U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2017~~

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

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

¨TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT 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~~days. YesxNo¨

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). YesxNo¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer¨	Accelerated filer¨
	Non-accelerated filer¨x	Smaller reporting companyx
	Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes¨No¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Nox

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading symbol		Name of each exchange of which registered
Common stock		DYSL		Nasdaq Capital Market

As of ~~February 6, 2018~~May 7, 2019 there were ~~17,175,175~~17,541,300 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~~MARCH 31, ~~2017~~2019 AND SEPTEMBER 30, ~~2017~~2018	3

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2017 AND 2016~~2019 and 2018	5

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE AND SIX MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2017~~2019 AND 2018	6

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ~~THREE~~SIX MONTHS ENDED ~~DECEMBER~~MARCH 31, ~~2017 AND 2016~~2019 and 2018	7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1826

Item 4. Controls and Procedures	2537

PART II. OTHER INFORMATION	2638

Item 1A. Risk Factors	2638

Item 6. Exhibits	2639

Signatures	2740

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

~~(UNAUDITED)~~

					March 31,		September 30,
					2019		2018
	December 31,		September 30,		(Unaudited)
	2017		2017
ASSETS

Current Assets
Cash and cash equivalents	$	961,000	$	2,415,000	$	350,000	$	2,327,000
Accounts receivable, net of allowances of $195,000 and $200,000 at December 31, 2017 and September 30, 2017, respectively		3,750,000		3,407,000
Costs in excess of billings and unbilled receivables		1,230,000		1,317,000
Accounts receivable, net of allowances of $267,000 and $262,000 at March 31, 2019 and September 30, 2018, respectively						3,950,000		4,069,000
Unbilled receivables						2,553,000		1,214,000
Contract assets						19,000		1,000
Inventories, net of reserves		4,491,000		4,326,000		4,525,000		4,106,000
Prepaid expenses and other current assets		792,000		973,000		847,000		664,000
Total current assets		11,224,000		12,438,000		12,244,000		12,381,000

Property, Plant and Equipment, net		7,377,000		7,032,000		8,020,000		8,098,000

Other Assets
Intangibles, net		978,000		987,000		701,000		755,000
Deferred tax asset		2,109,000		2,642,000		4,198,000		4,333,000
Goodwill		5,951,000		5,940,000		5,900,000		5,900,000
Long term contract assets						26,000		7,000
Security deposits		58,000		58,000		53,000		58,000
Total other assets		9,096,000		9,627,000		10,878,000		11,053,000

Total Assets	$	27,697,000	$	29,097,000	$	31,142,000	$	31,532,000

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Equipment line of credit					$	484,000	$	-
Current portion of long-term debt	$	1,840,000	$	2,007,000		1,307,000		1,246,000
Capital lease obligations, current		78,000		91,000
Capital lease obligations, current portion						33,000		40,000
Accounts payable		1,899,000		2,380,000		2,218,000		2,355,000
Deferred revenue		34,000		129,000
Contract liabilities						25,000		253,000
Accrued expenses and other liabilities		2,336,000		2,667,000		2,469,000		2,803,000
Total current liabilities		6,187,000		7,274,000		6,536,000		6,697,000

Long-term Liabilities
Long-term debt, net of current portion		1,358,000		1,045,000		1,660,000		2,075,000
Capital lease obligations, net of current portion		68,000		81,000		38,000		52,000
Deferred tax liability, net		236,000		234,000		205,000		205,000
Other long-term liabilities		163,000		38,000		180,000		175,000
Total long-term liabilities		1,825,000		1,398,000		2,083,000		2,507,000

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

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

~~(UNAUDITED)~~ (Continued)

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)

							March 31,			September 30,
	December 31,			September 30,			2019			2018
	2017			2017			(Unaudited)
Stockholders' Equity
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 17,929,183 and 17,893,763 shares issued, 17,119,023 and and 17,083,603 shares outstanding at December 31, 2017 and September 30, 2017, respectively.		9,000			9,000
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 18,301,216 and 18,152,074 shares issued, 17,491,056 and and 17,341,914 shares outstanding at March 31, 2019 and September 30, 2018, respectively.								9,000			9,000
Additional paid in capital		21,499,000			21,406,000			22,060,000			21,865,000
Accumulated other comprehensive income (loss)		(504,000	)		(539,000	)		(696,000	)		(700,000	)
Accumulated deficit		(1,716,000	)		(919,000	)
Retained earnings								862,000			841,000
Less 810,160 shares of treasury stock - at cost		(986,000	)		(986,000	)		(986,000	)		(986,000	)
Total Dynasil stockholders' equity		18,302,000			18,971,000			21,249,000			21,029,000
Noncontrolling interest		1,383,000			1,454,000			1,274,000			1,299,000
Total stockholders' equity		19,685,000			20,425,000			22,523,000			22,328,000

Total Liabilities and Stockholders' Equity	$	27,697,000		$	29,097,000		$	31,142,000		$	31,532,000

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

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

	Three Months Ended						Three Months Ended						Six Months Ended
	December 31,						March 31,						March 31,
	2017			2016			2019			2018			2019			2018
Net revenue	$	9,189,000		$	9,143,000		$	11,532,000		$	10,255,000		$	21,560,000		$	19,443,000
Cost of revenue		5,614,000			5,618,000			7,174,000			6,310,000			13,510,000			11,958,000
Gross profit		3,575,000			3,525,000			4,358,000			3,945,000			8,050,000			7,485,000
Operating expenses:
Sales and marketing		279,000			266,000			477,000			388,000			875,000			667,000
Research and development		308,000			196,000			147,000			215,000			324,000			524,000
General and administrative		3,157,000			2,987,000			3,410,000			3,262,000			6,652,000			6,418,000

Total operating expenses		3,744,000			3,449,000			4,034,000			3,865,000			7,851,000			7,609,000
Income (loss) from operations		(169,000	)		76,000			324,000			80,000			199,000			(124,000	)
Interest expense, net		43,000			67,000			46,000			45,000			88,000			88,000
Income (loss) before taxes		(212,000	)		9,000			278,000			35,000			111,000			(212,000	)
Income tax (benefit)		660,000			(2,730,000	)		206,000			(1,255,000	)		141,000			(595,000	)
Net income (loss)		(872,000	)		2,739,000			72,000			1,290,000			(30,000	)		383,000
Less: Net income (loss) attributable to noncontrolling interest		(75,000	)		(69,000	)
Less: Net loss attributable to noncontrolling interest								(4,000	)		(33,000	)		(13,000	)		(108,000	)
Net income (loss) attributable to common stockholders	$	(797,000	)	$	2,808,000		$	76,000		$	1,323,000		$	(17,000	)	$	491,000


Net income (loss)	$	(872,000	)	$	2,739,000		$	72,000		$	1,290,000		$	(30,000	)	$	383,000
Other comprehensive income (loss):
Foreign currency translation		35,000			(295,000	)		145,000			222,000			4,000			257,000
Total comprehensive income (loss)		(837,000	)		2,444,000			217,000			1,512,000			(26,000	)		640,000
Less: comprehensive income (loss) attributable to noncontrolling interest		(75,000	)		(69,000	)		(4,000	)		(33,000	)		(13,000	)		(108,000	)
Total comprehensive income (loss) attributable to common stockholders	$	(762,000	)	$	2,513,000		$	221,000		$	1,545,000		$	(13,000	)	$	748,000

Basic net income (loss) per common share	$	(0.05	)	$	0.17		$	0.00		$	0.08		$	(0.00	)	$	0.03
Diluted net income (loss) per common share	$	(0.05	)	$	0.17		$	0.00		$	0.08		$	(0.00	)	$	0.03

Weighted average shares outstanding
Basic								17,433,249			17,133,468			17,379,113			17,090,530
Diluted								17,433,249			17,133,468			17,379,113			17,090,530

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

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'
For the three months ended December 31, 2017 Shares Amount Capital Income (Loss) Deficit Shares Amount Interest Equity
Balance, September 30, 2017 17,893,763 $ 9,000 $ 21,406,000 $ (539,000 ) $ (919,000 ) 810,160 $ (986,000 ) $ 1,454,000 $ 20,425,000
Issuance of shares of common stock    under employee stock purchase plan 4,420 - 4,000 - - - - - 4,000

Stock-based compensation costs 31,000 - 89,000 - - - - 4,000 93,000

Foreign currency translation adjustment - - - 35,000 - - - - 35,000

Net income (loss) - - - - (797,000 ) - - (75,000 ) (872,000 )
Balance, December 31, 2017 17,929,183 $ 9,000 $ 21,499,000 $ (504,000 ) $ (1,716,000 ) 810,160 $ (986,000 ) $ 1,383,000 $ 19,685,000
Three Months Ended Six Months Ended
March 31, March 31,
2019 2018 2019 2018
Common Amount
Balance, beginning of period $ 9,000 $ 9,000 $ 9,000 $ 9,000
Balance, end of period 9,000 9,000 9,000 9,000
Additional Paid-in Capital
Balance, beginning of period 21,946,000 21,499,000 21,865,000 21,406,000
Issuance of shares of common stock under employee stock purchase plan 4,000 4,000 9,000 8,000
Stock-based compensation costs 110,000 132,000 186,000 221,000
Balance, end of period 22,060,000 21,635,000 22,060,000 21,635,000
Other Comprehensive Income (Loss)
Balance, beginning of period (841,000 ) (504,000 ) (700,000 ) (539,000 )
Foreign currency translation adjustment 145,000 222,000 4,000 257,000
Balance, end of period (696,000 ) (282,000 ) (696,000 ) (282,000 )
Retained Earnings (Accumulated Deficit)
Balance, beginning of period 770,000 (1,751,000 ) 841,000 (919,000 )
Impact of change in accounting policy - - 22,000 -
Xcede stock surrender of Series A Preferred 16,000 - 16,000 -
Net income (loss) 76,000 1,323,000 (17,000 ) 491,000
Balance, end of period 862,000 (428,000 ) 862,000 (428,000 )
Treasury Stock
Balance, beginning of period (986,000 ) (986,000 ) (986,000 ) (986,000 )
Balance, end of period (986,000 ) (986,000 ) (986,000 ) (986,000 )
Noncontrolling Interest
Balance, beginning of period 1,292,000 1,383,000 1,299,000 1,454,000
Stock-based compensation costs 2,000 5,000 4,000 9,000
Xcede stock surrender of Series A Preferred (16,000 ) - (16,000 ) -
Net income (loss) (4,000 ) (33,000 ) (13,000 ) (108,000 )
Balance, end of period 1,274,000 1,355,000 1,274,000 1,355,000
Total Stockholders' Equity $ 22,523,000 $ 21,303,000 $ 22,523,000 $ 21,303,000

Common Shares
Number of shares, beginning of period 18,198,121 17,929,183 18,152,074 17,893,763
Issuance of shares of common stock under employee stock purchase plan 5,512 3,536 11,830 7,956
Stock-based compensation costs 97,583 76,152 137,312 107,152
Number of shares, end of period 18,301,216 18,008,871 18,301,216 18,008,871
Treasury Shares
Number of shares, beginning of period 810,160 810,160 810,160 810,160
Number of shares, end of period 810,160 810,160 810,160 810,160

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 Six Months Ended
December 31, March 31,
2017 2016 2019 2018
Cash flows from operating activities:
Net income (loss) $ (872,000 ) $ 2,739,000 $ (30,000 ) $ 383,000
Adjustments to reconcile net income (loss) to net cash:
Stock compensation expense 93,000 89,000 190,000 230,000
Foreign exchange loss (gain) (7,000 ) 41,000 8,000 (33,000 )
Depreciation and amortization 299,000 311,000 693,000 610,000
Deferred income taxes 533,000 (2,730,000 ) 136,000 (710,000 )
Non-cash R&D services 163,000 38,000 - 200,000
Other 44,000 35,000 14,000 50,000
Other changes in assets and liabilities:
Accounts receivable, net (333,000 ) (374,000 ) 120,000 (811,000 )
Unbilled receivables (1,299,000 ) 472,000
Contract assets (37,000 ) -
Inventories (198,000 ) (280,000 ) (437,000 ) (279,000 )
Costs in excess of billings and unbilled receivables 88,000 249,000
Prepaid expenses and other assets 51,000 189,000 (180,000 ) 189,000
Accounts payable (483,000 ) (99,000 ) (137,000 ) (646,000 )
Accrued expenses and other liabilities (236,000 ) (790,000 ) (335,000 ) 123,000
Deferred revenue (95,000 ) 2,000
Contract liabilities (228,000 ) (3,000 )
Net cash from operating activities (953,000 ) (580,000 ) (1,522,000 ) (225,000 )

Cash flows from investing activities:
Purchases of property, plant and equipment (609,000 ) (91,000 ) (561,000 ) (1,005,000 )
Purchase of intangibles (16,000 ) (20,000 ) - (45,000 )
Net cash from investing activities (625,000 ) (111,000 ) (561,000 ) (1,050,000 )

Cash flows from financing activities:
Proceeds from issuance of common stock 4,000 4,000 10,000 8,000
Principal payments on capital leases (26,000 ) (28,000 ) (21,000 ) (50,000 )
Proceeds from (payments of) equipment line of credit, net 281,000 - 484,000 281,000
Proceeds from (payments of) bank and subordinated debt, net (141,000 ) (219,000 ) (360,000 ) (277,000 )
Net cash from financing activities 118,000 (243,000 ) 113,000 (38,000 )

Effect of exchange rates on cash and cash equivalents 6,000 (49,000 ) (7,000 ) 28,000

Net change in cash and cash equivalents (1,454,000 ) (983,000 ) (1,977,000 ) (1,285,000 )

Cash and cash equivalents, beginning $ 2,415,000 $ 2,607,000 $ 2,327,000 $ 2,415,000
Cash and cash equivalents, ending $ 961,000 $ 1,624,000 $ 350,000 $ 1,130,000

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 37,000 $ 47,000 $ 83,000 $ 77,000
Tax payments (refunds) 4,000 - (5,000 ) 5,000
Non cash activities:
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
Xcede stock surrender of Series A Preferred 18,000 -

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~~March 31, ~~2017,~~2019, the consolidated statements of operations and comprehensive income (loss) for the three and six months ended ~~December~~March 31, ~~2017~~2019 and ~~2016,~~2018, changes in stockholders’ equity for the three and six months ended ~~December~~March 31, ~~2017~~2019 and 2018, and cash flows for the ~~three~~six months ended ~~December~~March 31, ~~2017~~2019 and ~~2016~~2018 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~~March 31, ~~2017,~~2019, Dynasil Biomedical owned ~~62%~~63% of Xcede’s stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. The remaining ~~38%~~37% of Xcede’s stock is owned by others and is 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, ~~2017~~2018 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~~March 31, ~~2017,~~2019, 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, ~~2017,~~2018, the Company adopted Accounting Standards Codification (“ASC”) 606,Revenue from Contracts with Customers, and all the ~~guidance issued in Accounting Standard Update 2016-09,~~~~Improvements to Employee Share-Based Payment Accounting,~~ which intends to simplify various aspects of how share-based payments are accounted for and presented in financial statements. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The new standard contains severalrelated amendments ~~that will simplify~~using the ~~accounting for employee share-based payment transactions, including~~modified retrospective transition method. Under the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. In addition, the new standard eliminates the limitation on recognition of excess stock compensation benefits until such benefits are actually realized, and instead applies the general recognition standard to these deferred tax assets. This standard will be applied using a modified retrospective approach, the Company applied the standards to new contracts and those that were not completed as of October 1, 2018 which resulted in a cumulative adjustment to increase the retained earnings in the amount of $22,000. Prior periods will not be retrospectively adjusted, but the Company will ~~recognize forfeitures~~maintain dual reporting for the year of ~~awards as they occur.~~initial application in order to maintain comparability of the periods presented. The cumulative effect of the changes made to the October 1, 2018 unaudited consolidated balance sheet for the adoption of ~~the ASU had no impact on the retained earnings, other components of equity or net assets~~Topic 606 was as of the beginning of the period of adoption. For the three month period ended December 31, 2017, the Company recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. The Company has elected to present the cash flow statement on a prospective transition method and no prior periods have been adjusted.follows:
8

