DYNASIL CORP OF AMERICA (Form: 10-K, Received: 12/20/2013 16:34:51)

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended September 30, 2013.

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______________ to ______________

Commission file number: 000-27503

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.)

44 Hunt Street, Watertown, MA		02472
(Address of principal executive offices)		(Zip Code)

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

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

Title of each class		Name of each exchange on which registered

Common Stock, $0.0005 par value		The NASDAQ Stock Market LLC (NASDAQ Capital Market)

Securities registered pursuant to Section 12(g) of the Act: none

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x

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

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

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

Yes ¨ No x

As of March 31, 2013, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $5,857,930.

As of December 13, 2013 there were 15,414,242 shares of common stock, par value $.0005 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the Annual Meeting of Stockholders scheduled to be held on February 13, 2014 are incorporated by reference into Part III of this report.

PART I

This annual report on Form 10-K contains or incorporates by reference not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. We refer you to the information under the heading “Forward-Looking Statements."

As used in this annual report on Form 10-K, references to "Dynasil," the "Company," "we," "our" or "us," unless the context otherwise requires, refer to Dynasil Corporation of America and our subsidiaries.

All trademarks or trade names referred to in this report are the property of their respective owners.

ITEM 1. BUSINESS

General

Dynasil Corporation of America was founded as a New Jersey corporation in 1960 and incorporated in the state of Delaware through a migratory merger in March 2008. Our corporate headquarters are located at 44 Hunt Street, Watertown, MA 02472, and our corporate website is www.dynasil.com . You can access, free of charge, our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and any other amendments to those reports, through a link at our website, or at the Commission’s website at www.sec.gov .

The Company is divided into four reporting segments based on our main operating activities. Below is a summary of these segments:

	·	Contract Research : The Contract Research segment consists of the Radiation Monitoring Devices, Inc. (“RMD”) business unit, which is among the largest small business participants in U.S. government-funded research.

	·	Optics : The Optics segment encompasses four business units – Dynasil Fused Silica, Optometrics, Hilger Crystals, and Evaporated Metal Films (“EMF”) – 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.

	·	Instruments : The Instruments segment consists of Dynasil Products (formerly known as RMD Instruments), which manufactures precision instrumentation for medical and commercial applications. Subsequent to our fiscal yearend, we completed the sale of the Lead Paint business in our Instruments segment as discussed in Note 18 in the Notes to the Consolidated Financial Statements.

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Biomedical : The Biomedical segment consists of a single business unit, Dynasil Biomedical Corporation (“Dynasil Biomedical”), a medical technology incubator, developing disruptive technologies for a wide spectrum of applications, including hematology, hypothermic core cooling and tissue sealants. On or about October 1, 2013, Dynasil Biomedical formed Xcede Technologies, Inc. (“Xcede”), a joint venture with Mayo Clinic to spin out and separately fund the development of the tissue sealant technology. See Note 18 to the Consolidated Financial Statements included in this Report.

For information about our segments and geographical information about our operating revenues and assets, see Note 17 to the Consolidated Financial Statements included in this Report.

Our business strategy is based on continued development and expansion of our funded research portfolio, investment in the commercialization of the technologies originating from our Contract Research segment, organic growth of existing Optics segment products, and acquisitions that align with our core competencies. On December 31, 2012, we announced that we were in default of certain covenants of both our senior and our subordinated bank loans. As a result of and in response to those defaults, our short term strategy also includes identification of product lines or business units which could be sold in order to repay debt and deleverage our balance sheet. We expect to continue our efforts to deleverage our balance sheet at least until such time as we are no longer in default of our bank covenants.

Historical Growth by Acquisition

Through a series of acquisitions beginning in March 2005, Dynasil has evolved from a single product line optics company to one focused on commercializing its own products, patenting its own innovations and advancing its own technologies. Our revenue has increased from $2 million in FY 2004 to nearly $43 million in FY 2013.

The acquisitions we completed during this period included:

	·	Optometrics: In March 2005, we acquired Optometrics LLC (“Optometrics”), a worldwide supplier of optical components and instruments, including diffraction gratings, interference filters, laser optics, monochromators and specialized optical systems.

	·	Evaporated Metal Films: In October 2006, we acquired Evaporated Metal Films Corporation (“EMF”), an optical thin-film coatings company with a broad range of application markets, including solar energy, display systems, dental photography, optical instruments, satellite communications and lighting.

	·	RMD: In July 2008, we acquired Radiation Monitoring Devices, Inc. (“RMD”), a contract research company, and RMD Instruments, LLC (“Dynasil Products”), a precision instruments company that manufactures and sells instruments in the medical imaging and industrial markets, including hand-held analyzers for lead paint and medical probes for cancer surgery.

	·	Hilger Crystals: In July 2010, we acquired Hilger Crystals, Ltd., (“Hilger”) a manufacturer of synthetic crystals applicable to a wide range of industrial, medical, and homeland security applications with a long history of supplying high-quality synthetic crystals for infrared spectroscopy, X-ray and gamma ray detection.

	·	Biomedical technologies: In April 2011, we acquired the rights to six biomedical technologies from Dr. Daniel Ericson, a former hematologist at the Mayo Clinic, which jointly owns rights to certain of the technologies acquired. We have formed a joint venture to pursue the tissue sealant technology and are seeking opportunities to license, sell or develop several of the development-stage technologies for various therapeutic applications.

Contract Research – the Science Behind our Technology

Our Contract Research segment’s business unit, RMD, is among the largest small business participants in U.S. government-funded research, performing research and development activities for government agencies including Department of Energy, Department of Defense, Department of Homeland Security, Domestic Nuclear Detection Office, National Institutes of Health and NASA.

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RMD develops advanced technology in materials, sensors and prototype instruments that detect, use or measure radiation, light, magnetism or sound for use in security, medical and industrial applications. RMD has technology practices in material science, radiation detection, digital imaging technology, magnetic imaging, laser optics and photonics. As of September 30, 2013, our Contract Research segment had a total of 102 employees, including 37 Ph.D. level scientists. RMD serves as an incubator to expand our patent portfolio enabling the opportunity to advance our technology from development to commercialization using government-funded research. As of September 30, 2013, RMD had a portfolio of 48 issued U.S. patents and 42 pending patent applications, compared with 43 issued patents and 55 pending patent applications at the same point in 2012.

For more than 25 years, RMD has successfully conducted government research under the auspices of the Small Business Innovation Research (“SBIR”) program. In recent years, RMD has augmented its SBIR research with larger, competitively bid government research and development contracts. To grow our research portfolio within the federal government, we are broadening our relationships within key federal funding agencies and the U.S. military. RMD also provides research for non-governmental entities in areas where it has the appropriate expertise. Such research is currently not a significant portion of RMD’s revenues. Our research initiatives are aligned with our focus on the homeland security, medical and industrial markets. As of September 30, 2013, RMD had a contract backlog of approximately $40 million, of which approximately 48% is SBIR contracts.

RMD competes for contract research work against a variety of small and large entities, including universities that submit research proposals based on specific government solicitations. We generate revenues under various types of contracts, which include cost reimbursement, Time & Materials (T&M), Fixed Price-Level of Effort and Firm Fixed Price (FFP) contracts. We believe that RMD’s reputation for conducting state-of-the art research and development, as well as the quality of its proposals, are significant competitive advantages. In addition, RMD maintains strong working relationships with universities, government agencies, national laboratories, research hospitals and corporations. However, some of our competitors may have greater financial, technical and human resources than we have and may be better able to operate large, well-funded research and development programs.

We believe that research projects provide an important source for new commercial products in areas such as medical imaging, industrial sensors, critical care and point of care diagnostics and homeland security. For example, our lead paint analyzer and a medical probe for cancer surgery products emanated from the RMD portfolio. Our government-funded research work also has spawned programs such as our dual-mode radiation detection technology.

Commercialization Engines

We specialize in the production of optical materials, components and coatings for various applications in the medical, industrial, and homeland security/defense sectors.

Our Instruments segment manufactures precision instruments such as handheld lead paint analyzers ( LPA-1™ ) and medical probes that help surgeons detect cancer tracers, thereby enabling more effective surgical procedures (the Navigator GPS™ gamma counter and the wireless Navigator 2.0™ gamma counter). Subsequent to yearend, we sold the lead paint business (see Note 18 to the Consolidated Financial Statements included in this Report).

Our Optics segment supplies synthetic crystals, optical materials, components, and coatings that are used for baggage scanners, medical imaging systems, optical instruments, lasers, analytical instruments, semiconductor/electronic devices, automotive components, spacecraft/aircraft components and advertising displays. These products are offered through four business units (Dynasil Fused Silica, Optometrics, Hilger Crystal, and EMF).

Our Biomedical segment is focused on developing disruptive technologies for a wide spectrum of applications, including hematology, hypothermic core cooling and tissue sealants. All of these technologies are in early-stages and may require significant investment to support further development, regulatory approval and commercialization. While Dynasil currently believes that these technologies represent exciting opportunities, there can be no assurances that any of these technologies will be successfully commercialized. On or about October 1, 2013, Dynasil Biomedical formed Xcede, a joint venture with Mayo Clinic, to spin out and separately fund the development of the tissue sealant technology (see Note 18 to the Consolidated Financial Statements included in this Report).

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We compete for business with fabricators of industrial optical materials, other optical components manufacturers, other optical crystal manufacturers and other optical coaters as well as other analytical instruments manufacturers and synthetic crystal manufacturers. We believe our proprietary processes, reputation, specialty product offering, products in development and the price at which we offer our products enable us to successfully compete in these markets. However, many of our competitors have greater financial, sales and marketing resources than we do, which may enable them to develop and market products that would compete against those developed by us.

Our products are distributed through a direct sales and marketing staff of 14 people and through other channels, including manufacturer’s representatives and distributors in various foreign countries for international sales and U.S. manufacturer’s representatives for certain product lines. Marketing efforts include direct customer contact through sales visits, advertising in trade publications and attendance at trade shows.

Strategy to Commercialize our Advanced Technologies

Our business strategy focuses on combining our expertise in funded research, product development and technology innovation to commercialize detection and analysis equipment for the homeland security, industrial and medical markets. We are executing on this strategy by:

	·	developing and expanding our research portfolio;
	·	commercializing the technologies coming from our Contract Research segment;
	·	growing organically through investment in existing businesses; and
	·	identifying and investing in those technologies with the greatest revenue and growth potential in the market.

For example, our dual mode nuclear detector technology was developed by RMD under a program for the Department of Homeland Security for use in locating nuclear bombs or nuclear materials at our nation’s ports and borders. This technology is of critical importance to our national security, as well as other radiation detection applications, such as nuclear power plant safety. Our dual mode detectors are being commercialized as a part of our Optics segment and began generating revenue in 2012.

Our dual mode detector technology is designed to be a single detector that replaces two detector subsystems – the gamma radiation detector and also the helium-3 detectors for neutrons. Increasing our value proposition is the fact that the stockpile of the chemical element helium-3, a byproduct of nuclear weapons production, is in critically short supply. The stockpile of helium-3 has been drawn down during the past 10 years, as the federal government has increased its use in neutron detectors to help prevent nuclear and radiological material from being smuggled into the U.S.

In order to accelerate the pace of this technology to market, and to establish manufacturing capacity, in July 2010 we acquired Hilger Crystals, a leading manufacturer of scintillation crystals based in Margate, Kent, U.K.

Intellectual Property (IP)

From October 2012 through September 2013, we have been granted five new U.S. patents and have filed 14 new patent applications. Our current portfolio, company-wide, is 48 issued and 53 pending applications, most of which are issued to RMD. We believe that intellectual property represents an important strategic advantage for us. Our Patent Committee is strengthening the identification of intellectual property within the Company through a broad-based vetting process to ensure that we develop IP that maximizes the market value of our research. This allows us to protect selected technologies that we believe have commercial potential – either through product offerings or licensing agreements.

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Customers

We have more than 1,034 customers, with approximately 51.8% of our business concentrated in our top 10 customers. Our five largest customers are agencies and agents of the Federal government and accounted for approximately 13.0%, 9.2%, 7.2%, 7.0% and 4.5%, respectively, of our revenues during fiscal year 2013. The loss of any of these top five customers would likely have a material adverse effect on our business, financial condition and results of operations. Generally, our customers provide purchase orders for a specific part and quantity or they provide a contract for research projects. Product orders are normally filled over a period ranging from one to six weeks. We also have blanket orders that call for monthly deliveries of predetermined amounts. Contract research projects generally run for a one to two year period.

Employees

As of September 30, 2013, we had a total of 233 employees, of which 222 are full-time. Of the total, 51 of our employees are engaged in administration, 14 are engaged in sales, 100 are engaged in research and/or engineering and 68 are engaged in manufacturing. The Company has a total of 40 Ph.D. level employees. Our operations are non-union except for a two-person union in one location.

