Grant-Date Fair Value, Cancelled | $ / shares	0
Weighted-Average Grant-Date Fair Value, Nonvested, Ending Balance | $ / shares	$ 1.73

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Stock Based Compensation (Details 2) - $ / shares	3 Months Ended	12 Months Ended
	Dec. 31, 2016	Sep. 30, 2016
Stock Option Grants [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Balance, Options Outstanding	123,147
Outstanding and exercisable, Options Outstanding	123,147	123,147
Granted, Options Outstanding	0
Exercised, Options Outstanding	0
Cancelled, Options Outstanding	0
Balance, Options Outstanding	123,147	123,147
Balance, Weighted Average Exercise Price per Share	$ 2.30
Outstanding and exercisable, Weighted Average Exercise Price per Share	2.30	$ 2.30
Granted, Weighted Average Exercise Price per Share	0
Exercised, Weighted Average Exercise Price per Share	0
Cancelled, Weighted Average Exercise Price per Share	0
Balance, Weighted Average Exercise Price per Share	$ 2.30	$ 2.30
Balance, Weighted Average Remain Contractual Term (in Years)	1 year 5 months 5 days	1 year 8 months 8 days
Outstanding and exercisable, Weighted Average Remain Contractual Term (in Years)	1 year 5 months 5 days	1 year 8 months 8 days
Subsidiary Option Grants [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Balance, Options Outstanding	613,653
Outstanding and exercisable, Options Outstanding	629,126	320,586
Granted, Options Outstanding	428,000
Exercised, Options Outstanding	0
Cancelled, Options Outstanding	0
Balance, Options Outstanding	1,041,653	613,653
Balance, Weighted Average Exercise Price per Share	$ 1
Outstanding and exercisable, Weighted Average Exercise Price per Share	1.00	$ 1.00
Granted, Weighted Average Exercise Price per Share	1
Exercised, Weighted Average Exercise Price per Share	0
Cancelled, Weighted Average Exercise Price per Share	0
Balance, Weighted Average Exercise Price per Share	$ 1	$ 1
Balance, Weighted Average Remain Contractual Term (in Years)	8 years 10 months 2 days	8 years 4 months 6 days
Outstanding and exercisable, Weighted Average Remain Contractual Term (in Years)	8 years 8 months 26 days	8 years 4 days

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Stock Based Compensation (Details 3) - Subsidiary Option Grants [Member]	3 Months Ended
	Dec. 31, 2016
Class of Stock [Line Items]
Expected term in years	10 years
Risk-free interest rate	2.37%
Expected volatility	83.12%
Expected dividend yield	0.00%

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Stock Based Compensation (Details Textual)	3 Months Ended
	Dec. 31, 2016 USD ($) $ / shares shares
Employee Stock Option [Member]
Class of Stock [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross | shares	200,000
Subsidiary Option Grants [Member]
Class of Stock [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross | shares	428,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	3 years
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term	10 years
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price | $ / shares	$ 1
Deferred Compensation Arrangement with Individual, Fair Value of Shares Issued | $	$ 75,000
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period	10 years
Deferred Compensation, Share-based Payments [Member]
Class of Stock [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross | shares	228,000
Xcede joint venture [Member] | Subsidiary Option Grants [Member]
Class of Stock [Line Items]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options | $	$ 163,000
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term	17 months
Employee Stock Plan [Member]
Class of Stock [Line Items]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options | $	$ 140,000
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Term	14 months

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Segment, Customer and Geographical Reporting (Details) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Sep. 30, 2016
Segment Reporting Information [Line Items]
Revenue	$ 9,143,000	$ 11,204,000
Gross profit	$ 3,525,000	$ 3,965,000
GM %	39.00%	35.00%
SG&A	$ 3,449,000	$ 3,805,000
Gain on sale of assets	0	(4,000)
Operating income (loss)	76,000	164,000
Depreciation and amortization	311,000	325,000
Capital expenditures	111,000	603,000
Intangibles, net	1,033,000	1,197,000	$ 1,067,000
Goodwill	5,822,000	6,094,000	5,898,000
Total assets	28,252,000	25,636,000	$ 26,369,000
Optics [Member]
Segment Reporting Information [Line Items]
Revenue	4,405,000	6,214,000
Gross profit	$ 1,574,000	$ 2,110,000
GM %	36.00%	34.00%
SG&A	$ 1,328,000	$ 1,751,000
Gain on sale of assets		4,000
Operating income (loss)	246,000	363,000
Depreciation and amortization	234,000	228,000
Capital expenditures	91,000	565,000
Intangibles, net	474,000	644,000
Goodwill	883,000	1,155,000
Total assets	18,785,000	16,506,000
Contract Research [Member]
Segment Reporting Information [Line Items]
Revenue	4,738,000	4,990,000
Gross profit	$ 1,951,000	$ 1,855,000
GM %	41.00%	37.00%
SG&A	$ 1,740,000	$ 1,706,000
Gain on sale of assets		0
Operating income (loss)	211,000	149,000
Depreciation and amortization	74,000	80,000
Capital expenditures	0	7,000
Intangibles, net	222,000	256,000
Goodwill	4,939,000	4,939,000
Total assets	8,407,000	8,273,000
Biomedical [Member]
Segment Reporting Information [Line Items]
Revenue	0	0
Gross profit	$ 0	$ 0
GM %	0.00%	0.00%
SG&A	$ 381,000	$ 348,000
Gain on sale of assets		0
Operating income (loss)	(381,000)	(348,000)
Depreciation and amortization	3,000	17,000
Capital expenditures	20,000	31,000
Intangibles, net	337,000	297,000
Goodwill	0	0
Total assets	$ 1,060,000	$ 857,000

XML

Segment, Customer and Geographical Reporting (Details 1) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	$ 9,143,000	$ 11,204,000
% of Total	100.00%	100.00%
United State [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	$ 7,189,000	$ 8,235,000
% of Total	79.00%	74.00%
Europe [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	$ 1,086,000	$ 2,041,000
% of Total	12.00%	18.00%
Other [Member]
Revenues from External Customers and Long-Lived Assets [Line Items]
Revenue	$ 868,000	$ 928,000
% of Total	9.00%	8.00%

XML

Segment, Customer and Geographical Reporting (Details Textual) - Sales Revenue, Segment [Member]	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015
Customer Five [Member]
Segment Reporting [Line Items]
Concentration Risk, Percentage		10.00%
Customer Three [Member]
Segment Reporting [Line Items]
Concentration Risk, Percentage	10.00%
Optics [Member] | Customer One [Member]
Segment Reporting [Line Items]
Concentration Risk, Percentage		10.00%

XML

Income Taxes (Details Textual) - USD ($)	3 Months Ended
	Dec. 31, 2016	Dec. 31, 2015	Nov. 18, 2016
Income Tax [Line Items]
Income Tax Expense (Benefit)	$ (2,730,000)	$ 36,000
Effective Income Tax Rate Reconciliation, Percent	679.00%
Excluding The Impact Of Valuation Allowance [Member]
Income Tax [Line Items]
Effective Income Tax Rate Reconciliation, Percent	(25.00%)	34.00%
Xcede Technologies inc [Member]
Income Tax [Line Items]
Noncontrolling Interest, Ownership Percentage by Parent	59.00%		59.00%
Income Tax Expense (Benefit)	$ 2,700,000
Federal [Member]
Income Tax [Line Items]
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	34.00%