Balance at Adjustment for Adjusted balance at
September 30, 2018 Topic 606 October 1, 2018
Assets:
Unbilled receivables 1,214,000 40,000 1,254,000
Inventories, net of reserves 4,106,000 (18,000 ) 4,088,000

Liabilities:

Contract liabilities 253,000 - 253,000

Stockholders' equity:
Retained earnings 841,000 22,000 863,000
~~Effective~~Contract assets were formerly reported within costs in excess of billings and unbilled receivables. Contract liabilities were formerly reported as deferred revenue. The titles have been changed in the table below to be consistent with accounts currently used under the new standard.
September 30, 2018
As Reported As Adopted
Unbilled receivables 1,215,000 1,214,000
Contract assets - 1,000
Security and other deposits 65,000 58,000
Long term contract assets - 7,000
Deferred revenue 253,000 -
Contract liabilities - 253,000
The Company receives payments from customers based on a billing schedule as established in our contracts. Contract asset relates to our conditional right to consideration for our completed performance under the contract. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract liability relates to payments received in advance of performance under the contract. Contract liabilities are recognized as revenue as (or when) we perform under the contract. The Company recognized revenue in the amount of $137,000 during the three months ended March 31, 2019 and $252,000 during the six months ended March 31, 2019 for amounts included in the contract liability balance at September 30, 2018.
Under the new standard, most contracts in the Innovation and Development (formerly Contract Research) segment, which primarily provide contract research services, were not materially impacted upon the adoption of Topic 606 as revenue will continue to be recognized over time. Contracts in the Optics segment generally provide for the following revenue sources: standard product sales, custom product development and sales, and non-recurring engineering contracts. Revenues for this segment are recognized using either the “point in time” or “over time” methods of Topic 606, depending upon the revenue source. The change in revenue recognition for the Optics segment related to certain custom optics products and the related non-recurring engineering costs which changed from “point in time” to “over time” upon the adoption of Topic 606. This change will result in the recognition of revenue over time when compared to existing standards with the cumulative adjustment relating to contracts that are not complete as of September 30, 2018 recognized as an adjustment of $22,000 to opening retained earnings on October 1, ~~2017,~~2018. The revenue for the standard products will be recognized using the "point in time" model of Topic 606, and the timing of such revenue recognition is not expected to differ materially from the historical revenue recognition. Other immaterial adjustments related to the Optics segment that are sometimes offered to customers include customer rights of return and volume discounts. The Company has elected the practical expedient that the Company ~~adopted~~will not be required to adjust promised amounts of consideration for the ~~guidance issued in Accounting Standard Update 2016-17,~~~~Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control~~~~, which amends the consolidation guidance on how a reporting entity that is the single decision maker~~effects of a ~~VIE should treat indirect interests~~significant financing component if the transfer of promised goods or services will occur in ~~the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary~~one year or less.
9
The impact of ~~that VIE. The~~the adoption of ~~this ASU did not have an impact~~ASC 606 on the Company’s consolidated financial ~~statements.~~statements for the three and six months ended March 31, 2019 was immaterial as compared to what would have been reported under the previous guidance.
Innovation and Development Segment Revenues
The Company performs research and development for U.S. Federal government agencies, educational institutions and commercial organizations. The Company accounts for a research contract when a contract has been executed, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of the contract price is considered probable. Revenue ~~from Contracts with Customers (Topic 606) Section A—Summary~~is earned under reimbursement of costs plus fees, fixed price, or time 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 which outlines a single comprehensive model for entities to use in accounting for revenue arising from~~material type contracts.
The Company’s contracts with agencies of the U.S. government are subject to periodic funding by the respective contracting agency. Funding for a contract may be provided in full at inception of the contract or ratably throughout the contract as the services are provided. In evaluating the probability of funding for purposes of assessing collectability of the contract price, the Company considers previous experience with the customers, communication with the customers regarding funding status, and ~~supersedes most current~~knowledge of available funding for the contract or program. If funding is not assessed as probable, revenue recognition ~~guidance, including industry-specific guidance. Using~~is deferred until realization is reasonably assured.
Under the typical payment terms of the Company’s U.S. government contracts, the customer pays either performance-based payments or progress payments. Performance-based payments, which are typically used in the firm fixed price contracts, are interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments, which are typically used in the Company’s cost-plus type contracts, are interim payments based on costs incurred as the work progresses. For the Company’s U.S. government cost-plus contracts, the customer generally pays during the performance period for 80%-90% of the actual costs incurred. Because the customer retains a small portion of the contract price until completion of the contract and audit of allowable costs, cost-plus type contracts generally result in revenue recognized in excess of billings which the Company presents as contract assets on the balance sheet. Amounts billed and due from customers are classified as receivables on the balance sheet, whereas amounts earned, but not yet billed to the Company’s customers due to timing, are classified as unbilled receivables on the balance sheet. The Company recognizes a liability for performance-based payments paid in advance which are in excess of the revenue recognized and presents these ~~guidelines, a comprehensive framework was established~~amounts as contract liabilities on the balance sheet.
To determine the proper revenue recognition method for ~~determining how much revenue to recognize~~research and ~~when it~~development contracts, the Company evaluates whether two or more contracts should be ~~recognized.~~combined and accounted for as one single modified contract and whether the combined or single contract should be accounted for as more than one performance obligation. For instances where a contract has options that were bid with the initial contract and awarded at a later date, the Company combines the options with the original contract when options are awarded. For most contracts, the customer contracts for research with multiple milestones that are interdependent, thus, the entire contract is accounted for as one performance obligation. The ~~standard~~effect of the combined or modified contract on the transaction price and measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
Contract revenue recognition is measured over time as the Company performs the work because of continuous transfer of knowledge and control to the customer. For U.S. government contracts which are typically subject to the Federal Acquisition Regulation ("FAR"), this continuous transfer of knowledge and control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay for cost incurred plus a reasonable profit, and take control of any work in process. From time to time, as part of normal management processes, facts may change, causing revisions to estimated total costs or revenues expected. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.
10
Because of knowledge and control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the ~~principle~~nature of the services to be provided. The Company generally uses the input method, more specifically the cost-to-cost measure of progress for the contracts because it best depicts the transfer of knowledge and control to the customer which occurs as the Company incur costs on these contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. The underlying bases for estimating contract research revenues are measurable expenses, such as labor, subcontractor costs and materials, and data that are updated on a regular basis for purposes of preparing cost estimates. The Company’s research contracts generally have a period of performance of six months to three years, and estimates of contract costs have historically been consistent with actual results. Revisions in these estimates between accounting periods to reflect changing facts and circumstances have not had a material impact on operating results, and the Company does not expect future changes in these estimates to be material. The cumulative impact of any revisions to estimates and the full impact of anticipated losses on any type of contract are recognized in the period in which they become known.
Under cost-plus contracts, the Company is reimbursed for costs that are determined to be reasonable, allowable and allocable to the contract and paid a fixed fee representing the profit negotiated between the Company and the contracting agency. Revenue from cost-plus contracts is recognized as costs are incurred plus an ~~entity should~~estimate of applicable fees earned. The Company considers fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of the contract.
Revenue from time and materials contracts is recognized based on direct labor hours expended at contract billing rates plus other billable direct costs. The Company has elected the practical expedient to recognize revenue in the amount for which it has the right to ~~depict~~invoice the ~~transfer~~customer, provided that invoiced amount corresponds directly with the value to the customer of the Company’s performance to date.
Fixed price contracts may include either a product delivery or specific service performance throughout a period. For fixed price contracts that are based on the proportional performance method and involve a specified number of deliverables, the Company recognizes revenue based on the proportion of the cost of the deliverables compared to the cost of all deliverables included in the contract as this method more accurately measures performance under these arrangements. For fixed price contracts that provide for the development and delivery of a specific prototype or product, revenue is recognized based upon the performance completed to date, using an output method of revenue recognition based on milestones reached.
Whether certain costs under government contracts are allowable is subject to audit by the government. Certain indirect costs are charged to contracts using provisional or estimated indirect rates, which are subject to later revision based on government audits of those costs. Management is of the opinion that costs subsequently disallowed, if any, would not likely have a significant impact on revenues recognized for those contracts.
11
Optics Segment Revenues
The Company produces standard and customized products for commercial organizations, educational institutions, and U.S. Federal government agencies. In addition, the Company also offers services which include non-recurring engineering services. To determine the proper revenue recognition method for Optics contracts, the Company evaluates whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. The Company recognizes revenue when the performance obligation has been satisfied by transferring the control of the product or service to the customer. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation based on their relative stand-alone selling prices. In such circumstances, the Company uses the observable price of goods or services which are sold separately in similar circumstances to ~~customers~~similar customers. If these prices are not observable, then the Company will estimate the stand-alone selling price using information that is reasonably available. For the majority of the Company’s standard products and services, price list, and discount structures related to customer type are available. For products and services that do not have price list and discount structures, the Company may use one or more of the following: (i) adjusted market assessment approach or (ii) expected cost plus a margin approach. The adjusted market approach requires evaluation of the market in ~~an amount that reflects the consideration to~~ which the ~~entity expects~~Company sells goods or services and estimates the price that a customer in that market would be willing to ~~be entitled in exchange~~pay for those goods or services. ~~ASU 2014-09 also~~The expected cost plus margin approach requires ~~additional disclosure about~~the Company to forecast expected costs of satisfying the performance obligation and then add a reasonable margin for that good or service. Shipping and handling activities primarily occur after a customer obtains control and are considered fulfillment cost rather than separate performance obligations. Similarly, sales and similar taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer are excluded from the measurement of the transaction price.
Unfulfilled Performance Obligations
For standard products, the Company recognizes revenue at a point in time when control passes to the customer. Absent substantial product acceptance clauses, this is based on the shipping terms. For custom products that require engineering and development based on customer requirements and provide for cost plus reasonable margin throughout the contract, the Company recognizes revenue over time using the output method for any items shipped and any finished goods or work in process that is produced for balances of open sales orders. For any finished goods or work in process that has been produced for the balance of open sales orders the Company recognizes revenue by applying the average selling price for such open order to the lesser of the on hand balance in finished goods or open sales order quantity which the Company presents as a contract asset on the balance sheet. Cost of sales is recognized based on the standard cost of the finished goods and work in process associated with this revenue and inventory balances are reduced accordingly.
Unfulfilled performance obligations represent amounts expected to be earned on executed contracts. Indefinite delivery and quantity contracts and unexercised options are not reported in total unfulfilled performance obligations. Unfulfilled performance obligations include funded obligations, which is the amount for which money has been directly authorized by the U.S. government and by a commercial customer for which a purchase order has been received, and unfunded obligations, representing firm orders for which funding has not yet been appropriated. The approximate value of our Innovation and Development segment unfulfilled performance obligations was $32.8 million at March 31, 2019. The Company expects to satisfy 46% of the performance obligations in fiscal year 2019, 41% in fiscal year 2020, and the remaining amount by fiscal year 2024. The approximate value of our Optics segment unfulfilled performance obligations was $3.2 million at March 31, 2019. The Company expects to satisfy 86% of the performance obligations in fiscal year 2019 and 14% in fiscal year 2020.
The Company disaggregates revenue from contracts with customers by geographic locations, customer-type, contract type, timing of recognition, and major categories for each segments, as the Company believes it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows ~~arising from customer contracts, including significant judgments and changes~~are affected by economic factors. See details in ~~judgments and assets recognized from costs incurred to fulfill a contract. Entities have~~ the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. At this time, the Company plans to adopt this standard through the modified retrospective approach. The ASU becomes effective for the Company at the beginning of its 2019 fiscal year. In 2016 and 2017, the FASB issued several ASU’s related to ASU 2014-09, which simplify and provide additional guidance to companies for implementation of the standard. To be consistent with this core principle, an entity is required to apply the following five-step approach:tables below.

•12 ~~Identify the contract(s) with a customer;~~
• ~~Identify each performance obligation in the contract;~~
• ~~Determine the transaction price;~~
• ~~Allocate the transaction price to each performance obligation; and~~
• ~~Recognize revenue when or as each performance obligation is satisfied.~~

~~The Company is currently evaluating how~~
Three Months Ended March 31, 2019 Six Months Ended March 31, 2019
Optics Innovation &
Development Total Optics Innovation &
Development Total
Total Revenue by Geographic Location
United States $ 3,605,000 $ 5,168,000 $ 8,773,000 $ 6,880,000 $ 9,353,000 $ 16,233,000
Asia 858,000 7,000 865,000 1,773,000 22,000 1,795,000
Europe 1,701,000 12,000 1,713,000 3,186,000 51,000 3,237,000
Other 62,000 119,000 181,000 108,000 187,000 295,000
Total $ 6,226,000 $ 5,306,000 $ 11,532,000 $ 11,947,000 $ 9,613,000 $ 21,560,000

Total Revenue by Contract Type
Firm-fixed price $ 6,226,000 $ 605,000 $ 6,831,000 $ 11,947,000 $ 1,163,000 $ 13,110,000
Non-Firm Fixed price - 4,701,000 4,701,000 - 8,450,000 8,450,000
Total $ 6,226,000 $ 5,306,000 $ 11,532,000 $ 11,947,000 $ 9,613,000 $ 21,560,000

Total Revenue by Major Customer Type
U.S. government revenue $ - $ 5,035,000 $ 5,035,000 $ 3,000 $ 9,216,000 $ 9,219,000
U.S. commercial revenue 3,605,000 132,000 3,737,000 6,877,000 137,000 7,014,000
Foreign commercial and other revenue 2,621,000 139,000 2,760,000 5,067,000 260,000 5,327,000
Total $ 6,226,000 $ 5,306,000 $ 11,532,000 $ 11,947,000 $ 9,613,000 $ 21,560,000

Total Revenue by Major Products/Services
Optical components $ 6,194,000 $ - $ 6,194,000 $ 11,833,000 $ - $ 11,833,000
Contract research - 5,223,000 5,223,000 - 9,421,000 9,421,000
Other products and services 32,000 83,000 115,000 114,000 192,000 306,000
Total $ 6,226,000 $ 5,306,000 $ 11,532,000 $ 11,947,000 $ 9,613,000 $ 21,560,000