Suppliers

Our largest supplier for materials and components is Corning Incorporated, which is a primary supplier of the fused silica material that is fabricated and sold by our New Jersey facility. We believe that we have excellent relationships with our suppliers. If any of our suppliers should become unavailable to us for any reason, we believe that there are a number of potential replacements, although we might incur some delay in identifying such replacements.

Research and Development

Our RMD business unit primarily provides research and development (“R&D”) activities under government funded research contracts. The RMD business unit recognized revenues of $21.9 million for fiscal year 2013 and $25.3 million for fiscal year 2012. The direct costs associated with these revenues were $12.1 million and $15.4 million in 2013 and 2012, respectively. Substantially all the Contract Research segment’s cost of revenue relates to research contracts performed by RMD which are in turn billed to the contracting party.

R&D for our other businesses, which totaled $2.3 million and $2.8 million in 2013 and 2012, respectively, primarily involves new product development, changes to our manufacturing processes and the introduction of improved methods and equipment.

Government Regulation

The businesses that we operate are subject to various federal and states regulations.

Our Contract Research segment is subject to the rules and regulations applicable to government contracting, including: the Federal Acquisition Regulation (FAR) and supplements, which regulate the formation, administration and performance of U.S. Government contracts; the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with certain contract negotiations; the Procurement Integrity Act, which regulates access to competitor bids and proposal information and government source selection information, and our ability to provide compensation to certain former government officials; the Civil False Claims Act, which provides for substantial civil penalties for violations, including for submission of a false or fraudulent claim to the U.S. Government for payment or approval; and the U.S. Government Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. Government contracts.

Our handheld lead paint analyzers product business which was sold in November 2013 is subject to certain testing protocols and certifications and accreditation under rules and regulations promulgated by U.S. Department of Housing and Urban Development (“HUD”), the U.S. Environmental Protection Agency (“EPA”), and state and local Lead Renovation Repair Painting Rules (RRP rules).

Our Navigator GPS™ and Navigator 2.0™ gamma counter business is subject to the regulations of the Federal Drug Administration (“FDA”) relating to medical devices. The products being developed by our Biomedical segment are also subject to FDA regulations and approval.

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Our use of radioactive materials in certain of our products (our gamma counters, our dual-mode detector and lead paint analyzers) subject us to laws regulating hazardous wastes under United States federal, and Massachusetts, California, Washington and Wisconsin state, environmental and atomic energy regulatory laws and similar laws in each jurisdiction in which our research and manufacturing facilities are located. Environmental compliance costs, which totaled $84,788 for fiscal year 2013, have not historically had a material effect on our operational results.

With respect to our intellectual property rights, we rely, and are subject to, the laws in the U.S. and abroad governing intellectual property protection.

Item 1a. Risk Factors

In your evaluation of our company and our businesses, you should carefully consider the risks and uncertainties described below, together with the information included elsewhere in this Annual Report on Form 10-K and the other documents we file with the SEC. The following factors describe the risks and uncertainties that we consider significant to the operation of our business, but should not be considered a complete listing of all potential risks and uncertainties that could adversely affect our operating results, financial position or liquidity. Additionally, our business is subject to the same general risks and uncertainties that affect many other companies, such as the overall U.S. and global economic conditions, international conflicts, geopolitical events, changes in laws or accounting rules, fluctuations in interest and exchange rates or other disruptions of expected economic and business conditions.

Risks Related To Our Business

We are not in compliance with our financial covenants under our loan agreements with our lenders. Our lenders may exercise one or more of their available remedies, including the right to require the immediate repayment of all outstanding indebtedness.

Our outstanding indebtedness is as follows:

	September 30, 2013		September 30, 2012
Santander Bank, N.A.	$	6,819,000	$	8,984,000
Massachusetts Capital Resource Co.		3,000,000		3,000,000
Total Debt	$	9,819,000	$	11,984,000

As of September 30, 2013 and September 30, 2012, we were in default of certain covenants under our loan agreement with Santander Bank, N.A. (“Santander”) and our note agreement with Massachusetts Capital Resource Company (“MCRC”), which is subordinated to the Santander Bank loan. This indebtedness is secured by substantially all of our assets and is guaranteed by our subsidiaries. Our debt agreements include financial covenants which require us to maintain compliance with certain financial ratios during the term of the agreements. Failure to comply with the financial covenants is an event of default under the debt agreements. In an event of default, each of the lenders has the right to accelerate repayment of all outstanding indebtedness, impose a higher default interest rate and (in the case of Santander Bank) take any and all action, at its sole option, to collect monies owed to it, including to enforce and foreclose on its security interest on all of our assets. While we continue to be current with all principal and interest payments with Santander, we have not paid approximately $0.3 million in interest owed to MCRC. Additionally, as of both September 30, 2012 and 2013 and as of the date hereof, we were in violation of certain financial covenants contained in each of the loan agreements that require us to maintain certain ratios of earnings before interest, taxes, depreciation and amortization to fixed charges and to total/senior debt.

As of the date hereof, neither of our lenders has accelerated our payment obligations. Subsequent to September 30, 2013, in addition to our regular monthly interest and principal payments, we repaid an additional $1.25 million to Santander from cash received in connection with the sale of our lead paint analyzer business. We are continuing to evaluate potential alternatives that would resolve our current default status including additional sales transactions, negotiation of a forbearance agreement or a new borrowing arrangement with another lender. However, we cannot provide any assurance that the alternatives will be successful or that our obligations under our debt agreements will not be accelerated in the future or that our lenders will not exercise other remedies for default.

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If our lenders were to accelerate our debt payments, our assets may not be sufficient to fully repay the debt and we may not be able to obtain capital from other sources at favorable terms or at all. If additional funding is required, this funding may not be available on favorable terms, if at all, or without potentially very substantial dilution to our stockholders. If we do not raise the necessary funds, we may need to curtail or cease our operations, sell certain assets and/or file for bankruptcy, which would have a material adverse effect on our financial condition and results of operations.

The audit report contained in our Annual Report on Form 10-K for the year ended September 30, 2013 contains an explanatory paragraph to the effect that there is doubt about our ability to continue as a going concern .

As described in more detail above, we are in default with our financial covenants under our loan agreements as of September 30, 2013. Accordingly, our lenders have the ability to require immediate payment of all indebtedness under our loan agreements. While the lenders have not exercised this right, their ability to require immediate payment has caused all of our outstanding indebtedness to be accelerated to current on our consolidated financial statements. As a result, our independent registered public accounting firm has expressed substantial doubt that we can fund our ongoing operations during the next twelve months. This “going concern” statement may discourage some third parties from contracting with us and some investors from purchasing our stock or providing alternative capital financing, which could adversely affect our business, financial condition, results of operations and prospects.

Our loan agreements impose restrictions on our ability to take certain corporate actions and raise additional capital .

Our loan agreements contain numerous customary restrictions that limit our ability to undertake certain activities without the express prior written approval of our lenders. These include, but are not limited to, restricting our ability to:

	-	incur additional indebtedness;
	-	pay or declare dividends;
	-	enter into a business substantially different from existing operations;
	-	issue or authorize any additional or new equity that will result in a change of control; and
	-	take any corporate action outside the ordinary course of the business, including without limitation, the sale of assets or other strategic divestitures, without the prior written approval of our lender.

These restrictions could significantly hamper our ability to raise additional capital. Our ability to receive the necessary approvals is largely dependent upon our relationship with our lenders and our financial performance, and no assurances can be given that we will be able to obtain the necessary approvals in the future. Our inability to raise additional capital could lead to working capital deficits that could have a material adverse effect on our operations in future periods.

We may not be able to generate sufficient positive cash flow in the future to fund our operations .

In addition to our bank financing, we are dependent upon cash flow from our businesses to fund our operations. It is our expectation that we can continue to improve our cash flows; however, there can be no assurance that we will be able to continue to do so. If we are unable to fund our operations from future cash flows together with our available bank financing, we will need to seek additional debt and/or equity financing, which may not be available on attractive terms, if at all, in which case there could be a material adverse effect on our results of operations and financial condition.

Our Xcede joint venture requires further funding to support the development of its technology.

On or about October 1, 2013, Dynasil Biomedical formed Xcede, a joint venture with Mayo Clinic, to spin out and separately fund the development of the tissue sealant technology. Xcede has initiated financing efforts and has received funding from internal sources and outside investors. We expect Xcede will continue to require periodic outside investor funding in order to pursue clinical trials and further development of its tissue sealant technology. However, there can be no assurance that Xcede will be able to obtain future financing as needed or on terms which are attractive, in which case it might be required to close its operations and liquidate its assets in which case our investment would likely not be recovered.

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The Company relies on its Contract Research segment for approximately half of its revenues. A decline in or temporary suspension of U.S. Government spending, changes in federal budgetary priorities, the timing of contract awards or a restructuring of the SBIR/STTR programs may adversely affect our future revenues and limit our growth prospects .

Our Contract Research business unit, RMD, is among the largest small business participants in U.S. government-funded research, performing research and development activities for government agencies including Department of Energy, Department of Defense, Department of Homeland Security, Domestic Nuclear Detection Office, National Institutes of Health, and NASA. Historically RMD has conducted its government research contracts through the SBIR (Small Business Innovation Research Program) and the STTR (Small Business Technology Transfer Program). Though RMD has augmented its SBIR contracts with larger competitively bid government contracts in recent years, a reduction in or elimination of the SBIR or the STTR programs could result in our inability to win contracts, as we may not have the resources to compete effectively against much larger, better-funded companies. Further, a significant decline in overall U.S. Government spending, including in the areas of national security, intelligence and homeland security, a significant shift in its spending priorities, the substantial reduction or elimination of particular defense-related programs or significant delays in contract or task order awards for large programs could adversely affect our future revenues and limit our growth prospects. While the October 2013 government shutdown did not have a significant impact on the Company, a future government shutdown could result in the suspension of work on contracts in progress or in payment delays which would adversely affect our future revenues and cash flow.

The Company relies on a small number of key customers for a substantial portion of its revenues.

Ten customers accounted for approximately 51.8% of the Company’s revenues in 2013 and the largest four customers, all agencies of the U.S. Government, accounted for 36.5% of revenues. Although we have had business relationships with these customers for many years, there can be no guarantee that we will be able to win contracts with these agencies in the future. Accordingly our performance could be adversely affected by the loss of one or more of these key customers.

We may not realize as revenues the full amounts reflected in our backlog, which could adversely affect our expected future revenues and growth prospects.

As of September 30, 2013, our total backlog for Contract Research was approximately $40 million. Backlog consists of existing contracts, approved by agencies in favor of RMD. Note that some contracts are multi-year contracts and are subject to annual funding renewals. Due to the U.S. Government’s ability to not exercise contract options or to terminate, modify or curtail our programs or contracts and the rights of our non-government customers to cancel contracts and purchase orders in certain circumstances, we may realize less than expected or in some cases never realize revenues from some of the contracts that are included in our backlog. Our backlog contains management’s estimate of amounts expected to be realized on contract work that may never be realized as revenues. If we fail to realize as revenues amounts included in our backlog, our expected future revenues, growth prospects and profitability could be adversely affected.

The U.S. Government may terminate, cancel, modify or curtail our contracts at any time prior to their completion and, if we do not replace them, we may be unable to achieve or sustain revenue growth and may suffer a decline in revenues .

Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years and include one or more base years and one or more option years. These programs are normally funded on an annual basis. Under our contracts, the U.S. Government generally has the right not to exercise options to extend or expand our contracts and may otherwise terminate, cancel, modify or curtail our contracts at its convenience. Any decisions by the U.S. Government not to exercise contract options or to terminate, cancel, modify or curtail our major programs or contracts would adversely affect our revenues, revenue growth and profitability.

If a government customer terminates a contract for default, we may be exposed to liability, including for excess costs incurred by the customer in procuring undelivered services and products from another source. Depending on the nature and value of the contract, a performance issue or termination for default could cause our actual results to differ from those anticipated and could harm our reputation.

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Our earnings and profitability may be adversely affected by our failure to accurately estimate and manage costs, time and resources .

We generate revenues under various types of contracts, which include cost reimbursement, Time & Materials (T&M), Fixed Price-Level of Effort and Firm Fixed Price contracts (FFP). Our earnings and profitability may vary materially depending on changes in the proportionate amount of revenues derived from each type of contract, the nature of services or products provided, as well as the achievement of performance objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined. Cost reimbursement and T&M contracts generally have lower profitability than FFP contracts. Our operating results in any period may also be affected, positively or negatively, by variable purchasing patterns by our customers of our more profitable proprietary products. Our failure to accurately estimate costs or the resources and technology needed to perform our contracts or to effectively manage and control our costs during the performance of our work could result, and in some instances has resulted, in reduced profits or in losses. More generally, any increased or unexpected costs or unanticipated delays in connection with the performance of our contracts, including costs and delays caused by contractual disputes or other factors outside of our control, such as performance failures of our subcontractors, natural disasters or other force majeure events, could make our contracts less profitable than expected or unprofitable.

Our long-term success will depend upon our ability to successfully develop and commercialize new products and enhance our existing products, which is highly uncertain and subjects us to costly regulatory compliance requirements and delays .

One of our business strategies is based on successful commercialization of the technology primarily developed in our RMD business. We are devoting significant resources to our continuing research and development programs which are designed to develop new products and to enhance and improve our existing products. The successful development of our products and product enhancements is subject to numerous risks, both known and unknown, including:

	-	unanticipated delays in development or the approval or clearance process by the applicable regulatory authorities;
	-	access to capital;
	-	budget overruns;
	-	other difficulties that could result in the abandonment or substantial change in the design, development and commercialization of new products.

The medical devices developed in our Instruments segment are subject to regulation by numerous government agencies, including the U.S. FDA and comparable agencies outside the U.S. To varying degrees, each of these agencies requires us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing, and distribution of our medical devices. We cannot guarantee that we will be able to obtain marketing clearance for our new products or enhancements or modifications to existing products. If such approval is obtained, it may:

	-	take a significant amount of time,
	-	require the expenditure of substantial resources,
	-	involve stringent clinical and pre-clinical testing, as well as increased post-market surveillance,
	-	involve modifications, repairs, or replacements of our products, and
	-	result in limitations on the proposed uses of our products.

Given the uncertainties inherent with product development, introduction, and enhancement our efforts may not be completed on a timely basis or within budget, if at all. Our failure to develop new products and product enhancements on a timely basis or within budget, if at all, could harm our business and prospects.

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Goodwill and other intangible assets represent approximately 36% of our total assets and any impairment of these assets could negatively impact our results of operations .

Non-amortizing intangible assets, including goodwill, are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Examples of events or changes in circumstances indicating that the carrying value of such intangible assets may not be recoverable could include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel, or a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of. In the quarter ended March 31, 2013, the Company recorded an impairment of goodwill and intangible assets totaling approximately $6.8 million associated with its Instruments segment, which experienced delays with regulatory approvals (FDA and HUD) associated with product refreshes. Any future impairment of goodwill or other intangible assets would have a negative impact on our profitability and financial results.

Our failure to establish a strong intellectual property position and enforce our intellectual property rights against others would enable competitors to develop similar or alternative technologies .

Our success depends in part on our ability to obtain and maintain intellectual property protection for our technologies. Our policy is to protect our intellectual property by, among other methods, filing U.S. patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. The U.S. Congress recently passed the Leahy-Smith America Invents Act, or the America Invents Act, which was signed into law in September 2011. The America Invents Act reforms United States patent law in part by changing the standard for patent approval from a “first to invent” standard to a “first to file” standard and developing a post-grant review system. This new legislation changes United States patent law in a way that may weaken our ability to obtain or maintain patent protection for future inventions in the United States.

Our patent portfolio relating to our proprietary technology is comprised of issued patents and pending patent applications which, in either case, we own directly or for which we are the exclusive or semi-exclusive licensee. Some of these patents and patent applications are foreign counterparts of U.S. patents or patent applications. We may not be able to maintain and enforce existing patents or obtain further patents for our products, processes and technologies. Even if we are able to maintain our existing patents or obtain further patents, these patents may not provide us with substantial protection or be commercially beneficial. The issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate unimpeded by the patent rights of others. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and the extent of future protection is highly uncertain, so there can be no assurance that the patent rights that we have or may obtain will be valuable. Others have filed patent applications that are similar in scope to ours, and in the future are likely to file patent applications that are similar or identical in scope to ours or those of our licensors. We cannot predict whether any of our competitors’ pending patent applications will result in the issuance of valid patents. Moreover, we cannot assure investors that any such patent applications will not have priority or dominate over our patents or patent applications. The invalidation of key patents owned by or licensed to us or non-approval of pending patent applications could increase competition, and materially adversely affect our business, financial condition and results of operations. Furthermore, there can be no assurance that others will not independently develop similar or alternative technologies, duplicate any of our technologies, or, if patents are issued to us, design around the patented technologies developed by us.

Dynasil Biomedical is a pre-clinical stage business with no approved products, which makes it difficult to assess this business’s future viability.

Dynasil Biomedical is a preclinical-stage biomedical business with a limited operating history. On or about, October 1, 2013, Dynasil Biomedical formed Xcede, a joint venture with Mayo Clinic, to spin out and separately fund the development of the tissue sealant technology. We have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biomedical area. For example, to execute our business plan, we will need to successfully:

	-	execute product candidate development activities;
	-	oversee the product development and fundraising activities of its joint venture, Xcede;
	-	develop and maintain any new strategic relationships we elect to enter into;
	-	manage our spending as costs and expenses increase due to preclinical development, clinical trials, regulatory approvals and commercialization.
	-	obtain required regulatory approvals for the development and commercialization of our product candidates;

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	-	maintain, leverage and expand our intellectual property portfolio;
	-	build and maintain robust sales, distribution and marketing capabilities, either on our own or in collaboration with strategic partners;
	-	gain market acceptance for our products;

If we are unsuccessful in accomplishing these objectives, we may not be able to develop product candidates, raise capital, expand our business or continue our operations.

We compete in the optics industry and may be unable to compete effectively .

Our Optics companies’ business is highly competitive and we compete with larger companies that have greater name recognition, financial resources and larger technical staffs, such as Newport Corporation and JDSU. We also compete with smaller, more specialized companies that are able to concentrate their resources on particular areas. The markets in which we operate are characterized by rapidly changing technology and the needs of our customers change and evolve regularly. Accordingly, our success depends on our ability to develop services and products that address these changing needs and to provide people and technology needed to deliver these services and products. To remain competitive, we must consistently provide superior service, technology and performance on a cost-effective basis to our customers. Our competitors may be able to provide our customers with different or greater capabilities or technologies or better contract terms than we can provide, including technical qualifications, past contract experience, geographic presence, price and the availability of qualified professional personnel. In addition, our competitors may consolidate or establish teaming or other relationships among themselves or with third parties to increase their ability to address customers’ needs. Accordingly, we anticipate that larger or new competitors or alliances among competitors may emerge which may adversely affect our ability to compete.

Our failure to compete effectively in this market could have a material adverse effect on our results or operation and financial condition.

Our Contract Research business faces aggressive competition that can impact our ability to obtain contracts and therefore affect our future revenues and growth prospects.

RMD’s competitors include other small high technology companies performing SBIR R&D, large firms such as Raytheon which performs related R&D, and to some extent, universities and national laboratories.

The markets in which we operate are characterized by rapidly changing technology and the needs of our customers change and evolve regularly. Accordingly, our success depends on our ability to develop services and products that address these changing needs and to provide people and technology needed to deliver these services and products. To remain competitive, we must consistently provide superior service, technology and performance on a cost-effective basis to our customers. Our competitors may be able to provide our customers with different or greater capabilities or technologies or better contract terms than we can provide, including technical qualifications, past contract experience, geographic presence, price and the availability of qualified professional personnel. In addition, our competitors may consolidate or establish teaming or other relationships among themselves or with third parties to increase their ability to address customers’ needs. Accordingly, we anticipate that larger or new competitors or alliances among competitors may emerge which may adversely affect our ability to compete.

Our internal controls over financial reporting were not effective as of September 30, 2012 or 2013.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404(a) of the Sarbanes-Oxley Act. Our management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures and of our internal control over financial reporting as of September 30, 2012 and concluded that, as of that date, our disclosure controls and procedures were not effective as a result of material weaknesses in our internal control over financial reporting. While we have undertaken remediation efforts as discussed in Item 9A of this Form 10-K during fiscal year 2013, the Company concluded that adequate improvement has not yet been made to remediate the previously identified material weaknesses and has determined as of September 30, 2013 that, collectively, the control deficiencies that existed in the prior year still rise to the level of a material weakness described in management’s report in Item 9A. Until these issues are corrected and the changes made are operational for a sufficient period of time to demonstrate their effectiveness, our ability to report financial results or other information required to be disclosed on a timely and accurate basis may be adversely affected. In addition, remedying this matter may require additional management time and resources and cause the Company to incur additional costs.

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Our ability to use our federal and state tax credits and our state and foreign net operating loss carryforwards (“NOLs”) could be substantially limited or eliminated as we may not generate sufficient future taxable income.

As of September 30, 2013, we had approximately $1.5 million in federal and state tax credits and approximately $4.2 million of state NOLs available to offset future taxable income, which expire in varying amounts beginning in 2031, if unused. We had $182,000 of foreign NOLs which can be carried forward indefinitely. We may not generate taxable income in time to use these tax credits or the NOLs prior to their expiration, and the Internal Revenue Service may not agree with the amount or timing of prior losses, thereby limiting the value of our NOLs. Furthermore, our ability to use our NOLs is subject to an annual limitation due to ownership changes that may have occurred or that could occur in the future, as determined by Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state regulations. Depending on the actual amount of any limitation on our ability to use our tax credits and NOLs, our future taxable income could be subject to federal and/or state income tax, creating federal and/or state income tax liabilities.

Our business is subject to reviews, audits and cost adjustments by the U.S. Government, which, if resolved unfavorably to us, could adversely affect our profitability, cash position or growth prospects .

U.S. Government agencies, including the DCAA (Defense Contract Audit Agency), DCMA (Defense Contract Management Agency) and others, routinely audit and review a contractor’s performance on government contracts, indirect rates and pricing practices, and compliance with applicable contracting and procurement laws, regulations and standards. They also review the adequacy of the contractor’s compliance with government standards for its accounting and management internal control systems, including: control environment and overall accounting system, estimating system, purchasing system, property system and earned value management system. Both contractors and the U.S. Government agencies conducting these audits and reviews have come under increased scrutiny.

A finding of significant control deficiencies in our system audits or other reviews could result in decremented billing rates to our U.S. Government customers until the control deficiencies are corrected and our corrections are accepted by the auditing agency. Government audits and reviews may conclude that our practices are not consistent with applicable laws and regulations and result in adjustments to contract costs and mandatory customer refunds. Such adjustments can be applied retroactively, which could result in significant customer refunds. Our receipt of adverse audit findings or the failure to obtain an “approved” determination of our various accounting and management internal control systems, including our changes to indirect cost and direct labor estimating systems, from the responsible U.S. Government agency could significantly and adversely affect our business, including our ability to bid on new contracts and our competitive position in the bidding process. A determination of non-compliance with applicable contracting and procurement laws, regulations and standards could also result in the U.S. Government imposing penalties and sanctions against us, including withholding of payments, suspension of payments and increased government scrutiny that could delay or adversely affect our ability to invoice and receive timely payment on contracts, perform contracts or compete for contracts with the U.S. Government. We may suffer harm to our reputation if allegations of impropriety are made against us, which would impair our ability to win new contract awards or receive contract renewals.

Due to significant delays at the DCAA in auditing small firms performing SBIR research, our indirect cost audits by the DCAA have not been completed for fiscal 2010 and subsequent fiscal years. Although we have recorded contract revenues subsequent to fiscal 2010 based upon our estimate of costs that we believe will be approved upon final audit or review, we do not know the outcome of any ongoing or future audits or reviews and adjustments and, if future adjustments exceed our estimates, our profitability would be adversely affected.

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Our failure to comply with a variety of complex procurement rules and regulations could result in our being liable for penalties, including termination of our U.S. Government contracts, disqualification from bidding on future U.S. Government contracts and suspension or debarment from U.S. Government contracting .

We must comply with laws and regulations relating to the formation, administration and performance of U.S. Government contracts, which affect how we do business with our customers and may impose added costs on our business. Some significant statutes and regulations that affect us include:

	·	the Federal Acquisition Regulation (FAR) and supplements, which regulate the formation, administration and performance of U.S. Government contracts;
	·	the Truth in Negotiations Act, which requires certification and disclosure of cost and pricing data in connection with certain contract negotiations;
	·	the Procurement Integrity Act, which regulates access to competitor bid and proposal information and government source selection information, and our ability to provide compensation to certain former government officials;
	·	the Civil False Claims Act, which provides for substantial civil penalties for violations, including for submission of a false or fraudulent claim to the U.S. Government for payment or approval; and
	·	the U.S. Government Cost Accounting Standards, which impose accounting requirements that govern our right to reimbursement under certain cost-based U.S. Government contracts.

Our failure to comply with any of these rules or regulations could result in loss of business or penalties that could have a material adverse effect on our financial condition or results of operations.