Total Revenue by Timing of Recognition
Goods/services transferred over time $ 508,000 $ 5,223,000 $ 5,731,000 $ 1,068,000 $ 9,421,000 $ 10,489,000
Goods transferred at a point in time 5,718,000 83,000 5,801,000 10,879,000 192,000 11,071,000
Total $ 6,226,000 $ 5,306,000 $ 11,532,000 $ 11,947,000 $ 9,613,000 $ 21,560,000
Service Concession Arrangements (Topic 853): Determining the ~~adoption~~Customer of ~~ASU 2014-09 will impact its consolidated financial statements and results of operations by applying~~ the five-step approach to each revenue stream. This evaluation includes completing an inventory of revenue streams by like contracts to allow for ease of implementation, monitoring developments for the manufacturing industry and government contractors, and evaluating potential changes to our business processes, systems, and controls to support the recognition and disclosure under the new standard. The Company has engaged a third party to assist in evaluating the impact of this new standard on its consolidated financial statements and related disclosures. The Company plans to complete the conversion and implementation phases by the end of fiscal year 2018 in conjunction with future interpretative guidance.
~~Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.~~Operation Services.In May 2017, the FASB issued ASU ~~No. 2017-09~~2017-10 which ~~was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity~~provides guidance for operating entities when ~~applying the guidance in Topic 718, “Compensation – Stock Compensation” to changes in the terms and conditions of~~they enter into a ~~share-based payment award.~~service concession arrangement with a public-sector grantor. This update is required beginning with the Company’s 2019 fiscal year and should be applied prospectively to award modifications after the effective date. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.
~~Business Combinations (Topic 805): Clarifying the Definition of a Business:~~In January 2017, the FASB issued ASU 2017-01 which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for the Company in the fiscal year beginning October 1, ~~2018.~~2018, at the time the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company ~~is currently in the process of assessing the impact of~~implemented this ASU on ~~its~~October 1, 2018 and it is not expected to have a material impact on the Company’s consolidated financial ~~statements.~~position, results of operations or cash flows.
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.In October 2016, the FASB issued ASU 2016-16 which eliminates the exception, other than for inventory transfers, under current U.S. GAAP under which the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. Upon adoption of ASU 2016-16, the Company will recognize the tax expense from the sale of that asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. ~~This new guidance is effective for the Company beginning in fiscal 2019, with early adoption permitted.~~ Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. The cumulative-effect adjustment, if any, would consist of the net impact from (1) the write-off of any unamortized tax expense previously deferred and (2) recognition of any previously unrecognized deferred tax assets, net of any necessary valuation allowances. The impact of the adoption of this standard ison future periods will be dependent on future asset transfers, which generally occur in connection with acquisitions and other business structuring activities. The Company implemented this ASU on October 1, 2018 and it did not ~~expected to~~ have a material impact on the Company’s consolidated financial ~~statements.~~position, results of operations or cash flows.
913

~~Service Concession Arrangements~~Business Combinations (Topic ~~853)~~805): ~~Determining~~Clarifying the ~~Customer~~Definition of a Business. In January 2017, the ~~Operation Services.~~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 Company implemented this ASU on October 1, 2018 and it did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.In May 2017, the FASB issued ASU ~~2017-10~~No. 2017-09 which ~~provides~~was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance ~~for operating entities when they enter into~~in Topic 718, “Compensation – Stock Compensation” to changes in the terms and conditions of a ~~service concession arrangement with a public-sector grantor. The ASU becomes~~share-based payment award. This update is effective for the Company atin the ~~beginning of its 2019~~ fiscal year ~~at the time the Company adopts Accounting Standards Update No. 2014-09,~~~~Revenue from Contracts with Customers~~ ~~(Topic 606).~~beginning October 1, 2018. The ~~Company is currently in the process of assessing the impact~~adoption of this ~~ASU~~standard did not have a material impact on ~~its~~the Company’s consolidated financial ~~statements.~~position, results of operations, or cash flows.
Leases (Topic 842). In February 2016, the FASB issued ASU ~~No.~~ 2016-02 ~~Leases (Topic 842),~~(as subsequently amended by ASU 2018-01, ASU 2018-10, ASU 2018-11 and ASU 2018-20) which requires ~~lessees~~that a lessee recognize in the statement of financial position a liability to ~~put most~~make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases ~~on their balance sheets~~with a term of 12 months or less, a lessee is permitted to make an accounting policy election by ~~recognizing~~class of underlying asset not to recognize lease assets and lease liabilities. As with previous guidance, there continues to be a ~~lessee’s rights~~differentiation between finance leases and ~~obligations, while expenses~~operating leases, however this distinction now primarily relates to differences in the manner of expense recognition over time and in the classification of lease payments in the statement of cash flows. Lease assets and liabilities arising from both finance and operating leases will ~~continue to~~ be recognized in the statement of financial position. ASU 2016-02 leaves the accounting for leases by lessors largely unchanged from previous GAAP. The transitional guidance for adopting the requirements of ASU 2016-02 calls for a ~~similar manner~~modified retrospective approach that includes a number of optional practical expedients that entities may elect to ~~today’s legacy lease accounting guidance. This~~apply. In addition, ASU ~~could also significantly affect~~2018-11 provides for an additional (and optional) transition method by which entities may elect to initially apply the ~~financial ratios used for external reporting~~transition requirements in Topic 842 at that Topic’s effective date with the effects of initially applying Topic 842 recognized as a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption and ~~other purposes, such~~without retrospective application to any comparative prior periods presented. Also, ASU 2018-20 provides certain narrow-scope improvements to Topic 842 as ~~debt covenant compliance. This new~~it relates to lessors. The guidance isin ASU 2016-02 will become effective for the Company as of the beginning inof the 2020 fiscal ~~2020, with early adoption permitted.~~year. The Company ~~is currently in the process of~~has begun reviewing vendor relationships and assessing the impact of this ASU on its consolidated financial statements with the intention to adopt this ASU in fiscal year 2020.

Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ~~Impairment:~~Impairment. In January 2017, the FASB issued ASU 2017-04 which simplifies the test for goodwill ~~impairment.~~impairment by eliminating Step 2 from the Goodwill impairment test. This new guidance is effective for the Company beginning in fiscal year 2021. The ~~Company is currently in the process of assessing the impact~~adoption of this ~~ASU~~standard is not expected to have a material impact on ~~its consolidated~~the Company’s financial statements.

~~On December 22, 2017, the date the Tax Cuts and Jobs Act (“2017 Tax Act”) was signed into law, the Securities and Exchange Commission staff issued~~~~Staff Accounting Bulletin No. 118~~ (“SAB 118”) which provides guidance regarding accounting for the income tax effects of the Tax Cuts Act, including the impact of the Tax Cuts Act on deferred tax assets and liabilities for financial statements issued in the reporting period that includes the enactment date of December 22, 2017. The Company estimated and accounted for the tax implications of the Tax Cuts Act in the quarter ended December 31, 2017 and the resultant changes are reflected in the current financial statements.
14

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 $5.2 million in the aggregate principal amount of convertible notes bearing interest at 5% (“the Notes”) ~~pursuant to a note purchase agreement dated October 2013 and most recently amended in~~. In November ~~2016 that provided for the issuance~~ of ~~up to $5.2 million in the aggregate principal amount of~~2016, 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, of which $0.9 million has been invested as of December 31, 2017 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 in the quarter ended December 31, 2016. Fair value was determined by management based on an independent valuation using a market and income approach and an option pricing model to allocate value to the respective shares. The fair value of the Series A Preferred was approximately $3.6 million on the date of issuance, as compared to the carrying value of the convertible principal and accrued interest of $5.5 million, resulting in a gain of approximately $1.9 million. Due to the related party nature of the transaction, this gain was recorded within the equity of Xcede. Of that $1.9 million, approximately $1.6 million was attributed to DBM and eliminated in consolidation, and approximately $0.3 million was attributed to noncontrolling interest.
10
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.
Additionally, DBM invested $1.2 million of cash into Xcede in exchange for Series B convertible preferred stock of Xcede (“Series B Preferred”). Series A Preferred was issued at a 20% discount to the price per share of the Series B Preferred, in accordance with the amended provisions of the Notes. The value of ~~which~~DBM’s Series A Preferred and Series B Preferred, as they are wholly owned by DBM, is eliminated in consolidation.

Each share of Series A Preferred and Series B Preferred (together “the Preferred Stock”) ~~shall be~~is 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~~is entitled to 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~~March 31, ~~2017,~~2019, the liquidation value of the Series B Preferred would be approximately ~~$1.1~~$1.5 million and the Series A Preferred would be approximately $5.5 million, of which $2.4 million is DBM’s portion and $3.1 million would be attributed to noncontrolling shareholders.

As of ~~December~~March 31, ~~2017,~~2019, DBM owned approximately ~~62%~~63% of Xcede’s outstanding Common Stock and Preferred Stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. Due to the Series A Preferred having a liquidation preference and therefore not representing a residual interest, cumulative net losses of Xcede are attributed only to common stockholders in accordance with common stock ownership. Noncontrolling interest represents the value of the Series A Preferred and common stock not owned by DBM plus 17% of cumulative losses of Xcede based on the 17% common stock ownership held by noncontrolling interests.

Due to the issuance of Preferred Stock, DBM’s ownership percentage in Xcede decreased to less than 80%. Based on this ownership percentage, beginning in fiscal year 2017, Xcede is no longer included in the Dynasil consolidated federal tax return and the Company is no longer able to offset taxable income or benefit from net operating losses and other tax attributes related to Xcede. (See Note 11 – Income Taxes.)
~~As previously disclosed, in January~~In 2016, Xcede ~~announced that it had~~ signed ~~three~~ agreements with Cook Biotech Inc. ~~of West Lafayette, Indiana~~ (“~~Cook”~~CBI”)~~, including a Development Agreement, a License Agreement and a Supply Agreement,~~ in connection with the development, regulatory approval and production of Xcede’s hemostatic patch ~~(“Xcede’s~~(the “Xcede Patch”). In November 2016, Xcede entered into another Services Agreement, a Secured Promissory Note, a Loan Agreement, a Security Agreement and an Intellectual Property Security Agreement (collectively the “Note Agreement”) with Cook, in which ~~Cook~~CBI committed to fund up to $1.5 million for 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,~~Xcede utilized $0.5 million in CBI services in exchange for a note that is currently outstanding.
On July 20, 2018, Xcede received a notice of termination from CBI claiming that the ~~services performed by Cook,~~results of a recent animal study showed that it is not commercially reasonable, in CBI’s assessment, to continue to the next development phase of the Patch.
In light of the foregoing, Xcede has ~~committed~~halted clinical trial preparations at this time and has curtailed its operations to a ~~multiple draw credit facility in~~minimal level while the ~~aggregate amount not~~Board of Directors of Xcede evaluates alternatives, including the viability of modifying the Xcede Patch to ~~exceed $1.5 million. Three draws~~address the shortcomings cited by CBI and/or the possible sale or license of ~~principal~~Xcede IP assets, subject to amending CBI’s security interest. Additionally, Xcede and the Company’s RMD subsidiary have begun an investigation of possible continued development of the Xcede Patch, which includes seeking government funding of this development. In April 2019, RMD filed an application for a Phase I SBIR grant for $225,000, which is currently being reviewed. There can be no assurances with respect to any such alternatives or that any additional outside funding to continue development of the Xcede Patch 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 note is recorded at fair value net of unamortized discount based on an imputed interest rate of 5.4%. The outstanding principal and unpaid interest are due and payable in full at the earlier of closing of an acquisition transaction or December 31, 2025. Xcede will recognize research and development expense as the related services are performed by Cook. There was approximately $163,000 and $38,000 of research and development expense recognized during the three months ended December 31, 2017 and 2016, respectively.Xcede.

1115

Note 4 –- Inventories

Inventories, net of reserves, consists of the following:

December 31, September 30, March 31, September 30,
2017 2017 2019 2018
Raw Materials $ 2,647,000 $ 2,540,000 $ 2,626,000 $ 2,362,000
Work-in-Process 806,000 798,000 930,000 890,000
Finished Goods 1,038,000 988,000 969,000 854,000
$ 4,491,000 $ 4,326,000 $         4,525,000 $ 4,106,000

Note 5 – Intangible Assets

Intangible assets at ~~December~~March 31, ~~2017~~2019 and September 30, ~~2017~~2018 consist of the following:

Useful Gross Accumulated
December 31, 2017 Life (years) Amount Amortization Net
Acquired Customer Base 5 to 15 $ 741,000 $ 570,000 $ 171,000
Know How 15 512,000 324,000 188,000
Trade Names Indefinite 282,000 - 282,000
Patents 20 348,000 11,000 337,000
Biomedical Technologies 5 260,000 260,000 -
$ 2,143,000 $ 1,165,000 $ 978,000
Useful Gross Accumulated
September 30, 2017 Life (years) Amount Amortization Net
Acquired Customer Base 5 to 15 $ 737,000 $ 551,000 $ 186,000
Know How 15 512,000 316,000 196,000
Trade Names Indefinite 281,000 - 281,000
Patents 20 333,000 9,000 324,000
Biomedical Technologies 5 260,000 260,000 -
$ 2,123,000 $ 1,136,000 $ 987,000
Useful Gross Accumulated
March 31, 2019 Life (years) Amount Amortization Net
Acquired Customer Base 5 to 15 $ 719,000 $ 633,000 $ 86,000
Know How 15 512,000 367,000 145,000
Trade Names Indefinite 273,000 - 273,000
Patents 20 223,000 26,000 197,000
Biomedical Technologies 5 260,000 260,000 -
$ 1,987,000 $ 1,286,000 $ 701,000

Useful Gross Accumulated
September 30, 2018 Life (years) Amount Amortization Net
Acquired Customer Base 5 to 15 $ 719,000 $ 601,000 $ 118,000
Know How 15 512,000 350,000 162,000
Trade Names Indefinite 272,000 - 272,000
Patents 20 223,000 20,000 203,000
Biomedical Technologies 5 260,000 260,000 -
$ 1,986,000 $ 1,231,000 $ 755,000

Amortization expense for the three months ended ~~December~~March 31, ~~2017~~2019 and ~~2016~~2018 was $27,000 and $28,000, respectively. Amortization expense for the six months ended March 31, 2019 and ~~$26,000,~~2018 was $54,000 and $56,000, respectively.
16

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

2018 (9 months) 2019 2020 2021 2022 Thereafter Total
Acquired Customer Base $ 60,000 $ 80,000 $ 31,000 $ - $ - $ - $ 171,000
Know How 26,000 34,000 34,000 34,000 34,000 26,000 188,000
Patents 9,000 11,000 11,000 11,000 11,000 162,000 215,000
$ 95,000 $ 125,000 $ 76,000 $ 45,000 $ 45,000 $ 188,000 $ 574,000
~~As of December 31, 2017, Xcede had $122,000 in patents that have not been granted, therefore, the amortization related to these patents is not included in the five-year amortization table above.~~
2019 (6 months) 2020 2021 2022 2023 Thereafter Total
Acquired Customer Base $ 40,000 $ 46,000 $ - $ - $ - $ - $ 86,000
Know How 17,000 34,000 34,000 34,000 26,000 - 145,000
Patents 6,000 11,000 11,000 11,000 11,000 147,000 197,000
$ 63,000 $ 91,000 $ 45,000 $ 45,000 $ 37,000 $ 147,000 $ 428,000

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~~six months ended ~~December~~March 31, ~~2017.~~2019 and 2018.
12

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~~six months ended ~~December~~March 31, ~~2017.~~2019 and 2018.