We depend on our teaming arrangements and relationships with other contractors and subcontractors . If we are not able to maintain these relationships, or if these parties fail to satisfy their obligations to us or our customers, our revenues, profitability and growth prospects could be adversely affected.

We rely on our teaming relationships with other prime contractors and subcontractors in order to submit bids for large procurements or other opportunities where we believe the combination of services and products provided by us and the other companies will help us to win and perform the contract. Our future revenues and growth prospects could be adversely affected if other contractors eliminate or reduce their contract relationships with us, or if the U.S. Government terminates or reduces these other contractors’ programs, does not award them new contracts or refuses to pay under a contract. Companies that do not have access to U.S. Government contracts may perform services as our subcontractor and that exposure could enhance such companies’ prospect of securing a future position as a prime U.S. Government contractor which could increase competition for future contracts and impair our ability to perform on contracts.

We may have disputes with our subcontractors arising from, among other things, the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract, our hiring of a subcontractor’s personnel or the subcontractor’s failure to comply with applicable law. Current uncertain economic conditions (including risks associated with possible future government shutdowns) heighten the risk of financial stress of our subcontractors, which could adversely impact their ability to meet their contractual requirements to us. If any of our subcontractors fail to timely meet their contractual obligations or have regulatory compliance or other problems, our ability to fulfill our obligations as a prime contractor or higher tier subcontractor may be jeopardized. Significant losses could arise in future periods and subcontractor performance deficiencies could result in our termination for default. A termination for default could eliminate a revenue source, expose us to liability and have an adverse effect on our ability to compete for future contracts and task orders, especially if the customer is an agency of the U.S. Government.

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Our failure to attract, train and retain skilled employees, including our management team, would adversely affect our ability to execute our strategy .

Portions of our business involve the development of tailored solutions for our customers, a process that relies heavily upon the expertise and services of our employees. Our continued success depends on our ability to recruit and retain highly trained and skilled engineering, technical and professional personnel. Competition for skilled personnel is intense and competitors aggressively recruit key employees. Particularly in highly specialized areas, it has become more difficult to retain employees and meet all of our needs for employees in a timely manner, which may affect our growth in the current fiscal year and in future years. Although we intend to continue to devote significant resources to recruit, train and retain qualified employees, we may not be able to attract and retain these employees. Any failure to do so could impair our ability to perform our contractual obligations efficiently and timely meet our customers’ needs and win new business, which could adversely affect our future results.

In addition to attracting and retaining qualified engineering, technical and professional personnel, we believe that our success will also depend on the continued employment of a highly qualified and experienced senior management team and its ability to retain existing business and generate new business. Our senior management team is important to our business because personal reputations and individual business relationships are a critical element of retaining and obtaining customer contracts in our industry, particularly with agencies performing classified operations. Our inability to hire and retain appropriately qualified and experienced senior executives could cause us to lose customers or new business opportunities.

Misconduct of employees, subcontractors, agents and business partners could cause us to lose existing contracts or customers and adversely affect our ability to obtain new contracts and customers and could have a significant adverse impact on our business and reputation .

Misconduct, should it occur, could include fraud or other improper activities such as falsifying time or other records and violations of laws, including the Anti-Kickback Act. Other examples could include the failure to comply with our policies and procedures or with federal, state or local government procurement regulations, regulations regarding the use and safeguarding of classified or other protected information, legislation regarding the pricing of labor and other costs in government contracts, laws and regulations relating to environmental, health or safety matters, bribery of foreign government officials, import-export control, lobbying or similar activities, and any other applicable laws or regulations. Intentional or unintentional violation of the Export Control Act or ITAR could result in sever fines which could adversely affect our profitability. Any data loss or information security lapses resulting in the compromise of personal information or the improper use or disclosure of sensitive or classified information could result in claims, remediation costs, regulatory sanctions against us, loss of current and future contracts and serious harm to our reputation. Although we have implemented policies, procedures and controls to prevent and detect these activities, these precautions may not prevent all misconduct, and as a result, we could face unknown risks or losses. Our failure to comply with applicable laws or regulations or misconduct by any of our employees, subcontractors, agents or business partners could damage our reputation and subject us to fines and penalties, restitution or other damages, loss of security clearance, loss of current and future customer contracts and suspension or debarment from contracting with federal, state or local government agencies, any of which would adversely affect our business and our future results.

Quality problems with our processes, goods, and services could harm our reputation for producing high-quality products and erode our competitive advantage, sales, and market share .

Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Our quality certifications are critical to the marketing success of our goods and services. If we fail to meet these standards, our reputation could be damaged, we could lose customers, and our revenue and results of operations could decline. Aside from specific customer standards, our success depends generally on our ability to manufacture to exact tolerances precision-engineered components, subassemblies, and finished devices from multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high-quality components will be harmed, our competitive advantage could be damaged, and we could lose customers and market share.

Product liability claims could adversely impact our financial condition and our earnings and impair our reputation .

Our business exposes us to potential product liability risks that are inherent in the design, manufacture, and marketing of medical devices and detection instruments. Component failures, manufacturing defects, design flaws, or inadequate disclosure of product-related risks or product-related information with respect to our products could result in an unsafe condition or injury to, or death of, a patient. The occurrence of such a problem could result in product liability claims or a recall of, or safety alert relating to, one or more of our products. We have purchased, product liability insurance policies, but there is no assurance that the insurance coverage would apply to the circumstances in any liability claim. Nor is there assurance that the policy limits would be sufficient to cover all costs and liabilities. Product liability claims or product recalls in the future, regardless of their ultimate outcome, could have a material adverse effect on our business and reputation and on our ability to attract and retain customers for our products.

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From time to time we may make acquisitions. The failure to successfully integrate future acquisitions could harm our business, financial condition and operating results.

One component of our growth strategy is to selectively pursue strategic acquisitions. These transactions require significant investment of time and resources and may disrupt our business and distract our management from other responsibilities. Even if successful, these transactions could reduce earnings for a number of reasons, including the amortization of intangible assets, impairment charges, acquired operations that are not yet profitable or the payment of additional consideration under earn-out arrangements if an acquisition performs better than expected. Acquisitions, investments and joint ventures pose many other risks that could adversely affect our reputation, operations or financial results, including:

	-	we may not be able to identify, compete effectively for or complete suitable acquisitions and investments at prices we consider attractive;
	-	we may not be able to accurately estimate the financial effect of acquisitions and investments on our business and we may not realize anticipated synergies or acquisitions may not result in improved operating performance;
	-	we may encounter performance problems with acquired technologies, capabilities and products, particularly with respect to those that are still in development when acquired;
	-	we may have trouble retaining key employees and customers of an acquired business or otherwise integrating such businesses, such as incompatible accounting, information management, or other control systems, which could result in unforeseen difficulties;
	-	we may assume material liabilities that were not identified as part of our due diligence or for which we are unable to receive a purchase price adjustment or reimbursement through indemnification;
	-	we may assume legal or regulatory risks, particularly with respect to smaller businesses that have immature business processes and compliance programs;
	-	acquired entities or joint ventures may not operate profitably, which could adversely affect our operating income or operating margins and we may be unable to recover investments in any such acquisitions;
	-	acquisitions, investments and joint ventures may require us to spend a significant amount of cash or to issue capital stock, resulting in dilution of ownership; and
	-	we may not be able to effectively influence the operations of our joint ventures or we may be exposed to certain liabilities if our joint venture partners do not fulfill their obligations.

If our acquisitions fail, perform poorly or their value is otherwise impaired for any reason, including contractions in credit markets and global economic conditions, our business and financial results could be adversely affected. In addition, we periodically divest businesses, including businesses that are no longer a part of our ongoing strategic plan. These divestitures similarly require significant investment of time and resources, may disrupt our business, distract management from other responsibilities and may result in losses on disposal or continued financial involvement in the divested business, including through indemnification, guarantee or other financial arrangements, for a period of time following the transaction, which would adversely affect our financial results.

Our financial results may vary significantly from period-to-period .

Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our financial results may be negatively affected by any of the risk factors listed in this “Risk Factors” section and other matters described elsewhere in this Annual Report on Form 10-K and the other documents we file with the SEC.

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Changes in tax laws or exposure to additional income tax liabilities could have a material impact on our financial condition and results of operations .

We are subject to income taxes as well as non-income based taxes, in both the U.S. and U.K. We are subject to tax audits in various jurisdictions. Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, there can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our consolidated earnings and financial condition. Additionally, changes in tax laws or tax rulings could materially impact our effective tax rate.

We face risks associated with our international business .

In 2013 and 2012, we generated approximately 18.1% and 17.5% of our sales outside the U.S. Our international business operations may be subject to additional and different risks than our U.S. business. Our ability to achieve and maintain profitable growth in international markets is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many countries. As a result of our expansion outside the U.S., we are subject to certain inherent risks, including political and economic uncertainty, inflation rates, exchange rates, trade protection measures, local labor conditions and laws, restrictions on foreign investments and repatriation of earnings, and weak intellectual property protection. If we are unable to manage these risks it would have a material adverse effect on our results of operations and financial condition.

Increases in prices and declines in the availability of raw materials could negatively impact our financial results .

Our financial results are significantly affected by the cost of raw materials and energy. Most of the raw materials and energy used in production are purchased from outside sources, and the Company has made, and plans to continue to make, supply arrangements to meet the planned operating requirements for the future. Supply of critical raw materials and energy is managed by establishing contracts, multiple sources, and identifying alternative materials or technology whenever possible. An inability to obtain critical raw materials would adversely impact our ability to produce products. Increases in the cost of raw materials and energy may have an adverse effect on our earnings or cash flow in the event we are unable to mitigate these higher costs in a timely manner.

Our business and operations expose us to numerous legal and regulatory requirements and any violation of these requirements could harm our business .

We are subject to numerous federal, state and foreign legal requirements on matters as diverse as data privacy and protection, employment and labor relations, immigration, taxation, anticorruption, import/export controls, trade restrictions, internal and disclosure control obligations, securities regulation, environmental and anti-competition. We are also focused on expanding our business in certain identified growth areas, such as homeland security and biomedical technologies, which are highly regulated and may expose us to increased compliance risk. Compliance with diverse and changing legal requirements is costly, time-consuming and requires significant resources. Violations of one or more of these requirements in the conduct of our business could result in significant fines and other damages, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. Violations of these regulations or contractual obligations related to regulatory compliance in connection with the performance of customer contracts could also result in liability for significant monetary damages, fines and/or criminal prosecution, unfavorable publicity and other reputational damage, restrictions on our ability to compete for certain work and allegations by our customers that we have not performed our contractual obligations.

Moreover, we use controlled hazardous and radioactive materials in our business and generate wastes that are regulated as hazardous wastes under United States federal, and Massachusetts, California, Washington and Wisconsin state, environmental and atomic energy regulatory laws and similar laws in each jurisdiction in which our research and manufacturing facilities are located. Our use of these substances and materials is subject to stringent, and periodically changing, regulation that can impose costly compliance obligations on us and have the potential to adversely affect our manufacturing activities. The risk of accidental contamination or injury from these materials cannot be completely eliminated. If an accident with these substances occurs, we could be held liable for any damages that result, in addition to incurring clean-up costs and liabilities, which can be substantial. Additionally, an accident could damage our research and manufacturing facilities resulting in delays and increased costs.

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Our insurance may be insufficient to protect us from product and other liability claims or losses .

We maintain insurance coverage with third-party insurers as part of our overall risk management strategy and because some of our contracts require us to maintain specific insurance coverage limits. However, not every risk or liability is or can be protected by insurance, and, for those risks we insure, the limits of coverage we purchase or that are reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. If any of our third-party insurers fail, cancel our coverage or otherwise are unable to provide us with adequate insurance coverage, then our overall risk exposure and our operational expenses would increase and the management of our business operations would be disrupted. Our insurance may be insufficient to protect us from significant product and other liability claims or losses. Moreover, there is a risk that commercially available liability insurance will not continue to be available to us at a reasonable cost, if at all. If liability claims or losses exceed our current or available insurance coverage, our business and prospects may be harmed. Regardless of the adequacy of our liability insurance coverage, any significant claim may have an adverse effect on our industry and market reputation, leading to a substantial decrease in demand for our products and services and reduced revenues.

Our business and financial results could be negatively affected by cyber or other security threats .

As a U.S. Government contractor operating in multiple regulated industries and geographies, we handle sensitive information. Therefore, we are continuously exposed to cyber and other security threats, including computer viruses, attacks by hackers or physical break-ins. Any electronic or physical break-in or other security breach or compromise may jeopardize security of information stored or transmitted through our information technology systems and networks. This could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. Although we have implemented policies, procedures and controls to protect against, detect and mitigate these threats, attempts by others to gain unauthorized access to our information technology systems are becoming more sophisticated. These attempts include covertly introducing malware to our computers and networks and impersonating authorized users, among others, and may be perpetrated by well-funded organized crime or state sponsored efforts. We seek to detect and investigate all security incidents and to prevent their occurrence or recurrence. We continue to improve our threat protection, detection and mitigation policies, procedures and controls. In addition, we work with other companies in the industry and government participants on increased awareness and enhanced protections against cyber security threats. However, because of the evolving nature of these security threats, there can be no assurance that our policies, procedures and controls have or will detect or prevent any of these threats and we cannot predict the full impact of any such incident. We may experience similar security threats to the information technology systems that we develop, install or maintain under customer contracts. Although we work cooperatively with our customers and other business partners to seek to minimize the impacts of cyber and other security threats, we must rely on the safeguards put in place by those entities. Any remedial costs or other liabilities related to cyber or other security threats may not be fully insured or indemnified by other means. Occurrence of any of these security threats could adversely affect our reputation, ability to work on sensitive U.S. Government contracts, business operations and financial results.

Business disruptions caused by natural disasters and other crises could adversely affect our profitability and our overall financial position .

We have operations located in regions of the United States and the U.K. that may be exposed to damaging storms and other natural disasters, such as hurricanes, tornadoes, blizzards, flooding or earthquakes. Our business could also be disrupted by pandemics and other national or international crises. Although preventative measures may help mitigate the damage from such occurrences, the damage and disruption to our business resulting from any of these events may be significant. If our insurance and other risk mitigation mechanisms are not sufficient to recover all costs, including loss of revenues from sales to customers, we could experience a material adverse effect on our financial position and results of operations. Performance failures and disruptions by our subcontractors due to these types of events may also adversely affect our ability to perform our obligations on a prime contract, which could reduce our profitability due to damages or other costs that may not be fully recoverable from the subcontractor or the customer and could result in a termination of the prime contract and have an adverse effect on our ability to compete for future contracts.

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Risks Relating To Dynasil’s Stock

The market price for our common stock is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float and lack of profits, which could lead to wide fluctuations in our share price . You may be unable to sell your common stock at or above your purchase price, which may result in substantial losses to you.

The market for our common stock is characterized by significant price volatility when compared to the shares of larger, more established companies that have large public floats, and we expect that our share price will continue to be more volatile than the shares of such larger, more established companies for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common stock is, compared to the shares of such larger, more established companies, sporadically and thinly traded. As a consequence of this limited liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common stock is sold on the market without commensurate demand. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a larger, more established company that has a large public float. Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time, including as to whether our common stock will sustain its current market price, or as to what effect that the sale of shares or the availability of common stock for sale at any time will have on the prevailing market price.

If we do not regain compliance with certain listing requirements by March 24, 2014, we will be delisted from the NASDAQ Capital Market, which could impair the liquidity of our stock and our availability to access the capital markets.

The NASDAQ Stock Market requires that companies remain in compliance with the Global Market Continued Listing Requirements for their common stock as set forth in Marketplace Rule 5450(a) and at least one of the Standards in Rule 5450(b). On March 26, 2013, the Company received notice from Nasdaq that, because the closing bid price for the Company’s common stock had fallen below $1.00 per share for 30 consecutive business days, the Company was no longer in compliance with the minimum bid listing requirements for continued listing on the Nasdaq Global Select Market. The Company was provided an initial 180 period to regain compliance with the minimum bid requirement. That period ended on September 23, 2013 without the Company achieving compliance. As a result of its continued noncompliance, the Company requested a transfer to the NASDAQ Capital Market (which also has a $1.00 minimum bid requirement) and, in connection therewith received a second 180 day period to regain compliance with the minimum bid requirement. We can make no assurance that we will be able to regain compliance with the minimum bid requirement by the March 24, 2014 deadline or continue to comply with any of the other listing requirements and, consequently, whether or not we will be able to remain listed on the NASDAQ Stock Market. If we are de-listed by Nasdaq the liquidity of our common stock could be impaired and we could have more difficulty raising capital, which could have an adverse effect on our results of operations and financial condition.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock .

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

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ITEM 2. PROPERTIES

We own a manufacturing and office facility consisting of a one-story, masonry and steel building containing approximately 15,760 square feet in West Berlin, New Jersey. We lease a 10,000 square foot manufacturing and office building in Ayer, MA with a lease that expires in May 2025. We lease 3,600 square feet of office space in a building in Littleton, MA with a lease that expires in July 2018. We own a two-story, 44,000 square foot manufacturing and office facility in Ithaca, New York. We own a two-story, 17,000 square foot manufacturing and office facility in Margate, Kent, in the U.K. We lease a 40,000 square foot manufacturing, research, and office building in Watertown, MA for our RMD and Dynasil Products business units from a related party with leases that are month-to-month tenancies and continue until terminated by the landlord with not less than three years’ prior written notice or by the Company with not less than six months’ prior written notice. We also lease 11,600 square feet of office and research space in buildings within close proximity in Watertown, MA with one lease that expires February 2014 and two leases that are month-to-month. The Watertown locations are the primary location for our corporate offices and contract research segment. We also lease 2,030 square feet of office and research space in Rochester, MN with a lease that expires in October of 2016. We believe that the properties are in satisfactory condition and suitable for our purposes. The New Jersey, New York, and U.K. properties are collateral against notes payable to banks.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Since September 30, 2013, the Company’s Common Stock has been listed on the NASDAQ Capital Market under the symbol “DYSL”. From December 17, 2010 until September 30, 2013, the Company’s Common Stock was listed on the NASDAQ Global Market. Prior to December 17, 2010, the Company’s Common Stock was quoted on the NASD-OTC Bulletin Board under the symbol "DYSL.OB".

The following table reflects the range of high and low common stock sales prices for the four quarters of 2013 and 2012 as reported by the NASDAQ Global Market. The “high” and “low” bid information reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not necessarily represent actual transactions.

	High & Low Sale Prices
	Years ended September 30,
	2013				2012
	High		Low		High		Low
First quarter	$	1.94	$	1.04	$	2.97	$	1.47
Second quarter		1.25		0.63		2.42		1.72
Third quarter		0.86		0.40		2.35		1.05
Fourth quarter		1.00		0.58		1.65		1.03

As of December 13, 2013 there were 15,414,242 shares of the Company’s common stock outstanding held by approximately 1,260 holders of record.

The Company has paid no cash dividends on its common stock since its inception. The Company intends to retain any future earnings for use in its business and does not intend to pay cash dividends on its common stock in the foreseeable future. The Company is currently in default under the loan documents with Santander Bank, N.A., which means the Company is contractually prohibited under these documents from paying cash dividends to its stockholders.

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ITEM 6. SELECTED FINANCIAL DATA

Dynasil, a smaller reporting company, is not required to complete this item.

ITEM 7. 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 appearing elsewhere in this Form 10-K.

Overview

The Company is divided into four reporting segments based on our main operating activities. Below is a summary of these segments:

	·	Contract Research : The Contract Research segment consists of the Radiation Monitoring Devices, Inc. (“RMD”) business unit.

	·	Optics : The Optics segment encompasses four business units (our original optics business (“Dynasil Fused Silica”), Optometrics, Hilger Crystal, and EMF) 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.

	·	Instruments : The Instruments segment consists of Dynasil Products (formerly known as RMD Instruments), which manufactures precision instrumentation for medical and commercial applications.

	·	Biomedical : The Biomedical segment consists of a single business unit, Dynasil Biomedical Corporation (“Dynasil Biomedical”), a medical technology incubator, developing disruptive technologies for a wide spectrum of applications, including hematology, hypothermic core cooling and tissue sealants.

For information about our financial segments and geographical information about our operating revenues and assets, see Note 17 to the Consolidated Financial Statements included in this Report. A description of our strategy is included in Item 1 of this Form 10-K.

Our markets are characterized by rapidly changing technology and the needs of our customers change and evolve regularly. Accordingly, our success depends on our ability to develop services and products that address these changing needs and to provide the people and technology needed to deliver these services and products. To remain competitive, we must consistently provide superior service, technology and performance on a cost-effective basis to our customers. Our business performance also is influenced by a variety of other factors including, but not limited to, economic conditions, U.S. Government spending on research and development programs, the availability of Research & Experimentation tax credits, competition, regulatory requirements and insurance costs. Further information on certain risks to our Company is located in Item 1a of this Form 10-K.

Fiscal 2013 Financial Overview

Bank Default

On December 31, 2012, the Company announced it was in default of certain financial covenants set forth in the terms of its outstanding indebtedness with respect to its fiscal year ended September 30, 2012. We continued to be in default throughout our fiscal year ended September 30, 2013 and through the date of this filing. As a result, our lenders have the ability to require immediate payment of all indebtedness under our loan agreements. While our lenders have not exercised this right, their ability to require immediate payment has caused all of our outstanding indebtedness to be accelerated to current classification in our consolidated financial statements.

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The Company has accrued but not remitted monthly interest payments to its subordinated lender since February 2013 and does not expect to resume interest payments to its subordinated lender until it resolves its default with the senior lender. The Company has made all principal and interest payments due to its senior lender through the date of this filing. In addition to making the required principal payments of approximately $1.9 million during fiscal year 2013, the Company also repaid an additional $0.3 million of principal in connection with the contribution of its tissue sealant intellectual property to Xcede, a joint venture, formed on or about October 1, 2013.

Subsequent to yearend, in addition to our regular monthly interest and principal payments, we repaid an additional $1.25 million to Santander from cash received in connection with the sale of our lead paint analyzer business. Management is continuing to pursue potential other sales transactions which, if consummated, would result in additional principal payments to the bank and also expects to continue discussions with its lenders to address the financial covenant situation. Because of the continuing default of the financial covenants and the possibility of an acceleration of the indebtedness by the lenders, the Company has classified all its outstanding indebtedness as a current liability in the accompanying consolidated balance sheets.

Given the uncertainty created by the defaults under the Company’s outstanding indebtedness and sustained substantial losses from operations for the years ended September 30, 2013 and 2012, the Company's independent registered public accounting firm has included a “going concern” explanatory paragraph in its audit opinion for the year ended September 30, 2013.

In addition to the formation of the Xcede joint venture and the sale of the lead paint business, the Company has taken and will continue to take actions to improve its liquidity, including the implementation of a number of initiatives designed to conserve cash, improve profitability and right-size the cost structure of its various businesses.

2013 Overview of Results

In fiscal year 2013, we incurred a net loss of $8.7 million compared to a net loss of $4.3 million in 2012. The net losses included goodwill and intangible asset impairment charges totaling $6.8 million and $2.3 million in 2013 and 2012, respectively. Our net losses, exclusive of the impairment loss amounts indicated above, decreased in 2013 to $1.9 million from $2.0 million in 2012. Revenue declined 10.7% to $42.8 million in 2013 from $47.9 million in 2012. Contract Research segment revenues declined $3.4 million primarily as a result of lower billable material and subcontractor costs partially offset by higher billable direct labor hours. In addition, our Instruments segment revenues declined $1.3 million primarily as a result of the lack of availability of our updated lead paint analyzer which has not been approved for sale and our updated medical probe product which was not approved for sale until May 2013. The disclosure above of our net loss exclusive of the impairment charges is a non-GAAP measure. See page 33 for more information.

As a result of the higher-than-expected costs related to the product upgrades and delays in product launches in our Instruments segment, the Company determined that there was a decline in the fair value of its Instruments segment, and we recorded a non-cash goodwill and intangibles impairment charge of $6.8 million for the year ended September 30, 2013. Additionally, the Company incurred approximately $1.0 million in consulting and legal fees associated with evaluating strategic and restructuring alternatives, including the potential sale of product lines and/or a division.

As a result of the foregoing, our loss from operations for fiscal 2013 was $8.2 million, compared with a loss from operations of $3.7 million in fiscal 2012. The net loss for fiscal 2013 was $8.7 million, or $0.59 per share, compared with a loss of $4.3 million, or $0.29 per share, in 2012.

Recent Events

On or about October 1, 2013, Dynasil Biomedical formed Xcede, a joint venture with the Mayo Clinic, to spin out and separately fund the development of its tissue sealant technology. Xcede has initiated financing efforts and has received funding from internal sources and outside investors. To date, Xcede is 90% owned by Dynasil Biomedical and Dynasil Biomedical holds a majority of the seats on Xcede’s board of directors. Although it is anticipated that the Company will continue for the foreseeable future to hold a significant equity interest in Xcede, the Company expects that its equity interest will decrease over time if and to the extent that Xcede is successful in raising equity financing from outside sources.