Note 7 – Debt

Subordinated Debt

On ~~January 3,~~November 27, 2018, the Company amended the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the loan and defer principal repayment requirements to November 30, ~~2018.~~2019. Such amendment also ~~increased~~extended the ~~interest rate of the note~~maturity date from ~~six percent (6%)~~July 31, 2019 to ~~seven percent (7%) per annum.~~November 30, 2021.

17

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 the three and six months ended ~~December~~March 31, ~~2017,~~2019 and 2018, no common share equivalents related to stock options or unvested restricted stock were included in the calculation of dilutive shares, since there was a loss attributable to common shareholders and the inclusion of common share equivalents would be anti-dilutive.
~~For purposes of computing diluted earnings per share for the three months ended December 31, 2016, no common~~ stock options were included in the calculation of dilutive shares, as all of the ~~123,147~~95,602 and 160,537 common stock options outstanding, respectively, had exercise prices above the applicable ~~quarterly~~period’s average market price per share and ~~their~~the inclusion of common share equivalents would be anti-dilutive.
~~For~~ Additionally, for the three and six months ended ~~December~~March 31, ~~2016, 90,000~~2019 and 2018, 30,000 and 40,000 shares of restricted common stock were excluded from the calculation of dilutive shares, respectively, as the effect of their inclusion would be anti-dilutive.
13

The computation of the weighted shares outstanding for the three months ended ~~December~~March 31, ~~2017~~2019 and ~~2016~~2018 is as follows:

December 31, 2017 December 31, 2016 March 31, 2019 March 31, 2018
Weighted average shares outstanding
Basic 17,047,690 16,808,729 17,433,249 17,133,468
Effect of dilutive securities
Stock options - -
Restricted stock - -
Dilutive average shares outstanding 17,047,690 16,808,729
Stock Options - -
Restricted Stock - -
Dilutive Average Shares Outstanding 17,433,249 17,133,468
The computation of the weighted shares outstanding for the six months ended March 31, 2019 and 2018 is as follows:
March 31, 2019 March 31, 2018
Weighted average shares outstanding
Basic 17,379,113 17,090,530
Effect of dilutive securities
Stock Options - -
Restricted Stock - -
Dilutive Average Shares Outstanding 17,379,113 17,090,530

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.

18
As of March 31, 2019, DBM owned approximately 63% of Xcede’s outstanding Common Stock and Preferred Stock. No significant change in the Company’s position with respect to the ownership of Xcede’s stock occurred during the three months ended March 31, 2019.
Stock compensation expense for the three and six months ended ~~December~~March 31, ~~2017~~2019 and ~~2016~~2018 is as follows:

Three Months Ended Three Months Ended
Stock Compensation Expense December 31, 2017 December 31, 2016
Stock grants $ 39,000 $ 39,000
Restricted stock grants 13,000 13,000
Option grants 12,000 12,000
Employee stock purchase plan 1,000 1,000
Subsidiary option grants 28,000 24,000
Total $ 93,000 $ 89,000
Three Months Ended Three Months Ended
March 31, 2019 March 31, 2018
Stock Grants $ 91,000 $ 91,000
Restricted Stock Grants 9,000 13,000
Option Grants - 5,000
Employee Stock Purchase Plan 1,000 -
Subsidiary Option Grants 11,000 28,000
Total $ 112,000 $ 137,000

Six Months Ended Six Months Ended
March 31, 2019 March 31, 2018
Stock Grants $ 142,000 $ 130,000
Restricted Stock Grants 24,000 26,000
Option Grants - 17,000
Employee Stock Purchase Plan 2,000 1,000
Subsidiary Option Grants 22,000 56,000
Total $ 190,000 $ 230,000

At ~~December~~March 31, ~~2017,~~2019, there was approximately ~~$75,000~~$32,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period of approximately ~~eight~~thirteen months.
14

Restricted Stock Grants

A summary of restricted stock activity for the ~~three~~six months ended ~~December~~March 31, ~~2017~~2019 is presented below:

Restricted Stock Activity for the Three Months ended
December 31, 2017 Shares Weighted-Average
Grant-Date Fair Value
Nonvested at September 30, 2017 70,000 $ 1.73
Restricted Stock Activity for the Six Months ended
March 31, 2019 Shares Weighted-Average
Grant-Date Fair Value
Nonvested at September 30, 2018 60,000 $ 1.61

Granted - - -
Vested (10,000 ) $ 1.70 (30,000 ) 1.73
Cancelled - - - -
Nonvested and expected to vest at December 31, 2017 60,000 $ 1.73
Nonvested and expected to vest at March 31, 2019 30,000 $ 1.48
19

Stock Option Grants

During the ~~three~~six months ended ~~December~~March 31, ~~2017,~~2019, no Dynasil stock options were granted. A summary of stock option activity for the ~~three~~six months ended ~~December~~March 31, ~~2017~~2019 is presented below:

Options
Outstanding Weighted Average
Exercise Price per
Share Weighted Average
Remain Contractual
Term (in Years)
Balance at September 30, 2017 196,769 $ 1.98 1.64
Outstanding and exercisable at September 30, 2017 196,769 $ 1.98 1.64
Granted - -
Exercised - -
Cancelled - -
Balance at December 31, 2017 196,769 $ 1.98 1.39
Outstanding and exercisable at December 31, 2017 196,769 $ 1.98 1.39
Options
Outstanding Weighted Average
Exercise Price per
Share Weighted Average
Remain
Contractual Term
(in Years)
Balance at September 30, 2018 160,537 $ 2.01 0.93
Outstanding and exercisable at September 30, 2018 160,537 $ 2.01 0.93
Granted - -
Exercised - -
Cancelled (64,935 ) 2.33
Balance at March 31, 2019 95,602 $ 1.80 0.84
Outstanding and exercisable at March 31, 2019 95,602 $ 1.80 0.84

Subsidiary Stock Option Grants

During the ~~three~~six months ended ~~December~~March 31, ~~2017,~~2019, no Xcede stock options were granted. A summary of Xcede stock option activity for the ~~three~~six months ended ~~December~~March 31, ~~2017~~2019 is presented below:

Options
Outstanding Weighted Average
Exercise Price per
Share Weighted Average
Remain Contractual
Term (in Years)
Balance at September 30, 2017 1,375,956 $ 1.00 8.70
Outstanding and exercisable at September 30, 2017 923,617 1.00 8.30
Granted - -
Exercised - -
Cancelled - -
Balance at December 31, 2017 1,375,956 1.00 8.44
Outstanding and exercisable at December 31, 2017 1,020,078 $ 1.00 8.11
Options
Outstanding Weighted Average
Exercise Price per
Share Weighted Average
Remain
Contractual Term
(in Years)
Balance at September 30, 2018 1,300,956 $ 1.00 7.31
Outstanding and exercisable at September 30, 2018 1,229,685 1.00 7.11
Granted - -
Exercised - -
Cancelled - -
Balance at March 31, 2019 1,300,956 1.00 6.60
Outstanding and exercisable at March 31, 2019 1,266,581 $ 1.00 6.60

At ~~December~~March 31, ~~2017,~~2019, the Company’s Xcede joint venture had approximately ~~$125,000~~$21,000 of unrecognized stock compensation expense associated with stock options expected to be recognized over a ~~weighted average~~ period of ~~nine~~six months.
15

Note 10 – Segment, Customer and Geographical Reporting

Segment Financial Information

Dynasil reports three reportable segments: ~~contract research~~innovation and development (“Innovation and Development”), (formerly known as the Contract ~~Research”)~~Research segment), 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 (“Hilger”), 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~~Innovation and Development segment is one of the largest small business participants in U.S. government-funded research. The Biomedical segment consists of a single operating segment, Dynasil Biomedical Corporation (“Dynasil Biomedical”), a medical technology incubator which owns rights to certain early stage medical technologies. Dynasil Biomedical holds common and preferred stock in the Xcede joint venture which is developing a tissue sealant technology and currently has no other operations.

20
The Company’s segment information for the three months ended ~~December~~March 31, ~~2017~~2019 and ~~2016~~2018 is summarized below:

Results of Operations for the Three Months Ended December 31,
2017
Results of Operations for the Three Months Ended March 31, Results of Operations for the Three Months Ended March 31,
2019 2019
Optics Contract
Research Biomedical Total Optics Innovation and
Development* Biomedical Total
Revenue $ 4,942,000 $ 4,247,000 $ - $ 9,189,000 $ 6,226,000 $ 5,306,000 $ - $ 11,532,000
Gross profit 1,724,000 1,851,000 - 3,575,000 2,159,000 2,199,000 - 4,358,000
GM % 35 % 44 % - 39 % 35 % 41 % - 38 %
Operating expenses 1,576,000 1,723,000 445,000 3,744,000 1,871,000 2,141,000 22,000 4,034,000
Operating income (loss) 148,000 128,000 (445,000 ) (169,000 ) 288,000 58,000 (22,000 ) 324,000

Depreciation and amortization 231,000 65,000 3,000 299,000 292,000 60,000 3,000 355,000
Capital expenditures 590,000 19,000 16,000 625,000 313,000 47,000 - 360,000

Intangibles, net 453,000 188,000 337,000 978,000 358,000 145,000 198,000 701,000
Goodwill 1,012,000 4,939,000 - 5,951,000 961,000 4,939,000 - 5,900,000
Total assets $ 18,969,000 $ 8,114,000 $ 614,000 $ 27,697,000 $ 21,482,000 $ 9,456,000 $ 204,000 $ 31,142,000

Results of Operations for the Three Months Ended December 31,
2016
Results of Operations for the Three Months Ended March 31, Results of Operations for the Three Months Ended March 31,
2018 2018
Optics Contract
Research Biomedical Total Optics Innovation and
Development* Biomedical Total
Revenue $ 4,405,000 $ 4,738,000 $ - $ 9,143,000 $ 5,910,000 $ 4,345,000 $ - $ 10,255,000
Gross profit 1,574,000 1,951,000 - 3,525,000 2,050,000 1,895,000 - 3,945,000
GM % 36 % 41 % - 39 % 35 % 44 % - 38 %
Operating expenses 1,328,000 1,740,000 381,000 3,449,000 1,858,000 1,813,000 194,000 3,865,000
Operating income (loss) 246,000 211,000 (381,000 ) 76,000 192,000 82,000 (194,000 ) 80,000

Depreciation and amortization 234,000 74,000 3,000 311,000 247,000 61,000 3,000 311,000
Capital expenditures 91,000 - 20,000 111,000 339,000 58,000 29,000 426,000

Intangibles, net 474,000 222,000 337,000 1,033,000 455,000 179,000 363,000 997,000
Goodwill 883,000 4,939,000 - 5,822,000 1,070,000 4,939,000 - 6,009,000
Total assets $ 18,785,000 $ 8,407,000 $ 1,060,000 $ 28,252,000 $ 20,903,000 $ 8,028,000 $ 586,000 $ 29,517,000
*Formerly Contract Research
21
The Company’s segment information for the six months ended March 31, 2019 and 2018 is summarized below:
Results of Operations for the Six Months Ended March 31,
2019
Optics Innovation and
Development* Biomedical Total
Revenue $ 11,947,000 $ 9,613,000 $ - $ 21,560,000
Gross profit 4,009,000 4,041,000 - 8,050,000
GM % 34 % 42 % - 37 %
Operating expenses 3,756,000 4,020,000 75,000 7,851,000
Operating income (loss) 253,000 21,000 (75,000 ) 199,000

Depreciation and amortization 566,000 120,000 7,000 693,000
Capital expenditures 497,000 64,000 - 561,000

Intangibles, net 358,000 145,000 198,000 701,000
Goodwill 961,000 4,939,000 - 5,900,000
Total assets $ 21,482,000 $ 9,456,000 $ 204,000 $ 31,142,000
Results of Operations for the Six Months Ended March 31,
2018
Optics Innovation and
Development* Biomedical Total
Revenue $ 10,853,000 $ 8,590,000 $ - $ 19,443,000
Gross profit 3,740,000 3,745,000 - 7,485,000
GM % 34 % 44 % - 38 %
Operating expenses 3,433,000 3,537,000 639,000 7,609,000
Operating income (loss) 307,000 208,000 (639,000 ) (124,000 )

Depreciation and amortization 477,000 126,000 7,000 610,000
Capital expenditures 928,000 77,000 45,000 1,050,000

Intangibles, net 455,000 179,000 363,000 997,000
Goodwill 1,070,000 4,939,000 - 6,009,000
Total assets $ 20,903,000 $ 8,028,000 $ 586,000 $ 29,517,000
*Formerly Contract Research

Customer Financial Information

For ~~both~~three and six months ended March 31, 2019, one customer in the Optics segment represented more than 10% of the total segment revenue. For the three and six months ended ~~December~~March 31, ~~2017 and 2016,~~2018, no customer in the Optics segment represented more than 10% of the total segment revenue.

16
For the three and six months ended ~~December~~March 31, ~~2017, four~~2019, three customers of the ~~Contract Research~~Innovation and Development segment, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue. For the three and six months ended ~~December~~March 31, ~~2016, three~~2018, four customers of the ~~Contract Research~~Innovation and Development segment, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue.
22

Geographic Financial Information

Revenue by geographic location in total and as a percentage of total revenue, for the three months ended ~~December~~March 31, ~~2017~~2019 and ~~2016~~2018 are as follows:

Three Months Ended Three Months Ended Three Months Ended Three Months Ended
December 31, 2017 December 31, 2016 March 31, 2019 March 31, 2018
Geographic Location Revenue % of Total Revenue % of Total Revenue % of Total Revenue % of Total
United States $ 7,353,000 80 % $ 7,189,000 79 % $ 8,773,000 76 % $ 8,129,000 79 %
Asia 865,000 7 % 671,000 7 %
Europe 1,268,000 14 % 1,086,000 12 % 1,713,000 15 % 1,365,000 13 %
Other 568,000 6 % 868,000 9 % 181,000 2 % 90,000 1 %
$ 9,189,000 100 % $ 9,143,000 100 % $ 11,532,000 100 % $ 10,255,000 100 %
Revenue by geographic location in total and as a percentage of total revenue, for the six months ended March 31, 2019 and 2018 are as follows:
Six Months Ended Six Months Ended
March 31, 2019 March 31, 2018
Geographic Location Revenue % of Total Revenue % of Total
United States $ 16,233,000 75 % $ 15,481,000 80 %
Asia 1,795,000 8 % 1,193,000 6 %
Europe 3,237,000 15 % 2,633,000 13 %
Other 295,000 2 % 136,000 1 %
$ 21,560,000 100 % $ 19,443,000 100 %

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~~is no longer be included in Dynasil’s federal consolidated tax return and ~~will file~~files a separate federal return. Xcede ~~will continue~~continues 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~~is no longer be able to offset taxable income with Xcede’s current or cumulative net operating losses. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined that it is more likely than not that the federal deferred tax assets of the new Dynasil federal consolidated group will be realized based upon positive earnings history and expected future profits of the group. As a result, the federal deferred tax asset valuation allowance associated with the Dynasil federal consolidated group ~~has been~~was 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.