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On November 7, 2013, the Company sold its Lead Paint detector business to Protec Instrument Corporation, a Delaware corporation (“Protec”), which is a wholly owned subsidiary of Laboratoires Protec S.A., a French corporation and former European distributor of the lead paint detector products. The sales price totaled approximately $1.4 million, less certain adjustments and including the assumption of certain liabilities by Protec. The transaction also resulted in payment of approximately $0.4 million in satisfaction of outstanding accounts receivable. Concurrently with the sale, the Company and Protec entered into a transition services agreement pursuant to which the Company will provide certain transitional services to Protec for up to five months after closing. The Company used $1.25 million of the proceeds to repay amounts owed to Santander, as described above under “Bank Default”.

Results of Operations

Results of Operations for the Fiscal Year Ended September 30,
2013
	Contract
	Research			Optics			Instruments			Biomedical			Total
Revenue	$	21,888,746		$	15,564,766		$	5,104,812		$	194,508		$	42,752,832
Gross Profit		9,821,711			5,647,680			2,421,846			194,508			18,085,745
SG&A		9,345,214			5,624,291			3,486,729			969,532			19,425,766
Impairment of goodwill & long-lived assets		-			-			6,829,072			-			6,829,072
Operating Income (Loss)		476,497			23,389			(7,893,955)			(775,024)			(8,169,093)
GM %		44.9	%		36.3	%		47.4	%		100.0	%		42.3	%

Depreciation and Amortization		316,864			765,018			454,569			60,000			1,596,451
Capital expenditures		31,439			506,371			7,092			-			544,902

Intangibles, Net		332,717			882,296			2,089,573			179,997			3,484,583
Goodwill		4,938,625			1,302,358			-			-			6,240,983
Total Assets	$	9,831,209		$	12,380,248		$	4,253,926		$	211,843		$	26,677,226

Results of Operations for the Fiscal Year Ended September 30,
2012
	Contract
	Research			Optics			Instruments			Biomedical			Total
Revenue	$	25,273,308		$	16,055,952		$	6,452,603		$	105,287		$	47,887,150
Gross Profit		9,862,413			5,875,551			3,684,320			83,459			19,505,743
SG&A		9,523,642			5,398,350			5,065,794			939,149			20,926,935
Impairment of goodwill		-			-			2,284,499			-			2,284,499
Operating Income (Loss)		338,771			477,201			(3,665,973)			(855,690)			(3,705,691)
GM %		39.0	%		36.6	%		57.1	%		79.3	%		40.7	%

Depreciation and Amortization		237,623			796,847			575,246			60,003			1,669,719
Capital expenditures		348,314			462,445			207,454			-			1,018,213

Intangibles, Net		366,853			960,821			5,135,634			239,997			6,703,305
Goodwill		4,938,625			1,300,463			4,015,072			-			10,254,160
Total Assets	$	12,870,151		$	11,588,145		$	12,537,403		$	469,729		$	37,465,428

Revenue

Revenues for the fiscal year ended September 30, 2013 were $42.8 million. This represents a decrease of $5.1 million or 10.7% over revenues for the fiscal year ended September 30, 2012 of $47.9 million. Contract Research revenues declined by $3.4 million or 13.4% as a result of downturns in research grants awarded by the Domestic Nuclear Detection Office (“DNDO”) of $2.0 million and the National Institutes of Health (“NIH”) of $1.2 million. Governmental Agency contract awards are constrained by the Federal Budget and our contract revenues will reflect increases and decreases in contract awards that parallel Federal budgetary shifts. More recently, DNDO awards have rebounded from FY 2013 levels, while NIH awards are continuing at 2013 levels, reflecting Government funding priorities. The contract revenue backlog for contract research continues to be strong and is approximately $40 million, of which 48% is SBIR grants as of September 30, 2013. The Company continues to seek to diversify its contracting sources and to limit its reliance on both the SBIR program and the limited number of government agencies that currently contract for research. This diversification also includes contract research for commercial businesses rather than governmental agencies.

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Revenues in the Optics segment decreased by $0.5 million or 3.1% to $15.6 million in fiscal 2013. Substantially all the decline in revenues related to decreases in optical crystal sales which experienced slightly lower demand, primarily in Europe.

Revenues in the Instruments segment decreased $1.3 million or 20.9% to $5.1 million in fiscal year 2013. We believe the decrease was a result of customers delaying purchases of our existing products in anticipation of the availability of the newly refreshed products. Our refreshed medical probe product began shipping in May 2013; however, we suspended work required to obtain HUD approval for our lead paint analyzer product in the second quarter of 2013. Subsequent to our fiscal yearend, we completed the sale of the Lead Paint business in our Instrument segment as discussed in Note 18 in the Notes to the Consolidated Financial Statements.

The Biomedical segment revenues of $0.2 million were primarily associated with a technology development contract with the Mayo Clinic.

Gross Profit

Gross profit for fiscal year 2013 decreased $1.4 million or 7.3% to $18.1 million from the prior year amount of $19.5 million. Gross profit as a percentage of revenue increased to 42.3% from 40.7% at September 30, 2012 primarily as a result of higher gross profit margins in the Contract Research segment partially offset by a decrease in the Instruments segment.

Gross profit remained essentially flat for the Contract Research segment despite the 13.4% decline in revenues. Gross profit as a percentage of revenue increased to 44.9% from 39.0%, due to improvements in contract management in 2013 which reduced costs associated with losses incurred to complete contracts and costs incurred in excess of provisional contract rates.

The Optics segment’s gross profit decreased by $0.2 million or 3.9% while gross profit as a percentage of revenue remained essentially flat at 36.3% in 2013 compared to 36.6% in 2012.

The Instrument segment’s gross profit decreased $1.3 million or 34.3% to $2.4 million in 2013 from $3.7 million in 2012. Instrument segment’s gross profit as a percentage of revenue declined to 47.4% in 2013 from 57.1% in 2012 as a result of continuing fixed costs spread over a lower revenue volume; discounting of existing products during the periods when the refreshed product was not yet available; and lower revenue in 2013 of the RadCam product which has higher gross margins.

Selling, General & Administrative (“SG&A”) Expenses

SG&A expenses decreased $1.5 million to $19.4 million or 45.4% of revenue in fiscal year 2013, from $20.9 million or 43.7% of revenue for fiscal year 2012. SG&A expenses decreased primarily as a result of the substantial completion of the engineering costs associated with the product refreshes in our Instruments segment and the elimination in 2013 of approximately $0.5 million of expenses incurred in 2012 related to an internal review of billing and accounting practices and internal controls at the RMD division. This investigation has been satisfactorily completed and, as a result, the Company has adopted certain improved practices and internal controls. No material additional expenses related to this matter were incurred in the fiscal year ended September 30, 2013. These decreases were partially offset by increased sales and marketing expense in the Optics segment.

Contract Research SG&A decreased slightly to $9.3 million or 42.7% of revenue in fiscal 2013 from $9.5 million or 37.7% of revenue in the prior year. The increased percentage was primarily a result of SG&A costs being spread over lower revenues in 2013 as compared to 2012.

SG&A within the Optics segment increased $0.2 million to $5.6 million from $5.4 million in 2012. The increase is related primarily to additional personnel added in sales and marketing and engineering.

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The Instruments segment had the greatest decrease in SG&A costs, decreasing $1.6 million to $3.5 million or 68.3% of revenue in 2013 compared to $5.1 million or 78.5% of revenue in 2012. This segment had two main product lines: a hand-held lead paint analyzer and a medical gamma probe used primarily in breast cancer treatment. The Company began a product refresh on both product lines in 2012 to enhance them with new features and functionality to maintain their market positions. The Company spent $1.3 million in fiscal year 2012 on research and development on the products and significant additional amounts on sales and marketing efforts in advance of the new product launches. In fiscal year 2013, these costs and other SG&A costs were substantially reduced while awaiting regulatory approval. Regulatory approval for the medical gamma probe was received in May 2013 while efforts to obtain the approval of the lead paint analyzer were suspended in the second quarter of fiscal 2013 while the Company reviewed various strategic alternatives.

As a result of the delays associated with both product lines and the review of strategic alternatives for the lead paint analyzer product, the Company performed an interim impairment test and recorded an impairment of goodwill and intangibles totaling $6.8 million in the quarter ending March 31, 2013.

Finally, SG&A costs in the Biomedical segment in fiscal year 2013 were approximately $1.0 million as compared to $0.9 million in fiscal year 2012. These costs were incurred to advance the development of the three main technologies: hematology, hypothermic core cooling and tissue sealants. On or about October 1, 2013, Dynasil Biomedical formed Xcede, a joint venture with Mayo Clinic, to spin out and separately fund the development of the tissue sealant technology. While we believe these technologies are progressing favorably, they remain in the early stages of development and there can be no assurance that we will be able to successfully bring any of them to market. We are continuing to explore the availability of outside financing, including through a sale, licensing or joint venture involving one or more of the remaining technologies, though we may not be able to secure any such financing arrangement on favorable terms or at all.

Net Interest Expense

Net interest expense increased to $0.9 million in fiscal 2013 from $0.6 million in fiscal 2012 primarily as a result of the $3.0 million borrowing from Massachusetts Capital Resources Company being outstanding for the full year in fiscal 2013 compared to 2 months in fiscal 2012. The Company has been accruing interest on this debt at the default rate of 14% rather than the normal rate of 10% since it suspended interest payments in February 2013

Income Tax Credit

Total income tax expense (credit) increased from a tax credit of ($41,000) in fiscal 2012 to a tax credit of ($303,000) in fiscal 2013. The increase in the credit is due to lower state tax liability in 2013 compared to 2012 and higher foreign research credits claimed in 2013.

Net Loss

As a result, the Company had a net loss of $8.7 million for the year ended September 30, 2013 compared to a net loss of $4.3 million for the fiscal year ended September 30, 2012. Our net losses, exclusive of the impairment loss amounts indicated above, were $1.9 million in 2013 compared to $2.0 million in 2012.

Liquidity and Capital Resources

Liquidity Overview

On December 31, 2012, the Company announced it is in default of the financial covenants set forth in the terms of its outstanding indebtedness at September 30, 2012 and we remain in default as of September 30, 2013. These covenants require the Company to maintain specified ratios of earnings before interest, taxes, depreciation and amortization (EBITDA) to fixed charges and to total/senior debt. These financial covenant defaults give the lenders the right to accelerate the maturity of the indebtedness outstanding and foreclose on any security interest. Furthermore, the Company's lenders, may, at their option, impose default interest rates with respect to their indebtedness. While we continue to be current with all principal and interest payments with Santander, we have not paid approximately $0.3 million in interest owed to MCRC. As of the date hereof, neither of our lenders has accelerated our payment obligations.

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The causes for the covenant violations were lower revenue and higher than expected expenses in the Company's Instruments and Contract Research segments during the fiscal quarter ended September 30, 2012 and continuing through fiscal 2013, combined with the continued investment in Dynasil Biomedical Corp. and the Company's Dual Mode nuclear detection initiative. In addition, in the fiscal quarter ended September 30, 2012, the Company incurred a significant, non-recurring charge of approximately $0.5 million to its selling, general and administrative expenses related to costs incurred as a result of a review of certain cash application processes and billing practices and internal controls of the RMD division.

As of September 30, 2013, the Company had total indebtedness outstanding of approximately $9.8 million, consisting of approximately $6.8 million of senior debt owed to Santander and approximately $3.0 million of subordinated debt owed to MCRC.

Subsequent to September 30, 2013, in addition to our regular monthly interest and principal payments, we repaid an additional $1.25 million to Santander from cash received in connection with the sale of our lead paint analyzer business. We are continuing to evaluate potential alternatives that would resolve our current default status including additional sales transactions, negotiation of a forbearance agreement or a new borrowing arrangement with another lender. However, we cannot provide any assurance that the alternatives will be successful or that our obligations under our debt agreements will not be accelerated in the future or that our lenders will not exercise other remedies for default.

Because of the uncertainty of any resolution of the covenant violations and the possibility of an acceleration of the indebtedness by the lenders, the Company has reclassified all of its outstanding indebtedness to current classification in the financial statements for the year ended September 30, 2013 and 2012 filed herewith. As a result of the above and the Company’s sustained substantial losses from operations for the years ended September 30, 2013 and 2012, the Company's independent registered public accounting firm, McGladrey LLP, has included a "going concern" explanatory paragraph in its audit opinion with respect to such financial statements.

Net cash as of September 30, 2013 was $2.4 million which was a decrease of $1.0 million as compared to $3.4 million at September 30, 2012. The Company does not currently have cash available to satisfy its obligations under its indebtedness if it were to be accelerated or payment demanded. If the Company is not able to resolve its current defaults under its outstanding indebtedness and improve its liquidity through the actions described above, it may not have sufficient liquidity to meet its anticipated cash needs for the next twelve months.