23
As a result of Xcede’s decision to halt clinical trial preparations and curtail operations to a minimal level while the Board of Directors of Xcede evaluates alternative avenues to develop the Xcede Patch, following the July 2018 notice of termination from Cook Biotech Inc. (“CBI”) claiming that the results of a recent animal study showed that it is not commercially reasonable, in CBI’s assessment, to continue to the next development phase of the Xcede Patch, the Company has concluded that it is more likely than not that the deferred tax assets associated with the Company’s unitary state filings will be realized based on future profit for the group and thus has reversed the related valuation allowance on the Company’s NOLs of approximately $0.6 million. In addition, the Company conducted a research and experimentation study which released the tax valuation allowance and increased deferred tax assets by $0.6 million. The reversal resulted in an income tax benefit of approximately $1.2 million recorded during the year ended September 30, 2018.
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~~March 31, ~~2017~~2019 and September 30, ~~2017,~~2018, 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~~March 31, ~~2017~~2019 and September 30, ~~2017,~~2018, 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.

17
On December 22, 2017, the 2017 Tax ~~Cuts and Jobs~~ Act ~~(the “Tax Act”)~~ was signed into law. The 2017 Tax Act, which iswas effective on December 22, 2017, significantly ~~revises~~revised the U.S. tax code by, among other changes, lowering the corporate income tax rate from 35% to 21%, requiring a one-time transition tax on accumulated foreign earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings. ~~At December 31, 2017, the~~The Company has ~~not~~ completed its accounting for the tax effects of the 2017 Tax ~~Act; however, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax.~~Act.

The Company re-measured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and ~~provisionally~~ recorded an income tax expense of ~~$0.5~~$0.7 million related to such re-measurement in the ~~first~~ quarter ~~of fiscal~~ended December 31, 2018. ~~It is still analyzing certain aspects of the Tax Act and refining its calculations during the measurement period.~~
The one-time transition tax iswas based on the total unremitted earnings of the Company’s foreign subsidiary, Hilger, ~~that has~~which had previously been deferred from U.S. income taxes. The Company recorded a ~~provisional amount~~provision for its one-time transition liability of its foreign subsidiary resulting in additional income tax expense of ~~$0.1~~$0.2 million in fiscal year 2018.
During the ~~first~~fiscal year ended, September 30, 2018, the Company has federal research credits of $2.9 million, primarily resulted from a benefit in the second quarter of fiscal ~~2018.~~year 2018 related to R&E tax credits for the years ended 2013 through 2016. The ~~Company has not yet completed its calculation of~~federal credits begin expiring in fiscal year 2030. During the ~~total unremitted earnings of Hilger. The transition tax is based in part on the amount of those earnings held in cash and other specified assets. The amount may change when~~fiscal year ended September 30, 2018, the Company ~~finalizes the calculation~~had state research credits of ~~Hilger’s total unremitted earnings previously deferred from U.S. federal taxation and finalize the amounts held~~$852,000 which begin expiring in ~~cash or other specified assets.~~fiscal year 2027.

The effective tax rates were ~~(309%)~~74% and ~~679%~~(3,586%) for the three months ended ~~December~~March 31, ~~2017~~2019 and ~~2016,~~2018, respectively. The ~~results~~effective tax rates were 127% and 281% for ~~both~~the six months ended March 31, 2019 and 2018, respectively. The effective tax rates for the three ~~month periods~~and six months ended ~~December~~March 31, ~~2017 and 2016 had significant events which resulted in an extreme variation in tax rates.~~2019 were a result of the anticipated non-deductible transaction costs resulting from the Board of Directors’ plan to cease the registration of the Company’s common stock under federal securities laws (see Note 12 - Subsequent Events). The effective tax rate for the ~~three~~six months ended ~~December~~March 31, ~~2017~~2018 was due to the recently signed 2017 Tax Act. The effective tax rate for the three months ended December 31, 2016 was the result of the tax benefit of $2.7 million recorded for the release of the valuation allowance as a result of the ~~tax deconsolidation of its Xcede subsidiary.~~2017 Tax Act. The effective tax rate excluding the impact of the 2017 Tax Act was (16%) for the ~~three~~six months ended ~~December~~March 31, ~~2017. The effective tax rate excluding the impact of the valuation allowance was (25%) for the three months ended December 31, 2016.~~ 2018.

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.
24

Note 12 – Subsequent Events

On ~~January 3, 2018,~~April 30, 2019, the Company ~~amended~~converted the ~~Note Purchase Agreement~~outstanding balance on the equipment line of credit with ~~Massachusetts~~Middlesex Savings Bank (“Middlesex”) of approximately $484,000, which was outstanding on March 31, 2019, into a five year term note with an interest rate of 5.17%. Additionally, on May 1, 2019, the Company’s equipment line of credit was renewed for $750,000 through April 30, 2020, at which time the outstanding balance will be converted into a five year term note.
On May 2, 2019, the Company announced that a Special Committee of the Company’s Board of Directors comprised of three independent directors has recommended, and its Board of Directors has approved, a plan to cease the registration of the Company’s common stock under federal securities laws following the completion of a proposed reverse stock split transaction and to delist its shares of common stock from trading on the Nasdaq Capital ~~Resource Company. (See Note 7 – Debt.)~~Market. It is expected that this plan would be effectuated in the late summer 2019, subject to Dynasil’s stockholders approving the proposed reverse stock split at a Special Meeting of Stockholders, as described below.
Dynasil is taking these steps to avoid the substantial cost and expense of being a public reporting company and to focus the Company's resources on enhancing long-term stockholder value. The Company anticipates savings exceeding $900,000 on an annual basis as a result of the proposed deregistration and delisting transaction.
The proposed reverse stock split is a 1-for-8,000 split, in which holders of less than 8,000 shares of the Company’s common stock would be cashed out at a price of $1.15 per share for their pre-split number of shares. Such price represents a premium above the common stock’s closing price on May 1, 2019 and is supported by a fairness opinion by Mirus Capital Advisors Inc., whom the Special Committee engaged for such purpose. Stockholders owning 8,000 or more shares of the Company’s common stock prior to the reverse stock split would remain stockholders in Dynasil, which would no longer be encumbered by the expenses and distraction of a public reporting company. The number of shares they would own following the proposed transaction would be unchanged, as immediately after the reverse stock split a forward split of 8,000-for-1 would be applied to the continuing stockholders, negating any effects to them. Dynasil estimates that approximately 1.4 million shares (or less than 8% of the shares of its common stock currently outstanding) would be cashed out in the proposed transaction and the aggregate cost to the Company of the proposed transaction would be approximately $1.6 million, plus transaction expenses, which are estimated to be approximately $650,000. Dynasil intends to fund such costs using cash-on-hand and borrowings available under its existing credit facilities.
Dynasil’s Board of Directors has determined the proposed transaction is in the best interests of all of the Company’s stockholders. Dynasil currently realizes none of the traditional benefits of public company status, yet incurs all of the significant annual expenses and indirect costs associated with being a public company. Without its public company status, Dynasil would have an ongoing cost structure befitting its current and foreseeable scale of operations and its management would be able to have an increased focus on core operations.
Subject to regulatory clearance of the Company’s proxy statement to be filed relating to the proposed stock splits and stockholder approval thereof, it is anticipated that the proposed transaction would become effective shortly after the Special Meeting of Stockholders, which is expected to be held this summer 2019. Approval of the proposed transaction requires the affirmative vote of a majority of the shares cast (represented in person or by proxy) and entitled to vote at the Special Meeting. As of the date hereof, the Company’s directors and executive officers own approximately 37% of the Company’s currently issued and outstanding shares and are expected to vote “FOR” the transaction.
Promptly after the Special Meeting, the Company expects to terminate the registration of its common stock with the SEC and de-list its common stock from the Nasdaq Capital Market. As a result, at such time, (i) the Company would cease to file annual, quarterly, current, and other reports and documents with the SEC, and stockholders would cease to receive annual reports and proxy statements, and (ii) the Company’s common stock would no longer be listed on the Nasdaq Capital Market.
The Board reserves the right to change the ratio of the reverse stock split to the extent they believe it is necessary or desirable in order to accomplish the goal of staying below 300 record holders. They may also abandon the proposed reverse stock split at any time prior to the completion of the proposed transaction if they believe that the proposed transaction is no longer in the best interests of the Company or its stockholders.

The Company has evaluated subsequent events through the date the financial statements were released.
25

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, ~~2017.~~2018.

General Business Overview

Operations

Consolidated revenue for the ~~first~~ quarter ended ~~December~~March 31, ~~2017~~2019 was ~~$9.2~~$11.5 million, compared to revenue of ~~$9.1~~$10.3 million for the ~~first~~second quarter of fiscal year ~~2017.~~2018. This ~~slight~~$1.2 million or 12% increase resulted from a ~~12%~~5% increase in Optics segment revenue ~~largely offset by~~and a ~~10% decrease~~22% increase in ~~Contract Research~~Innovations and Development segment revenue.

18
~~Cost~~Gross profit for the quarter ended March 31, 2019 was $4.4 million, or 38% of revenue, as compared to the gross profit of $3.9 million, or 38% of revenue for the quarter ended ~~December~~March 31, ~~2017 was $5.6 million or 61% of revenue, essentially the same as the cost of revenue and percent of revenue for the quarter ended December 31, 2016.~~2018.

Total operating expenses were ~~$3.7~~$4.0 million for the ~~three month~~three-month period ended ~~December~~March 31, ~~2017 as compared to $3.4~~2019, a 3% increase over the $3.9 million in operating expenses for the ~~same period in fiscal year 2017.~~three months ended March 31, 2018. The increase was attributable to promotional activities from our new marketing team along with higher patent and recruiting expenses. The operating expenses in our Biomedical segment ~~increased~~decreased by $0.2 million over the same period last year. In the first two quarters of fiscal year ~~over year, as~~2018, our majority owned joint venture, Xcede Technologies, Inc. (“Xcede”), ~~prepared~~was preparing for clinical trials. As described below, these activities have since been suspended due to a notice of termination Xcede received from Cook Biotech, Inc. (“CBI”) in July 2018, in which CBI asserted its ~~first-in-human~~termination rights under the Note Agreement and Development Agreement between Xcede and CBI, claiming that in CBI’s assessment it is not commercially reasonable to continue to the next development phase of Xcede’s hemostatic patch.
In light of the foregoing, Xcede has halted clinical trial ~~application as~~preparations at this time and has curtailed its operations to a minimal level while the ~~primary reason for~~Board of Directors of Xcede evaluates alternatives, including the ~~increase.~~viability of modifying the Xcede Patch to address the shortcomings cited by CBI and/or the possible sale or license of Xcede IP assets, subject to amending CBI's security interest. Additionally, ~~operating expenses in our Optics segment increased, largely as~~ the ~~result of recent personnel additions~~Company’s RMD subsidiary and ~~the related charges.~~
~~Our Biomedical segment primarily consists~~Xcede have begun an investigation of the ~~results~~possible continued development of the Xcede Patch, which includes seeking government funding of this development. In April 2019, Xcede filed an application for a government grant seeking $225,000, which is currently being reviewed. There can be no assurances with respect to any such alternatives or that any additional outside funding to continue development of the Xcede Patch will be available to Xcede. Without such funding, the Board of Directors of Xcede ~~which incurred $1.4 million in research expenses in fiscal year 2017 and $0.4 million~~may be required to cease all operations of Xcede. In the event that such a determination were to be made by the Xcede Board of Directors 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 2018 as it continues its development activities and initiates its planned clinical trial. In November 2016,future, the Company ~~entered into an agreement~~expects that it would be required to account for Xcede at such time as discontinued operations in accordance with ~~Xcede pursuant to which~~ASC 205-20 and would recognize a non-cash gain based on the losses absorbed by the Company in excess of their actual ownership percentage. This potential gain will have no impact on the Company’s cash position when and if it ~~agreed to invest up to $1.2 million of cash into Xcede over~~is recognized or in the following 18 months. We expect Xcede will continue to need additional external investor funding in order to pursue its planned clinical trials and regulatory approvals of its tissue sealant technology.future.

Income ~~(loss)~~ from operations for the quarter ended ~~December~~March 31, ~~2017~~2019 was ~~a loss of $0.2~~$0.3 million, compared with ~~income of~~ $0.1 million for the quarter ended ~~December~~March 31, ~~2016, as a result of the growth-oriented higher operating expenses in fiscal year~~ 2018.

The provision for income taxes for the ~~first~~second quarter of ~~2018~~2019 was ~~$0.7~~approximately $0.2 million, as compared to a benefit of ~~$2.7~~$1.3 million for the second quarter of fiscal year 2018. The second quarter 2018 provision was primarily the result of the estimate of the PATH 2015 R&E Tax Credit for the years 2012 thru 2016 that the Company was in the process of conducting in fiscal year 2018.
Net income attributable to common stockholders was essentially breakeven, or $0.00 per share, as compared to $1.3 million, or $0.08 per share for the quarters ended March 31, 2019 and 2018, respectively, largely as a result of the income tax event in the fiscal year 2018.
Recent Business Developments
On May 2, 2019, the Company announced that a Special Committee of the Company’s Board of Directors comprised of three independent directors has recommended, and its Board of Directors has approved, a plan to cease the registration of the Company’s common stock under federal securities laws following the completion of a proposed reverse stock split transaction and to delist its shares of common stock from trading on the Nasdaq Capital Market. It is expected that this plan would be effectuated in the late summer 2019, subject to Dynasil’s stockholders approving the proposed reverse stock split at a Special Meeting of Stockholders, as described below.
26
Dynasil is taking these steps to avoid the substantial cost and expense of being a public reporting company and to focus the Company's resources on enhancing long-term stockholder value. The Company anticipates savings exceeding $900,000 on an annual basis as a result of the proposed deregistration and delisting transaction.
The proposed reverse stock split is a 1-for-8,000 split, in which holders of less than 8,000 shares of the Company’s common stock would be cashed out at a price of $1.15 per share for their pre-split number of shares. Such price represents a premium above the common stock’s closing price on May 1, 2019 and is supported by a fairness opinion by Mirus Capital Advisors Inc., whom the Special Committee engaged for such purpose. Stockholders owning 8,000 or more shares of the Company’s common stock prior to the reverse stock split would remain stockholders in Dynasil, which would no longer be encumbered by the expenses and distraction of a public reporting company. The number of shares they would own following the proposed transaction would be unchanged, as immediately after the reverse stock split a forward split of 8,000-for-1 would be applied to the continuing stockholders, negating any effects to them. Dynasil estimates that approximately 1.4 million shares (or less than 8% of the shares of its common stock currently outstanding) would be cashed out in the proposed transaction and the aggregate cost to the Company of the proposed transaction would be approximately $1.6 million, plus transaction expenses, which are estimated to be approximately $650,000. Dynasil intends to fund such costs using cash-on-hand and borrowings available under its existing credit facilities.
Dynasil’s Board of Directors has determined the proposed transaction is in the best interests of all of the Company’s stockholders. Dynasil currently realizes none of the traditional benefits of public company status, yet incurs all of the significant annual expenses and indirect costs associated with being a public company. Without its public company status, Dynasil would have an ongoing cost structure befitting its current and foreseeable scale of operations and its management would be able to have an increased focus on core operations.
Subject to regulatory clearance of the Company’s proxy statement to be filed relating to the proposed stock splits and stockholder approval thereof, it is anticipated that the proposed transaction would become effective shortly after the Special Meeting of Stockholders, which is expected to be held this summer 2019. Approval of the proposed transaction requires the affirmative vote of a majority of the shares cast (represented in person or by proxy) and entitled to vote at the Special Meeting. As of the date hereof, the Company’s directors and executive officers own approximately 38% of the Company’s currently issued and outstanding shares and are expected to vote “FOR” the transaction.
Promptly after the Special Meeting, the Company expects to terminate the registration of its common stock with the SEC and de-list its common stock from the Nasdaq Capital Market. As a result, at such time, (i) the Company would cease to file annual, quarterly, current, and other reports and documents with the SEC, and stockholders would cease to receive annual reports and proxy statements, and (ii) the Company’s common stock would no longer be listed on the Nasdaq Capital Market.
The Board reserves the right to change the ratio of the reverse stock split to the extent they believe it is necessary or desirable in order to accomplish the goal of staying below 300 record holders. They may also abandon the proposed reverse stock split at any time prior to the completion of the proposed transaction if they believe that the proposed transaction is no longer in the best interests of the Company or its stockholders.
27
Results of Operations
Results of Operations for the Three Months Ended March 31,
2019
Optics Innovation and
Development* Biomedical Total
Revenue $ 6,226,000 $ 5,306,000 $ - $ 11,532,000
Gross profit 2,159,000 2,199,000 - 4,358,000
GM % 35 % 41 % - 38 %
Operating expenses 1,871,000 2,141,000 22,000 4,034,000
Operating income (loss) 288,000 58,000 (22,000 ) 324,000

Depreciation and amortization 292,000 60,000 3,000 355,000
Capital expenditures 313,000 47,000 - 360,000

Intangibles, net 358,000 145,000 198,000 701,000
Goodwill 961,000 4,939,000 - 5,900,000
Total assets $ 21,482,000 $ 9,456,000 $ 204,000 $ 31,142,000
Results of Operations for the Three Months Ended March 31,
2018
Optics Innovation and
Development* Biomedical Total
Revenue $ 5,910,000 $ 4,345,000 $ - $ 10,255,000
Gross profit 2,050,000 1,895,000 - 3,945,000
GM % 35 % 44 % - 38 %
Operating expenses 1,858,000 1,813,000 194,000 3,865,000
Operating income (loss) 192,000 82,000 (194,000 ) 80,000

Depreciation and amortization 247,000 61,000 3,000 311,000
Capital expenditures 339,000 58,000 29,000 426,000

Intangibles, net 455,000 179,000 363,000 997,000
Goodwill 1,070,000 4,939,000 - 6,009,000
Total assets $ 20,903,000 $ 8,028,000 $ 586,000 $ 29,517,000
*Formerly Contract Research
Consolidated revenue for the quarter ended March 31, 2019, was $11.5 million, a 12% increase as compared with revenue of $10.3 million for the quarter ended March 31, 2018.
Optics segment revenue increased $0.3 million, or 5%, for the three months ended March 31, 2019 compared with the same period in the prior year, primarily as a result of revenue growth in three of the four operating units in this segment. The growth in this quarter is largely the result of increased orders from a few of our large key customers.
Innovation and Development segment revenue increased by $1.0 million or 22% to $5.3 million for the second quarter of fiscal year 2019, as compared with the same period in the prior year due to an increase in funded research contract awards. The research backlog for the Innovation and Development segment remains strong at $32.8 million at March 31, 2019.
28
The Biomedical segment has no revenue as it is currently exploring development options for Xcede’s tissue sealant technology.
Cost of revenue for the quarter ended March 31, 2019 was 62%, or $7.2 million, as compared to 62% or $6.3 million for the quarter ended March 31, 2018.
Gross profit for the three months ended March 31, 2019 was $4.4 million, compared to $3.9 million, for the three months ended March 31, 2018. The gross profit as a percent of revenue for the second quarter in both 2019 and 2018 was 38%. The gross profit for the Optics segment was $2.2 million for the quarter ended March 31, 2019, compared to $2.0 million, for the quarter ended March 31, 2018. The gross profit as a percent of revenue for the Optics segment was 35% in both the second quarter of 2019 and 2018. The Innovation and Development segment gross profit increased to $2.2 million, as compared to $1.9 million in the same period in fiscal year 2018, as a result of actively working on an increased number of contract research projects in 2019. Gross profit as a percent of revenue decreased in the second quarter of 2019 by 3% as compared to 2018 due to fewer commercial product sales in 2019 which have higher margins than contract research sales.
The Biomedical segment, through Xcede, is engaged in exploring development options for a tissue sealant technology which has not been approved for commercial use, and consequently it has no gross profit.
Total operating expenses increased to $4.0 million for the three months ended March 31, 2019 from $3.9 million for the same quarter in fiscal year 2018. Operating expenses for the Optics segment remained essentially the same in the second quarter year over year. Innovation and Development segment expenses increased to $2.1 million in the second quarter of fiscal year 2019, as compared to $1.8 million in the second quarter of fiscal year 2018, as a result of increases in patent and hiring costs. Biomedical segment expenses decreased by $0.2 million in the three months ended March 31, 2019, compared to the three months ended March 31, 2018, primarily due to the cessation of work on its preparations for first-in-human clinical trials.
As a result of the items discussed above, income from operations for the three months ended March 31, 2019 was $0.3 million compared to of $0.1 million for the same period in fiscal year ~~2017.~~2018.
Net interest expense was essentially the same in both the three month periods ended March 31, 2019 and 2018.
The provision for income taxes for the second quarter of 2019 was approximately $0.2 million, as compared to a benefit of $1.3 million for the second quarter of fiscal year 2018. The second quarter 2018 provision was primarily the result of the estimate of the PATH 2015 R&E Tax Credit for the years 2012 thru 2016 that the Company was in the process of conducting in fiscal year 2018.
Net income for the three months ended March 31, 2019 was essentially breakeven, or $0.00 in basic earnings per share, as compared to $1.3 million, or $0.08 in basic earnings per share, for the quarter ended March 31, 2018.
29
Results of Operations – Year to Date
Results of Operations for the Six Months Ended March 31,
2019
Optics Innovation and
Development* Biomedical Total
Revenue $ 11,947,000 $ 9,613,000 $ - $ 21,560,000
Gross profit 4,009,000 4,041,000 - 8,050,000
GM % 34 % 42 % - 37 %
Operating expenses 3,756,000 4,020,000 75,000 7,851,000
Operating income (loss) 253,000 21,000 (75,000 ) 199,000

Depreciation and amortization 566,000 120,000 7,000 693,000
Capital expenditures 497,000 64,000 - 561,000

Intangibles, net 358,000 145,000 198,000 701,000
Goodwill 961,000 4,939,000 - 5,900,000
Total assets $ 21,482,000 $ 9,456,000 $ 204,000 $ 31,142,000
Results of Operations for the Six Months Ended March 31,
2018
Optics Innovation and
Development* Biomedical Total
Revenue $ 10,853,000 $ 8,590,000 $ - $ 19,443,000
Gross profit 3,740,000 3,745,000 - 7,485,000
GM % 34 % 44 % - 38 %
Operating expenses 3,433,000 3,537,000 639,000 7,609,000
Operating income (loss) 307,000 208,000 (639,000 ) (124,000 )

Depreciation and amortization 477,000 126,000 7,000 610,000
Capital expenditures 928,000 77,000 45,000 1,050,000

Intangibles, net 455,000 179,000 363,000 997,000
Goodwill 1,070,000 4,939,000 - 6,009,000
Total assets $ 20,903,000 $ 8,028,000 $ 586,000 $ 29,517,000
*Formerly Contract Research
Revenue for the six months ended March 31, 2019 increased 11% to $21.6 million, a $2.2 million increase over the six months ended March 31, 2018.
Optics segment revenue increased $1.1 million, or 10%, for the six months ended March 31, 2019, compared with the same period in the prior year, primarily as a result of revenue growth in three of the four operating units in this segment. Our Optics segment revenue showed increased orders from a number of our larger established customers.
Revenue from our Innovation and Development segment increased $1.0 million, or 12%, for the six months ended March 31, 2019 as compared to the same period in 2018, primarily due to increased orders from some of our key government customers, partially offset by a delay in our commercial product orders.
30
The Biomedical segment had no revenue in either the six months ended March 31, 2019 or 2018.
Gross profit for the six months ended March 31, 2019 was $8.1 million, or 37% of sales, compared to $7.5 million, or 38% of sales for the six months ended March 31, 2018. The $0.6 gross profit increase was attributed to the higher revenue generated in the first six months.
Gross profit for the Optics segment increased approximately $0.3 million to $4.0 million for the six months ended March 31, 2019, compared to the gross profit for the same period in fiscal year 2018, primarily as a result of the increase in revenues in the first six months of fiscal 2019 as compared to the same period in 2018.
Gross profit for the Innovation and Development segment increased by approximately $0.3 million to $4.0 million for the six months ended March 31, 2019, compared to the six months ended March 31, 2018, largely due to the increased revenue year over year.
The Biomedical segment, through Xcede, is developing a tissue sealant technology which has not been approved for commercial use and consequently has no gross profit.
Total operating expenses increased $0.3 million to $7.9 million for the six months ended March 31, 2019, as compared to the total operating expenses of $7.6 million for the six months ended March 31, 2018. This increase was spread fairly consistently across the organization as we have added and upgraded resources in 2019, compared to 2018, as we work on new initiatives.
Income (loss) from operations was $0.2 for the six months ended March 31, 2019 and ($0.1) for the same six month period in 2018.
Net interest expense for both the six month periods ended March 31, 2019 and 2018 was $0.1 million.
The provision for income taxes for the first six months of 2019 was a $0.1 million as compared to a benefit of $0.6 million for the same period in fiscal year 2018. The 2018 provision was ~~primarily~~the result of the $1.3 million PATH 2015 R&E Tax Credit estimate for the years 2012 thru 2016 that was recognized in the second quarter of 2018, offset by the result of the 2017 Tax Act, in which we estimated the rate reduction impact to be $0.5 million, the earnings and profit transition tax of our Hilger Crystals subsidiary to be $0.1 million and ~~a current~~the first quarter earnings provision of $0.1 million. The 2017 benefit resulted from the deconsolidation of Xcede, which means the Company can no longer 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 was reversed, which resulted in an income tax benefit in the amount of $2.7 million during the quarter ended 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 ~~(loss) was a loss of $0.8 million, or ($0.05) per share, as compared~~attributable to ~~income of $2.8 million, or $0.17 per share,~~common stockholders for the ~~quarters ended December 31, 2017 and 2016 respectively, largely as a result of the two discrete income tax events in the two periods.~~
19
~~Results of Operations~~
Results of Operations for the Three Months Ended December 31,
2017
Optics Contract
Research Biomedical Total
Revenue $ 4,942,000 $ 4,247,000 $ - $ 9,189,000
Gross profit 1,724,000 1,851,000 - 3,575,000
GM % 35 % 44 % - 39 %
Operating expenses 1,576,000 1,723,000 445,000 3,744,000
Operating income (loss) 148,000 128,000 (445,000 ) (169,000 )

Depreciation and amortization 231,000 65,000 3,000 299,000
Capital expenditures 590,000 19,000 16,000 625,000

Intangibles, net 453,000 188,000 337,000 978,000
Goodwill 1,012,000 4,939,000 - 5,951,000
Total assets $ 18,969,000 $ 8,114,000 $ 614,000 $ 27,697,000
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

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
Consolidated revenue for the first quarter of fiscal year 2018, which ended December 31, 2017, was $9.2 million, a marginal increase, as compared with revenue of $9.1 million for the quarter ended December 31, 2016.
~~The Optics segment revenue increased $0.5 million, or 12%, for the three~~six months ended ~~December~~March 31, 2017 compared with the same period in the prior year, primarily as a result of the resumption of more normalized purchasing by two of the segment’s largest customers, as well as revenue growth in the U.S. operating units in this segment.
~~Contract Research segment revenue decreased approximately $0.5 million,~~2019 was essentially breakeven or 10%, compared with the same period in the prior year, as a result of a reduction in both commercial product revenue, as some orders did not come in as expected, and contract revenue, as Department of Energy contracts have shown some cut backs. The research backlog for the Contracts Research segment remains strong at $30.5 million at December 31, 2017.
~~The Biomedical segment has no revenue 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, nearly the same as for the quarter ended December 31, 2016.~~
20
Gross profit for the three months ended December 31, 2017 was $3.6 million, or 39% of revenues, compared to $3.5 million, also 39% of revenues, for the three months ended December 31, 2016. Gross profit for the Optics segment decreased by 1% to 35% of revenue, or $1.7 million, at December 31, 2017 compared to 36% of revenues, or $1.6 million, for the quarter ended December 31, 2016. The decrease in gross profit was the result of the product mix and higher material costs in some product lines. The Contract Research segment gross profit decreased to $1.9 million, as compared to $2.0 million in the same period in fiscal year 2017 as the result of the lower revenue. Gross profit as a percent of revenue increased to 44% in the Contract Research segment compared to 41% in the first quarter of 2017 as fewer outside resources were used in the first three months of fiscal year 2018.
~~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 increased to $3.7 million for the three months ended December 31, 2017 from $3.4 million for the same quarter in fiscal year 2017. Operating expenses for the Optics segment increased $0.2 million due to personnel additions and related charges, as well as legal, advertising and travel costs. 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 by $0.1 million in the three months ended December 31, 2017, compared to the three months ended December 31, 2016, primarily due to increases related to its first-in-human clinical trial preparations, offset by lower administrative expenses.
As a result of the items discussed above, income from operations for the three months ended December 31, 2017 was a loss of $0.2 million compared to income of $0.1 million for the same period in fiscal year 2017.
~~Net interest expense was approximately $0.1 million for both the three months ended December 31, 2017 and 2016.~~
The provision for income taxes for the first quarter of 2018 was $0.7 million as compared to a benefit of $2.7 million for the same period in fiscal year 2017. The 2018 provision was primarily the result of the 2017 Tax Act in which we estimated the rate reduction impact to be $0.5 million, the earnings and profit transition tax of our Hilger Crystals subsidiary to be $0.1 million and a current quarter earnings provision of $0.1 million. The 2017 benefit resulted from the deconsolidation of Xcede, which means the Company no longer is able to offset taxable income with Xcede’s net operating loss results or carryforwards.
~~Net income (loss) for the three months ended December 31, 2017 was a loss of $0.8 million, or~~ ($~~0.05) in~~0.00) basic earnings per share, compared ~~with~~to net income of ~~$2.8~~$0.5 million or ~~$0.17 in~~$0.03 basic earnings per share for the ~~quarter~~six months ended ~~December~~March 31, ~~2016.~~2018.

Liquidity and Capital Resources

~~Liquidity Overview and Outlook~~
Net cash as of ~~December~~March 31, ~~2017~~2019 was ~~$1.0~~$0.4 million, or approximately ~~$1.4~~$1.9 million less than ~~the~~ net cash of ~~$2.4~~$2.3 million at September 30, ~~2017.~~2018.