Net cash provided by operating activities

Net cash provided by operating activities was $1.7 million for fiscal year 2013 versus $0.7 million for fiscal year 2012. The fiscal year 2013 net loss was $8.7 million. There were non-cash expenses contained in the net loss including stock compensation expense of $0.4 million, depreciation and amortization expense of $1.6 million and the impairment of goodwill and long lived assets of $6.8 million. These major non-cash items totaled $8.8 million. The net change in assets and liabilities totaled $1.8 million. This included a $2.0 million decrease in billed and unbilled accounts receivable primarily as a result of improved billing and collection practices in the Contracts Research segment. The decrease in assets was partially offset by an increase in liabilities of $0.5 million for accounts payable, accrued expenses and deferred revenue.

Cash flows from investing activities

Cash flows used in investing activities were $0.5 million for fiscal 2013 compared with $1.0 million for fiscal 2012. All expenditures in 2013 were made to purchase machinery and equipment. There are currently plans for capital expenditures of $1.3 million during fiscal year 2014, depending on the availability of cash and/or financing.

Cash flows from financing activities

Cash flows from financing activities used $2.2 million of cash in fiscal 2013 and used $0.7 million of cash in fiscal 2012 primarily for regularly scheduled payments to Santander Bank under the five year term debt agreement.

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Summary of Terms of Outstanding Indebtedness

Management expects to continue discussions with its lenders to address the financial covenant defaults as of September 30, 2013 as described above. The following is summary of the terms of the existing loan agreement in place with the Company’s senior lender, Santander Bank, and the terms of subordinated debt owed to Massachusetts Capital Resources Company.

Santander Bank Loan Agreement

On June 29, 2012, the Company entered into a letter agreement (the “Waiver Letter”) with Santander as well as Amendment No. 3 (the “Amendment”) to the Loan and Security Agreement, dated July 7, 2010, as amended on April 1, 2012 and April 12, 2012 (the “Original Loan Agreement”). Under the Waiver Letter, the Lender agreed to waive non-compliance by the Company with certain financial covenants under the Original Loan Agreement as of June 30, 2012, subject to the Company’s compliance with the terms of the Amendment, including the requirement that the Company would raise, on or before September 30, 2012, at least $2.0 million in gross proceeds from the sale of its capital stock and/or the incurrence of new indebtedness which is subordinated to the indebtedness in favor of the Lender, on terms and conditions acceptable to the Lender in its sole discretion (the “Required Capital Raise”) and applying the proceeds as described below, all of which the Company has successfully completed.

The Amendment also made certain other changes to the Original Loan Agreement, including certain financial covenants, limitations on capital expenditures and the termination of the Company’s acquisition line of credit, in each case as described in more detail below. The Amendment did not change the interest rates on outstanding indebtedness under the Original Loan Agreement.

The terms of the Amendment are described below:

The Required Capital Raise on or before September 30, 2012

Under the Amendment, the Company agreed with the Lender that the Company would raise, on or before September 30, 2012, at least $2.0 million in gross proceeds from the sale of its capital stock and/or the incurrence of new indebtedness which is subordinated to the indebtedness in favor of the Lender, on terms and conditions acceptable to the Lender in its sole discretion. As disclosed in the Company’s Form 8-K filed on June 8, 2012, the Company has incurred indebtedness in favor of certain entities affiliated with Dr. Gerald Entine (together, “Entine”) in the aggregate principal amount of $1,857,546 (the “Entine Indebtedness”). The Company incurred the Entine Indebtedness in satisfaction of its obligation to repurchase certain shares of Dynasil common stock from Entine pursuant to a put right exercised by Entine on February 12, 2012. The proceeds of the Required Capital Raise must first be used to repay all amounts outstanding under the Entine Indebtedness by September 30, 2012, and thereafter for general working capital needs. The Required Capital Raise has been completed as of July 31, 2012 pursuant to the Note Purchase Agreement (“the Agreement”) with Massachusetts Capital Resource Company described below. Pursuant to the terms of the Agreement, the Company issued and sold to MCRC a $3.0 million subordinated note (the “Subordinated Note”) for proceeds of $3.0 million.

Amendment to Leverage Ratio Covenants

For the Consolidated Maximum Leverage Ratio (Consolidated Total Funded Debt to Consolidated EBITDA, as defined in the Amendment), the Amendment (i) revised the required ratio for September 30, 2012 from 3.25x to 4.5x; (ii) revised the required ratio for December 31, 2012 from 3.0x to 4.5x; and (iii) revised the required ratio for March 31, 2013 and for each rolling four quarters thereafter from 3.0x to 4.0x.

The Amendment also included a new Consolidated Maximum Adjusted Leverage Ratio covenant, which is Consolidated Total Funded Debt (excluding subordinated debt) to Consolidated EBITDA, as defined in the Amendment. The Amendment requires the Company to maintain a Consolidated Maximum Adjusted Leverage Ratio equal to or less than (i) 3.25x to 1.00x for each of the rolling four quarter periods ending on September 30, 2012 and December 31, 2012, and (ii) 3.0x to 1.0x for each rolling four quarter period ending on or after March 31, 2013.

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For the purposes of calculating both the Consolidated Maximum Leverage Ratio and the Consolidated Maximum Adjusted Leverage Ratio, Consolidated EBITDA (as defined in the Amendment) will be (i) at September 30, 2012, the actual Consolidated EBITDA for the 3 months then ended times 4; (ii) at December 31, 2012, the actual Consolidated EBITDA for the 6 months then ended times 2; and (iii) at March 31, 2013, the actual Consolidated EBITDA for the 9 months then ended times 4/3 (provided that the add-backs for costs are not annualized).

Amendment to Fixed Charge Coverage Ratio Covenants

For the Consolidated Fixed Charge Coverage Ratio, the Amendment (i) revised the required ratio for September 30, 2012 from 1.10x to 1.00x; (ii) revised the required ratio for December 31, 2012 from 1.20x to 1.00x; (iii) revised the required ratio for March 31, 2013 from 1.20x to 1.05x; (iv) revised the required ratio at June 30, 2013 from 1.20x to 1.10x; and (v) did not change the required ratio at September 30, 2013 (remained at 1.20x).

The Consolidated Fixed Charge Coverage Ratio is defined as Consolidated EBITDA (as defined in the Amendment) for the applicable period divided by the sum of (a) the Company’s consolidated interest expense for such period, plus (b) the aggregate principal amount of scheduled payments on the Company’s indebtedness made during such period (excluding any repayment of the Entine Indebtedness), plus (c) the sum of all cash dividends and other cash distributions to the Company’s shareholders during such period, plus (d) the sum of all taxes paid in cash by the Company during such period, less (e) up to $75,000 paid to the IRS, to the extent characterized as interest expense, in connection with certain historical tax filings (the “IRS Payments”).

For the purposes of calculating the Consolidated Fixed Charge Coverage Ratio, Consolidated EBITDA will be (i) at September 30, 2012, the actual Consolidated EBITDA for the 3 months then ended times 4; (ii) at December 31, 2012, the actual Consolidated EBITDA for the 6 months then ended times 2; and (iii) at March 31, 2013, the actual Consolidated EBITDA for the 9 months then ended times 4/3 (provided that the add-backs for Entine Indebtedness repayment and the IRS Payments are not annualized).

Restriction on Capital Expenditures

For the fiscal year ending September 30, 2012, the Amendment reduced the limitation on the Company’s capital expenditures from $3.25 million to $2.25 million and for fiscal years ending September 30, 2013 and for each fiscal year thereafter, the Amendment raised the limitation on the Company’s capital expenditures from $2.00 million to $2.25 million.

Termination of Acquisition Line of Credit

The Amendment also accelerated the termination date of the Company’s $5 million acquisition line of credit to June 29, 2012, which prevented the Company from being able to draw on the approximately $1 million of previously available undrawn funds.

Note Purchase Agreement – Massachusetts Capital Resource Company

As described above, the Company is currently in financial default under its note purchase agreement with MCRC.

On July 31, 2012, the Company entered into the Agreement with MCRC. Pursuant to the terms of the Agreement, the Company issued and sold to MCRC the $3.0 million Subordinated Note for proceeds of $3.0 million. The Company has used a portion of the proceeds from the sale of the Subordinated Note to repay the Entine Indebtedness in the aggregate principal amount of $1.9 million and has agreed to use the balance of the proceeds for working capital purposes.

The Subordinated Note matures on July 31, 2017, unless accelerated pursuant to an event of default, as described below. The Subordinated Note bears interest at the rate of ten percent (10.0%) per annum, with interest to be payable monthly on the last day of each calendar month in each year, the first such payment to be due and payable on August 31, 2012. Under the terms of the Agreement, beginning on and with September 30, 2015, and on the last day of each calendar month thereafter through and including July 31, 2017, the Company will redeem, without premium, $130,434 in principal amount of the Subordinated Note together with all accrued and unpaid interest then due on the amount redeemed.

	28

Under the terms of the Agreement and a Subordination Agreement dated July 31, 2012, among the Company, the Guarantor Subsidiaries, the Lender and MCRC, MCRC and any successor holder of the Subordinated Note have agreed that the payment of the principal of and interest on the Subordinated Note shall be subordinated in right of payment, to the prior payment in full of all indebtedness of the Company for money borrowed from banks or other institutional lenders at any time outstanding, including money borrowed from the Lender under the Original Loan Agreement.

The Agreement contains customary representations, warranties and covenants, including covenants by the Company limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. In addition, the Agreement contains financial covenants by the Company (as further defined in the Agreement) that (i) impose a Consolidated Maximum Leverage Ratio (consolidated total funded debt to consolidated EBITDA) equal to or less than (a) 5.0 to 1.0 for each of the rolling four quarter periods ending on September 30, 2012 and December 31, 2012, and (b) 4.5 to 1.0 for each rolling four quarter period ending on or after March 31, 2013, and (ii) require a Consolidated Fixed Charge Coverage Ratio (consolidated EBITDA to consolidated fixed charges) of not less than (a) .75 to 1.00 for each of the rolling four quarter periods ending on September 30, 2012 and December 31, 2012, (b) .8 to 1.0 for each of the rolling four quarter period ending on March 31, 2013 and June 30, 2013, and (c) .95 to 1.00 for each rolling four quarter period ending on or after September 30, 2013.

The Agreement also provides for events of default customary for agreements of this type, including, but not limited to, non-payment, breach of covenants, insolvency and defaults on other debt. Upon an event of default, MCRC may elect to declare all obligations (including principal, interest and all others amounts payable) immediately due and payable, which shall occur automatically if the Company becomes insolvent.

On September 26, 2013, Santander and MCRC agreed to certain amendments to the Loan and Security Agreement, dated July 7, 2010, as amended on April 1, 2012, April 12, 2012 and June 29, 2012 and the Note Purchase Agreement dated July 31, 2012, respectively, in order to permit the Company to form Xcede, a joint venture with the Mayo Clinic, to spin out and separately fund the development of the tissue sealant technology.

“Off Balance Sheet” Arrangements

The Company has no “Off Balance Sheet” arrangements.

NEW ACCOUNTING PRONOUNCEMENTS

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

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, valuation of long-lived assets, intangible assets and goodwill, estimating allowances for doubtful accounts receivable, stock-based compensation and accounting for income taxes.

Revenue Recognition

Revenue from sales of products is recognized at the time title and the risks and rewards of ownership pass. Revenue is recognized when the products are shipped per customers’ instructions, the contract has been executed, the contract or sales price is fixed or determinable, delivery of services or products has occurred and the Company’s ability to collect the contract price is considered reasonably assured.

	29

Revenue from research and development activities is derived generally from the following types of contracts: reimbursement of costs plus fees, fixed price or time and material type contracts. Government funded services revenues from cost plus contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the contracts’ fixed fees. Revenue from fixed-type contracts is recognized under the percentage of completion method with estimated costs and profits included in contract revenue as work is performed. Revenues from time and materials contracts are recognized as costs are incurred at amounts generally commensurate with billing amounts. Recognition of losses on projects is taken as soon as the loss is reasonably determinable.

The majority of the Company’s contract research revenue is derived from the United States government and government related contracts. Such contracts have certain risks which include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under United States government contracts are subject to audit. The Company believes that the results of such audits will not have a material adverse effect on its financial position or its results of operations.

Goodwill

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

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

Step one of the impairment testing compares the carrying value of a reporting unit to its fair value. The carrying value represents the net book value of the net assets of the reporting unit or simply the equity of the reporting unit if the reporting unit is the entire entity. If the fair value of the reporting unit is greater than its carrying value, no impairment has been incurred and no further testing or analysis is necessary. The Company estimates fair value using a discounted cash flow methodology which calculates fair value based on the present value of estimated future cash flows. Estimating future cash flows requires significant judgment and includes making assumptions about projected growth rates, industry-specific factors, working capital requirements, weighted average cost of capital, and current and anticipated operating conditions. Assumptions by management are necessary to evaluate the impact of operating and economic changes. The Company's evaluation includes assumptions on future growth rates and cost of capital that are consistent with internal projections and operating plans. The use of different assumptions or estimates for future cash flows could produce different results. The Company regularly assesses the estimates based on the actual performance of each reporting unit.