As of ~~December~~March 31, ~~2017,~~2019, the Company was in full compliance with ~~the terms~~all of ~~all~~ its outstanding indebtedness which consisted of $1.3 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, $0.3 million owed to Middlesex Savings Bank under the newly established equipment line of credit, and $0.8 million of subordinated debt owed to the Massachusetts Capital Resources Company.bank covenants. The Company has $4.0 million of ~~additional availability~~available cash under its Middlesex Savings Bank line of credit based on its collateral calculations as of ~~December~~March 31, ~~2017.~~2019. Management believes that ~~the~~its cash ~~and~~on hand, together with availability under ~~the lines~~its line of credit, ~~discussed above~~ are adequate to meet the Company’s current liquidity requirements for the next twelve months.

On ~~January 3,~~November 27, 2018, the Company amended the Note Purchase Agreement ~~(the “Note”)~~ with Massachusetts Capital Resource Company (“MCRC”) to reinstate the ~~interest only~~interest-only payment requirements of the loan and defer principal repayment requirements to November 30, ~~2018, and institute~~2019. Such amendment also extended the maturity date from July 31, 2019 to November 30, 2021. On March 31, 2019, approximately $865,000 in principal was outstanding on the MCRC loan.
On April 30, 2019, the Company converted the outstanding balance on the equipment line of credit with Middlesex Savings Bank (“Middlesex”) of approximately $484,000, which was outstanding on March 31, 2019, into a ~~1% rate increase, raising the Note’s~~five year term note with an interest rate ~~to 7% per annum.~~of 5.17%. Additionally, on May 1, 2019, the Company’s equipment line of credit was renewed for $750,000 through April 30, 2020, at which time the outstanding balance will be converted into a five year term note.

2131

~~During the quarter ended December~~On March 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, 2017,~~2019, Xcede had $0.5 million of outstanding indebtedness owed to CBI. The note was recorded at fair value at issuance net of unamortized discount based on an imputed interest rate of 5.4%. On July 20, 2018, Xcede received a notice of termination from CBI, which ~~consisted~~included CBI’s assertion that the foregoing study results trigger an immediate repayment of athe $500,000 promissory note ~~issued~~owed by Xcede to ~~Cook Biotech Inc. (“Cook”)~~CBI under the Note Agreement and cancelled the remaining availability under the Note Agreement. While Xcede vigorously contests this assertion, at this time it is unclear how this matter will be resolved between Xcede and CBI. The Company carries the promissory note in ~~November 2016~~short-term debt. Upon termination of the CBI agreements, research and ~~due on December 31, 2025. Xcede has agreed~~development expense of $35,000 was recorded to ~~use the proceeds from~~accrete 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~~face value. See Note 3 – 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.Technologies, Inc. Joint Venture.

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 ~~$1.0~~$1.5 million for the ~~three~~six months ended ~~December~~March 31, ~~2017.~~2019. Approximately ~~$0.2~~$0.4 million of ~~the~~ cash was used for inventory increases to ensure the proper supply of ~~raw materials~~material is available to meet customer demand and ~~the remaining $0.8~~$0.5 million was used ~~due~~ to ~~the decrease in the~~pay down year end accrued expenses and accounts payable. In addition, unbilled receivables increased and contract liabilities decreased, which used approximately $1.5 million of cash along with an increase in prepaid expenses of $0.1 million. The decreases in cash were offset by net income, net of non-cash items of approximately $1.0 million.

Cash From Investing and Financing Activities

The Company used cash of approximately $0.6 million for the purchase of property, plant, ~~equipment~~ and ~~patents~~equipment for the ~~three~~six months ended ~~December~~March 31, ~~2017.~~2019.

Total outstanding bank debt as of ~~December~~March 31, ~~2017~~2019 increased approximately ~~$0.1~~$0.2 million to ~~$3.2~~$3.5 million from ~~$3.1~~$3.3 million at September 30, ~~2017.~~2018. The net cash increase from financing activities during the ~~three~~six months ended ~~December~~March 31, ~~2017~~2019 was approximately $0.1 million as a result of ~~$0.2~~$0.4 million in principal payments to Middlesex Savings Bank, offset by ~~$0.3~~approximately $0.5 million in financing from the new Middlesex Savings Bank equipment line of credit.

Critical Accounting Policies and Estimates

~~There have~~During the six months ended March 31, 2019, we adopted ASU 2014-09, which provides for new requirements in regards to revenue recognition. See Note 2 – Recent Accounting Pronouncements for further details. Aside from the adoption of ASU 2014-09, there been no material changes in our critical accounting policies or critical accounting estimates since September 30, ~~2017.~~2018. 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, ~~2017~~2018 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

~~Revenues~~We generate revenues from contract research, product sales, and non-recurring engineering contracts.
Our Optics segment produces standard and customized products for commercial organizations, educational institutions, and U.S. Federal government agencies. In addition, we also offer services which include non-recurring engineering services. We recognize revenue when the ~~sale~~performance obligation has been satisfied by transferring the control of the ~~Company’s~~product or service to the customer. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation based on their relative stand-alone selling prices. In such circumstances, the Company uses the observable price of goods or services which are sold separately in similar circumstances to similar customers. If these prices are not observable, then we will estimate the stand-alone selling price using information that is reasonably available. For the majority of our standard products and services, price list, and discount structures related to customer type are ~~recognized when persuasive evidence~~available. For products and services that do not have price list and discount structures, we may use one or both of ~~an arrangement exists, delivery has occurred~~the following: (i) adjusted market assessment approach or (ii) expected cost plus a margin approach. The adjusted market approach requires evaluation of the market in which we sell goods or services ~~have been rendered,~~and estimation of the price ~~is fixed~~that a customer in that market would be willing to pay for those goods or ~~determinable,~~services. The expected cost plus margin approach requires the Company to forecast expected costs of satisfying the performance obligation and ~~collectability is reasonably assured. The Company generally ships products F.O.B. shipping point. Revenue from~~then add a reasonable margin for that good or service. Shipping and handling activities primarily occur after a customer obtains control and are considered fulfillment cost rather than separate performance obligations.
32
Our Innovation and Development segment performs research and development ~~activities~~for U.S. Federal government agencies, educational institutions and commercial organizations. We account for a research contract when a contract has been executed, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of the contract price is ~~derived generally from the following types of contracts:~~considered probable. Revenue is earned under reimbursement of costs plus fees, fixed price, or time and material type contracts. Revenue is recognized when the ~~products are shipped per customers’ instructions,~~contract has been approved by both parties, each entity can identify each’s party’s rights regarding goods and services to be transferred, the payment terms have been identified, the contract has ~~been executed, the contract or sales price~~commercial substance, and it is ~~fixed or determinable, delivery~~probable that we will collect substantially all of ~~services or products has occurred and the Company’s ability to collect the contract price is considered reasonably assured.~~
Government funded services revenues from cost plus contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the contracts’ fixed fees. Revenue from fixed-type contracts is recognized under the percentage of completion method with estimated costs and profits included in contract revenue as work is performed. Revenues from time and materials contracts are recognized as costs are incurred at amounts generally commensurate with billing amounts. Recognition of losses on projects is taken as soon as the loss is reasonably determinable.
22
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.
In May 2014, the FASB issued ASU 2014-09 which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Using these guidelines, a comprehensive framework was established for determining how much revenue to recognize and when it should be recognized. The standard is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which ~~the entity expects to be~~it is entitled in exchange for ~~those~~the goods or ~~services. ASU 2014-09 also requires additional disclosure about~~services transferred.
Under the ~~nature, amount, timing and uncertainty~~typical payment terms of ~~revenue and cash flows arising from~~our U.S. government contracts, the customer pays either performance-based payments or progress payments. Performance-based payments, which are typically used in the firm fixed price contracts, ~~including significant judgments and changes~~are interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments, which are typically used in ~~judgments and assets recognized from~~our cost-plus type contracts, are interim payments based on costs incurred ~~to fulfill a contract. Entities have~~as the ~~option of using either a full retrospective or a modified retrospective approach~~work progresses. For our U.S. government cost-plus contracts, the customer generally pays during the performance period for ~~the adoption~~80%-90% of the ~~new standard. At this time,~~actual costs incurred. Because the ~~Company plans~~customer retains a small portion of the contract price until completion of the contract and audit of allowable costs, cost-plus type contracts generally result in revenue recognized in excess of billings which we present as contract assets on the balance sheet. Amounts billed and due from customers are classified as receivables on the balance sheet, whereas amounts earned, but not yet billed to ~~adopt this standard through~~the Company’s customers due to timing, are classified as unbilled receivables on the balance sheet. We recognize a liability for performance-based payments paid in advance which are in excess of the revenue recognized and presents these amounts as contract liabilities on the balance sheet.
Effective October 1, 2018, we adopted Topic 606,Revenue from Contracts with Customers, using the modified retrospective ~~approach. The ASU becomes effective for the Company at the beginning of its 2019 fiscal year. In 2016~~transition method, and 2017, the FASB issued several ASU’s related to ASU 2014-09, which simplify and provide additional guidance to companies for implementation of the standard. To be consistent with this core principle, an entity is required to apply the following five-step approach:
• ~~Identify the contract(s) with a customer;~~
• ~~Identify each performance obligation in the contract;~~
• ~~Determine the transaction price;~~
• ~~Allocate the transaction price to each performance obligation; and~~
• ~~Recognize revenue when or as each performance obligation is satisfied.~~
We are currently evaluating how the adoption of ASU 2014-09 will impact our consolidated financial statements and result of operations by applying the five-step approach to each revenue stream. This evaluation includes completing an inventory of revenue streams by like contracts to allow for ease of implementation, monitoring developments for the manufacturing industry and government contractors, and evaluating potentialimplemented changes to ~~our~~its business processes, systems and controls to support ~~the~~revenue recognition and ~~disclosure~~the related disclosures under this ASU. Under the modified retrospective approach, we applied the standards to new ~~standard. The Company~~contracts and those that were not completed as of October 1, 2018. For those contracts not completed as of October 1, 2018, this method resulted in a cumulative adjustment to increase the Company’s retained earnings in the amount of $22,000.
This guidance has ~~engaged a third party~~resulted in very few changes in revenue recognition for the standard contracts in both the Optics and the Innovation and Development segments. This new guidance may lead to ~~assist~~recognition of certain revenue transactions sooner than in ~~evaluating~~ the ~~impact of this new standard~~past on ~~its consolidated financial statements~~contracts that require us to maintain stated inventory levels, as we have an enforceable right to payment for the required inventory, and ~~related disclosures. We plan~~on contracts such as engineering services and design and tooling transactions, as we have an enforceable right to ~~complete the conversion and implementation phases by the end of fiscal year 2018 in conjunction with future interpretative guidance.~~payment for these performance obligations satisfied over time.

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;
33
· 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.

23
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~~Innovation and Development 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~~six-month periods ended ~~December~~March 31, ~~2017~~2019 or ~~2016.~~2018.

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~~six months ended ~~December~~March 31, ~~2017.~~2019.

Impairment of Long-Lived Assets

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

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~~six months ended ~~December~~March 31, ~~2017.~~2019.

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.

34
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.

2435

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We regularly evaluate our ability to recover the reported amount of our deferred income tax assets 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 adoption of ASC 2014-09, which provides for new requirements in regards to revenue recognition, as well as 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 ~~expecting timing of the First-in-Human clinical trial of the Xcede patch, the~~ success of efforts to develop a successful Xcede Patch and to fund ~~Xcede, results of our pre-clinical and planned clinical trials, regulatory approvals,~~that development, our development of new technologies including at Dynasil Biomedical, the adequacy of our current financing sources to fund our current operations, our growth initiatives, ~~governmental budgetary and funding matters,~~ our capital expenditures, ~~and~~ the strength of our intellectual property ~~portfolio.~~portfolio, perceived benefits and costs of the proposed stock split transaction, the number of shares of the Company’s common stock that are expected to be cashed out in the such transaction and the timing and stockholder approval of such transaction.. These forward-looking statements may be identified by the use of words such as ~~“plans”,~~“plans,” “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” ~~“continue”~~“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~~forward-looking statements could differ materially from those stated in such ~~forward looking~~forward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to develop and commercialize our products, including obtaining regulatory approvals, the size and growth of the potential markets for our products and our ability to serve those markets, the rate and degree of market acceptance of any of our products, general economic conditions, costs and availability of raw materials and management information systems, our ability to obtain and maintain intellectual property protection for our products, Xcede’s ability to produce preclinical data sufficient to enable it to initiate clinical studies of hemostatic patch, clinical results of Xcede’s programs which may not support further development, the ability of our RMD business unit to identify and pursue possible continued development opportunities for the Xcede patch, which is not assured, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, ~~changing priorities or reductions in government spending,~~ 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, seasonality, the many variables that may impact the Company’s projected cost savings, variables and ~~seasonality,~~risks related to consummation of the proposed stock split transaction, SEC regulatory review of the Company’s filings related to the such transaction, and the continuing determination of the Board of Directors and Special Committee that such transaction is in the best interests of all stockholders. as well as the uncertainties set forth in the Company’s Annual Report on Form 10-K, filed on December ~~20, 2017,~~21, 2018, 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.
36

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.

25
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~~March 31, ~~2017.~~2019. Based on ~~this~~the evaluation of our ~~management~~disclosure controls and procedures as of March 31, 2019, our Chief Executive Officer and our Chief Financial Officer concluded that, as of ~~December 31, 2017, these~~such date, our disclosure controls and procedures were ~~effective at~~not effective.
As disclosed in our Annual Report on Form 10-K for the year ended September 30, 2018, we identified a material weakness in our internal control over financial reporting as of September 30, 2018. Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) are an integral part of disclosure controls and procedures. This material weakness, which is described in detail in our 2018 Annual Report on Form 10-K, can be summarized as relating to our controls over the revenue recognition process. Specifically, we lacked personnel with an appropriate level of knowledge, experience and training in contract review and management to provide reasonable assurance ~~level.~~that revenue was being properly recorded in accordance with GAAP. Additionally, as our cost recognition system for contract revenue is a manual entry system, additional training and in-depth review for accuracy and completeness are required.

The measures that we have identified and implemented to address the material weakness are also discussed in detail in our 2018 Form 10-K. The Company believes that it has taken steps that it believes will remediate the previously identified material weakness. However, certain controls designed and implemented during the second quarter of the 2019 fiscal year to address the material weakness in the initial contract review and period-end financial reporting processes have not been operational for a sufficient period of time to allow management to conclude that they are operating effectively. As a result, management has determined as of March 31, 2019 the control deficiency that existed in the prior year still exists, and, that our internal controls do not effectively mitigate the risk that a material misstatement in our financial statements could occur and not be prevented or detected. We expect the evaluation and testing of the steps previously taken to remediate the previously identified material weaknesses will continue throughout fiscal year 2019 in order to allow management sufficient basis to conclude that the controls are operating effectively.
Changes in Internal Control Over Financial Reporting

As a result of our adoption of the new revenue standard (Topic 606), we implemented controls to ensure adequate evaluation of contracts and assessment of the impact of the new accounting standard related to revenue recognition on our financial statements to facilitate its adoption on October 1, 2018. There were nonot any significant changes into our internal control over financial reporting due to the adoption of the new standard, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) during the ~~most recent fiscal quarter~~period covered by this Quarterly Report or in other factors that have materially affected, or are reasonably likely to materially affect, our internal ~~control~~controls over financial reporting.

37

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 herein and in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, ~~2017,~~2018, which could materially affect our business, financial condition or future results. The risks described in this ~~Quarterly Report on Form 10-Q~~report 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.

~~The recently passed comprehensive tax reform bill could adversely affect our business and financial condition.~~Risks Related To Dynasil’s Stock

~~On December 22, 2017, President Trump signed into law~~Subject to stockholder approval, the ~~“Tax Cuts~~board of directors of the Company has approved a plan to effectuate a reverse/forward stock split to reduce the number of record holders of the Common Stock and ~~Jobs Act” (“TCJA”) that significantly reforms~~terminate the ~~Internal Revenue Code~~registration of ~~1986, as amended, or~~ the ~~Code. The TCJA, among other things, includes changes~~Common Stock under the Exchange Act.
If the proposed reverse/forward stock split is effected, the Company intends to ~~U.S. federal tax rates, imposes significant additional limitations~~terminate the registration of the Common Stock under the Exchange Act. Following deregistration, the Company will no longer file annual reports on ~~the deductibility of interest~~Form 10-K, quarterly reports on Form 10-Q, and net operating loss carryforwards, allows for the expensing of capital expenditures, and puts into effect the migration from a “worldwide” system of taxation to a territorial system. Our net deferred tax assets and liabilitiescurrent reports on Form 8-K. Accordingly, there will be ~~revalued at~~significantly less information regarding the ~~newly enacted U.S. corporate rate,~~Company available to stockholders and potential investors. In addition, the ~~impact, if~~Company will no longer be subject to the provisions of the Sarbanes-Oxley Act and certain of the liability provisions of the Exchange Act, although the Company will still be subject to the antifraud provisions of the Exchange Act and any applicable state securities laws. Following deregistration, the Company’s executive officers, directors and 10% stockholders will no longer be ~~recognized in our tax expense~~required to file reports relating to their transactions in the ~~year~~Common Stock with the SEC. In addition, the Company’s executive officers, directors and 10% stockholders will no longer be subject to the recovery of ~~enactment. We continue~~short-swing profits provision of the Exchange Act, and persons acquiring 5% of the Common Stock will no longer be required to ~~examine~~report their beneficial ownership under the ~~impact this tax reform legislation may have on our business. The impact~~Exchange Act. In addition, following the effective time of ~~this tax reform is uncertain and could be adverse. We urge our stockholders~~the reverse/forward stock split, the Company plans to ~~consult with their legal and tax advisors with respect to such legislation and~~delist its common stock from the ~~potential tax consequences of investing~~Nasdaq Stock Market. Any trading in our common ~~stock.~~stock after the deregistration and delisting would only occur in privately negotiated sales or potentially on the OTC Pink Market, if one or more brokers chooses to make a market for our common stock there and complies with applicable regulatory requirements; however, there can be no assurances regarding any such trading. The lack of public information and increased illiquidity will make trading in our shares of common stock more difficult, which may cause the value of our common stock to decrease.
The Company will file a preliminary proxy statement that includes important information regarding the proposed reverse/forward stock split. A definitive proxy statement will be filed with the Securities and Exchange Commission and mailed to stockholders at least 20 calendar days prior to the special stockholders meeting at which the proposed transaction will be voted on. Stockholders are urged to read the definitive proxy statement carefully.
38

ITEM 6       EXHIBITS

10.01 ~~Second Amendment to~~ Equipment Line of Credit Term Note ~~Purchase Agreement~~ between the Company and ~~Massachusetts Capital Resource Company,~~Middlesex Savings Bank, dated ~~January 3, 2018.~~April 30, 2019 and filed herewith.

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.

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~~May 14, 2019 issued by Dynasil Corporation of America announcing its financial results for the quarter ended ~~December~~March 31, ~~2017.~~2019.
26
101 The following materials from Dynasil Corporation of America’s Quarterly Report on Form 10-Q for the quarter ended ~~December~~March 31, ~~2017,~~2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of ~~December~~March 31, ~~2017~~2019 and September 30, ~~2017,~~2018, (ii) Consolidated Statements of Operations for the three months ended ~~December~~March 31, ~~2017~~2019 and ~~2016,~~2018, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended ~~December~~March 31, ~~2017;~~2019 and 2018; (iv) Consolidated Statements of Cash Flows for the three months ended ~~December~~March 31, ~~2017~~2019 and ~~2016,~~2018, and (v) Notes to Consolidated Financial ~~Statements.~~Statements, tagged as blocks of text.

39

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, 2018~~ May 14, 2019
Peter Sulick,
Chief Executive Officer and President

/s/ Robert J. Bowdring DATED:~~February 13, 2018~~ May 14, 2019
Robert J. Bowdring,
Chief Financial Officer

2740

					Additional		Other														Total
	Common		Common		Paid-in		Comprehensive			Accumulated			Treasury Stock					Noncontrolling			Stockholders'
For the three months ended December 31, 2017	Shares		Amount		Capital		Income (Loss)			Deficit			Shares		Amount			Interest			Equity
Balance, September 30, 2017		17,893,763	$	9,000	$	21,406,000	$	(539,000	)	$	(919,000	)		810,160	$	(986,000	)	$	1,454,000		$	20,425,000
Issuance of shares of common stock under employee stock purchase plan		4,420		-		4,000		-			-			-		-			-			4,000

Stock-based compensation costs		31,000		-		89,000		-			-			-		-			4,000			93,000

Foreign currency translation adjustment		-		-		-		35,000			-			-		-			-			35,000

Net income (loss)		-		-		-		-			(797,000	)		-		-			(75,000	)		(872,000	)
Balance, December 31, 2017		17,929,183	$	9,000	$	21,499,000	$	(504,000	)	$	(1,716,000	)		810,160	$	(986,000	)	$	1,383,000		$	19,685,000

	Balance at		Adjustment for			Adjusted balance at
	September 30, 2018		Topic 606			October 1, 2018
Assets:
Unbilled receivables		1,214,000		40,000			1,254,000
Inventories, net of reserves		4,106,000		(18,000	)		4,088,000

Liabilities:

Contract liabilities		253,000		-			253,000

Stockholders' equity:
Retained earnings		841,000		22,000			863,000

	September 30, 2018
	As Reported		As Adopted
Unbilled receivables		1,215,000		1,214,000
Contract assets		-		1,000
Security and other deposits		65,000		58,000
Long term contract assets		-		7,000
Deferred revenue		253,000		-
Contract liabilities		-		253,000

	•12	~~Identify the contract(s) with a customer;~~
	•	~~Identify each performance obligation in the contract;~~
	•	~~Determine the transaction price;~~
	•	~~Allocate the transaction price to each performance obligation; and~~
	•	~~Recognize revenue when or as each performance obligation is satisfied.~~

	Three Months Ended March 31, 2019						Six Months Ended March 31, 2019
	Optics		Innovation & Development		Total		Optics		Innovation & Development		Total
Total Revenue by Geographic Location
United States	$	3,605,000	$	5,168,000	$	8,773,000	$	6,880,000	$	9,353,000	$	16,233,000
Asia		858,000		7,000		865,000		1,773,000		22,000		1,795,000
Europe		1,701,000		12,000		1,713,000		3,186,000		51,000		3,237,000
Other		62,000		119,000		181,000		108,000		187,000		295,000
Total	$	6,226,000	$	5,306,000	$	11,532,000	$	11,947,000	$	9,613,000	$	21,560,000

Total Revenue by Contract Type
Firm-fixed price	$	6,226,000	$	605,000	$	6,831,000	$	11,947,000	$	1,163,000	$	13,110,000
Non-Firm Fixed price		-		4,701,000		4,701,000		-		8,450,000		8,450,000
Total	$	6,226,000	$	5,306,000	$	11,532,000	$	11,947,000	$	9,613,000	$	21,560,000

Total Revenue by Major Customer Type
U.S. government revenue	$	-	$	5,035,000	$	5,035,000	$	3,000	$	9,216,000	$	9,219,000
U.S. commercial revenue		3,605,000		132,000		3,737,000		6,877,000		137,000		7,014,000
Foreign commercial and other revenue		2,621,000		139,000		2,760,000		5,067,000		260,000		5,327,000
Total	$	6,226,000	$	5,306,000	$	11,532,000	$	11,947,000	$	9,613,000	$	21,560,000

Total Revenue by Major Products/Services
Optical components	$	6,194,000	$	-	$	6,194,000	$	11,833,000	$	-	$	11,833,000
Contract research		-		5,223,000		5,223,000		-		9,421,000		9,421,000
Other products and services		32,000		83,000		115,000		114,000		192,000		306,000
Total	$	6,226,000	$	5,306,000	$	11,532,000	$	11,947,000	$	9,613,000	$	21,560,000

Total Revenue by Timing of Recognition
Goods/services transferred over time	$	508,000	$	5,223,000	$	5,731,000	$	1,068,000	$	9,421,000	$	10,489,000
Goods transferred at a point in time		5,718,000		83,000		5,801,000		10,879,000		192,000		11,071,000
Total	$	6,226,000	$	5,306,000	$	11,532,000	$	11,947,000	$	9,613,000	$	21,560,000

	Useful	Gross		Accumulated
December 31, 2017	Life (years)	Amount		Amortization		Net
Acquired Customer Base	5 to 15	$	741,000	$	570,000	$	171,000
Know How	15		512,000		324,000		188,000
Trade Names	Indefinite		282,000		-		282,000
Patents	20		348,000		11,000		337,000
Biomedical Technologies	5		260,000		260,000		-
		$	2,143,000	$	1,165,000	$	978,000

	2018 (9 months)		2019		2020		2021		2022		Thereafter		Total
Acquired Customer Base	$	60,000	$	80,000	$	31,000	$	-	$	-	$	-	$	171,000
Know How		26,000		34,000		34,000		34,000		34,000		26,000		188,000
Patents		9,000		11,000		11,000		11,000		11,000		162,000		215,000
	$	95,000	$	125,000	$	76,000	$	45,000	$	45,000	$	188,000	$	574,000

	2019 (6 months)		2020		2021		2022		2023		Thereafter		Total
Acquired Customer Base	$	40,000	$	46,000	$	-	$	-	$	-	$	-	$	86,000
Know How		17,000		34,000		34,000		34,000		26,000		-		145,000
Patents		6,000		11,000		11,000		11,000		11,000		147,000		197,000
	$	63,000	$	91,000	$	45,000	$	45,000	$	37,000	$	147,000	$	428,000

	December 31, 2017		December 31, 2016		March 31, 2019		March 31, 2018
Weighted average shares outstanding
Basic		17,047,690		16,808,729		17,433,249		17,133,468
Effect of dilutive securities
Stock options		-		-
Restricted stock		-		-
Dilutive average shares outstanding		17,047,690		16,808,729
Stock Options						-		-
Restricted Stock						-		-
Dilutive Average Shares Outstanding						17,433,249		17,133,468

	Three Months Ended		Three Months Ended
Stock Compensation Expense	December 31, 2017		December 31, 2016
Stock grants	$	39,000	$	39,000
Restricted stock grants		13,000		13,000
Option grants		12,000		12,000
Employee stock purchase plan		1,000		1,000
Subsidiary option grants		28,000		24,000
Total	$	93,000	$	89,000

Restricted Stock Activity for the Three Months ended December 31, 2017	Shares			Weighted-Average Grant-Date Fair Value
Nonvested at September 30, 2017		70,000		$	1.73
Restricted Stock Activity for the Six Months ended March 31, 2019						Shares			Weighted-Average Grant-Date Fair Value
Nonvested at September 30, 2018							60,000		$	1.61

Granted		-					-			-
Vested		(10,000	)	$	1.70		(30,000	)		1.73
Cancelled		-			-		-			-
Nonvested and expected to vest at December 31, 2017		60,000		$	1.73
Nonvested and expected to vest at March 31, 2019							30,000		$	1.48

	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2017		196,769	$	1.98		1.64
Outstanding and exercisable at September 30, 2017		196,769	$	1.98		1.64
Granted		-		-
Exercised		-		-
Cancelled		-		-
Balance at December 31, 2017		196,769	$	1.98		1.39
Outstanding and exercisable at December 31, 2017		196,769	$	1.98		1.39

	Options Outstanding			Weighted Average Exercise Price per Share		Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2018		160,537		$	2.01		0.93
Outstanding and exercisable at September 30, 2018		160,537		$	2.01		0.93
Granted		-			-
Exercised		-			-
Cancelled		(64,935	)		2.33
Balance at March 31, 2019		95,602		$	1.80		0.84
Outstanding and exercisable at March 31, 2019		95,602		$	1.80		0.84

Results of Operations for the Three Months Ended December 31,
2017
Results of Operations for the Three Months Ended March 31,													Results of Operations for the Three Months Ended March 31,
2019													2019
	Optics			Contract Research			Biomedical			Total				Optics			Innovation and Development*			Biomedical			Total
Revenue	$	4,942,000		$	4,247,000		$	-		$	9,189,000			$	6,226,000		$	5,306,000		$	-		$	11,532,000
Gross profit		1,724,000			1,851,000			-			3,575,000				2,159,000			2,199,000			-			4,358,000
GM %		35	%		44	%		-			39	%			35	%		41	%		-			38	%
Operating expenses		1,576,000			1,723,000			445,000			3,744,000				1,871,000			2,141,000			22,000			4,034,000
Operating income (loss)		148,000			128,000			(445,000	)		(169,000	)			288,000			58,000			(22,000	)		324,000

Depreciation and amortization		231,000			65,000			3,000			299,000				292,000			60,000			3,000			355,000
Capital expenditures		590,000			19,000			16,000			625,000				313,000			47,000			-			360,000

Intangibles, net		453,000			188,000			337,000			978,000				358,000			145,000			198,000			701,000
Goodwill		1,012,000			4,939,000			-			5,951,000				961,000			4,939,000			-			5,900,000
Total assets	$	18,969,000		$	8,114,000		$	614,000		$	27,697,000			$	21,482,000		$	9,456,000		$	204,000		$	31,142,000

Results of Operations for the Six Months Ended March 31,
2019
	Optics			Innovation and Development*			Biomedical			Total
Revenue	$	11,947,000		$	9,613,000		$	-		$	21,560,000
Gross profit		4,009,000			4,041,000			-			8,050,000
GM %		34	%		42	%		-			37	%
Operating expenses		3,756,000			4,020,000			75,000			7,851,000
Operating income (loss)		253,000			21,000			(75,000	)		199,000

Depreciation and amortization		566,000			120,000			7,000			693,000
Capital expenditures		497,000			64,000			-			561,000

Intangibles, net		358,000			145,000			198,000			701,000
Goodwill		961,000			4,939,000			-			5,900,000
Total assets	$	21,482,000		$	9,456,000		$	204,000		$	31,142,000

10.01 ~~Second Amendment to~~		Equipment Line of Credit Term Note ~~Purchase Agreement~~ between the Company and ~~Massachusetts Capital Resource Company,~~Middlesex Savings Bank, dated ~~January 3, 2018.~~April 30, 2019 and filed herewith.

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.

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~~May 14, 2019 issued by Dynasil Corporation of America announcing its financial results for the quarter ended ~~December~~March 31, ~~2017.~~2019.

BY:	/s/ Peter Sulick	DATED:~~February 13, 2018~~	May 14, 2019
	Peter Sulick,
	Chief Executive Officer and President


	/s/ Robert J. Bowdring	DATED:~~February 13, 2018~~	May 14, 2019
	Robert J. Bowdring,
	Chief Financial Officer