If the carrying value of a reporting unit is greater than its fair value, step two of the impairment testing process is performed to determine the amount of impairment to be recognized. Step two requires the Company to estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill. An impairment then exists if the carrying value of the goodwill is greater than the goodwill's implied fair value. With respect to the Company's annual goodwill impairment testing performed during the fourth quarter of fiscal year 2013, step one of the testing determined the estimated fair value of RMD substantially exceeded its carrying value. The estimated fair value of the Hilger Crystals reporting unit exceeded its carrying value by approximately 20%. Accordingly, the Company concluded that no impairment had occurred and no further testing was necessary.

	30

During the second quarter of 2013, the Company performed an interim impairment test of long lived assets and goodwill associated with its Dynasil Products reporting unit and asset group. Under step two of the impairment testing, the income method was used to allocate the fair values of all of the assets and liabilities of this reporting unit, with the remaining residual fair value allocated to goodwill. The result of this impairment test was to write off Product’s goodwill totaling $4.0 million and approximately $2.8 million of its long lived assets other than goodwill for a total write-off of $6.8 million.

During the fourth quarter of 2012, the Company completed its annual goodwill impairment reviews and wrote off $2.3 million of impaired value of goodwill associated with the Products reporting unit.

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.

During the second quarter of 2013, in connection with an interim impairment test of long lived assets and goodwill associated with its Dynasil Products reporting unit, the Company determined that the fair value of the long-lived assets (other than goodwill) of Products was less than the carrying amount of those assets and, as a result, recorded a pre-tax impairment charge of approximately $2.8 million plus a $4.0 million write-off of goodwill as discussed above.

There was no impairment charge during the year ended September 30, 2012.

Intangible Assets

The Company's intangible assets consist of an acquired customer base of Optometrics, LLC, acquired customer relationships and trade names of Hilger Crystals, customer relationships and trade names of Dynasil Products, acquired backlog and know-how of Radiation Monitoring Devices, Inc., and provisionally patented technologies within Dynasil Biomedical Corp.

Dynasil estimates the fair value of indefinite-lived intangible assets using an income approach, and recognizes an impairment loss when the estimated fair value of the indefinite-lived intangible assets is less than the carrying value. During the fourth quarter of fiscal year 2013, the Company conducted its annual impairment review of indefinite-lived intangible assets with no impairments to the carrying values identified.

The Company reviews intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of these intangible assets is assessed based on the undiscounted future cash flows expected to result from the use of the asset. If the undiscounted future cash flows are less than the carrying value, the intangible assets with finite lives are considered to be impaired. The amount of the impairment loss, if any, is measured as the difference between the carrying amount of these assets and the fair value based on a discounted cash flow approach or, when available and appropriate, to comparable market values.

The Company amortizes its intangible assets with definitive lives over their useful lives, which range from 4 to 15 years, based on the time period the Company expects to receive the economic benefit from these assets.

Allowance for Doubtful Accounts Receivable

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

	31

Stock-Based Compensation

We account for stock-based compensation using fair value. Compensation costs are recognized for stock options granted to employees and directors. Options and warrants granted to employees and non-employees are recorded as an expense over the requisite service period based on the grant date estimated fair value of the grant, determined using the Black-Scholes option pricing model.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse. The Company believes it is more likely than not that these carry-forwards will not be realized and, therefore, a valuation allowance has been applied.

Forward-Looking Statements

The statements contained in this Annual Report on Form 10-K 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 default under the financial covenants under our loan agreement with Santander Bank and Massachusetts Capital Resource Company, Xcede obtaining financing from outside investors, the commercialization of our products including our dual mode detectors, our development of new technologies including at Dynasil Biomedical, the adequacy of our current financing sources to fund our current operations, our growth initiatives, our capital expenditures and the strength of our intellectual property portfolio. These forward-looking statements may be identified by the use of words such as “plans”, “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” “continue” or similar terms, though not all forward-looking statements contain such words. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to resolve our current default under our outstanding indebtedness, 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, our ability to address our material weaknesses in our internal controls, 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, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to deleverage our balance sheet, our ability to identify and execute on acquisition opportunities and integrate such acquisitions into our business, and seasonality, as well as the uncertainties set forth in this Annual Report on Form 10-K, 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.

	32

Use of Non-GAAP Financial Measures

In addition to financial measures prepared in accordance with generally accepted accounting principles (GAAP), this report also contains a measure of our net loss excluding goodwill and intangible asset impairment charges. The Company believes that the inclusion of this non-GAAP financial measure helps investors to gain a meaningful understanding of the Company’s core operating results and enhance comparing such performance with prior periods. Our management uses this non-GAAP measure, in addition to GAAP financial measures, as the basis for measuring our core operating performance and comparing such performance to that of prior periods. The non-GAAP financial measure included in this report is not meant to be considered superior to or a substitute for results of operations prepared in accordance with GAAP.

	33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements

		Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Financial Statements:
Balance Sheets as of September 30, 2013 and 2012		F-3
Statements of Operations and Comprehensive Loss for the years ended September 30, 2013 and 2012		F-5
Statements of Stockholders’ Equity for the years ended September 30, 2013 and 2012		F-6
Statements of Cash Flows for the years ended September 30, 2013 and 2012		F-7
Notes to Consolidated Financial Statements		F-8

	F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Dynasil Corporation of America and Subsidiaries

Watertown, Massachusetts

We have audited the accompanying consolidated balance sheets of Dynasil Corporation of America and Subsidiaries (the Company) as of September 30, 2013 and 2012 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dynasil Corporation of America and Subsidiaries as of September 30, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, as of September 30, 2013, the Company is in default with the financial covenants set forth in the terms of its outstanding loan agreements (and may enter into a forbearance arrangement with its lenders) and has sustained substantial losses from operations for the years ended September 30, 2013 and 2012. These factors, among others, as discussed in Note 1 to the consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plan in regards to these matters is also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

McGladrey LLP

Boston, Massachusetts

December 20, 2013

	F-2

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2013 and 2012

	September 30, 2013		September 30, 2012
ASSETS
Current Assets
Cash and cash equivalents	$	2,436,828	$	3,414,880
Accounts receivable, net of allowances of $184,775 and $198,070 at September 30, 2013 and September 30, 2012, respectively		3,657,320		5,475,142
Costs in excess of billings and unbilled receivables		1,537,318		1,735,798
Inventories, net of reserves		3,140,244		3,271,700
Prepaid expenses and other current assets		1,291,942		1,460,836
Total current assets		12,063,652		15,358,356

Property, Plant and Equipment, net		4,773,779		4,984,150

Other Assets
Intangibles, net		3,484,583		6,703,305
Goodwill		6,240,983		10,254,160
Deferred financing costs, net		114,229		165,457
Total other assets		9,839,795		17,122,922

Total Assets	$	26,677,226	$	37,465,428

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt	$	9,819,048	$	11,984,492
Capital lease obligations, current		124,383		-
Accounts payable		2,056,262		2,416,397
Deferred revenue		515,790		694,672
Accrued expenses and other liabilities		2,846,850		2,809,580
Total current liabilities		15,362,333		17,905,141

Long-term Liabilities
Capital lease obligations, net of current portion		232,173		-
Pension liability		249,966		345,443
Deferred tax liability		186,866		371,256
Total long-term liabilities		669,005		716,699

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

	F-3

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2013 and 2012 (Continued)

	September 30, 2013		September 30, 2012
Stockholders' Equity
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 16,224,402 and 15,610,517 shares issued, 15,414,242 and and 14,800,357 shares outstanding at September 30, 2013 and September 30, 2012, respectively.		8,112		7,805
Additional paid in capital		17,476,003		17,037,618
Accumulated other comprehensive income		152,685		61,906
Retained earnings (Accumulated deficit)		(6,004,570)		2,722,601
Less 810,160 shares of treasury stock - at cost		(986,342)		(986,342)
Total stockholders' equity		10,645,888		18,843,588

Total Liabilities and Stockholders' Equity	$	26,677,226	$	37,465,428

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

	F-4

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE YEARS ENDED SEPTEMBER 30, 2013 and 2012

	2013		2012
Net revenue	$	42,752,832	$	47,887,150
Cost of revenue		24,667,087		28,381,407
Gross profit		18,085,745		19,505,743
Operating expenses:
Sales and marketing expenses		1,746,865		1,729,703
Research and development expenses		2,307,407		2,810,778
General and administrative expenses		15,371,494		16,386,454
Impairment of goodwill and long-lived assets		6,829,072		2,284,499
Total operating expenses		26,254,838		23,211,434
Loss from operations		(8,169,093)		(3,705,691)
Interest expense, net		861,038		639,096
Loss before income taxes		(9,030,131)		(4,344,787)
Income tax credit		(302,960)		(41,021)
Net loss	$	(8,727,171)	$	(4,303,766)

Net loss	$	(8,727,171)	$	(4,303,766)
Other comprehensive loss:
(Increase) decrease in pension liability	$	92,513	$	(345,443)
Foreign currency translation		(1,734)		109,783
Total comprehensive loss	$	(8,636,392)	$	(4,539,426)

Basic net loss per common share	$	(0.59)	$	(0.29)
Diluted net loss per common share	$	(0.59)	$	(0.29)

Weighted average shares outstanding
Basic		14,812,858		14,811,294
Diluted		14,812,858		14,811,294

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

	F-5

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED SEPTEMBER 30, 2013 and 2012

				Additional		Other							Total
	Common	Common		Paid-in		Comprehensive		Retained Earnings		Treasury Stock			Stockholders'
	Shares	Amount		Capital		Income (Loss)		(Accumulated Deficit)		Shares	Amount		Equity
Balance, September 30, 2011	15,393,053	$	7,696	$	15,896,755	$	297,566	$	7,026,367	810,160	$	(986,342)	$	22,242,042

Issuance of shares of common stock under employee stock purchase plan	47,440		24		63,098		-		-	-		-		63,122

Stock-based compensation costs	57,592		29		935,367		-		-	-		-		935,396
Exercise of options by director to purchase common stock	41,205		21		(21)		-		-	-		-		-

Expiration of put shares	71,227		35		142,419		-		-	-		-		142,454

Adjustment for increase in pension liability, net of tax	-		-		-		(345,443)		-	-		-		(345,443)

Foreign currency translation adjustment	-		-		-		109,783		-	-		-		109,783

Net loss	-		-		-		-		(4,303,766)	-		-		(4,303,766)
Balance, September 30, 2012	15,610,517	$	7,805	$	17,037,618	$	61,906	$	2,722,601	810,160	$	(986,342)	$	18,843,588

Issuance of shares of common stock under employee stock purchase plan	28,622		14		20,995		-		-	-		-		21,009

Stock-based compensation costs	585,263		293		417,390		-		-	-		-		417,683

Adjustment for decrease in pension liability, net of tax	-		-		-		92,513		-	-		-		92,513

Foreign currency translation adjustment	-		-		-		(1,734)		-	-		-		(1,734)

Net loss	-		-		-		-		(8,727,171)	-		-		(8,727,171)
Balance, September 30, 2013	16,224,402	$	8,112	$	17,476,003	$	152,685	$	(6,004,570)	810,160	$	(986,342)	$	10,645,888

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

	F-6

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED SEPTEMBER 30, 2013 and 2012

	2013		2012
Cash flows from operating activities:
Net loss	$	(8,727,171)	$	(4,303,766)
Adjustments to reconcile net loss to net cash:
Stock compensation expense		417,683		935,396
Foreign exchange loss		(4,867)		30,602
Contingent consideration adjustment		-		(17,376)
Gain on sale of property, plant and equipment		(87,803)		-
Depreciation and amortization		1,596,451		1,669,719
Noncash interest expense		51,228		41,799
Change in reserves		6,831		76,981
Deferred income taxes		(120,634)		166,920
Impairment of goodwill and long-lived assets		6,829,072		2,284,499
Other changes in assets and libilities:
Accounts receivable, net		1,822,982		(2,107,477)
Inventories		132,185		(134,449)
Costs in excess of billings / unbilled receivables		198,480		1,121,344
Prepaid expenses and other assets		100,900		(574,652)
Accounts payable		(364,330)		338,205
Accrued expenses and other liabilities		29,061		470,637
Deferred revenue		(178,882)		694,672
Net cash provided by operating activities		1,701,186		693,054

Cash flows from investing activities:
Proceeds from sale of property, plant, and equipment		80,252		-
Purchases of property, plant and equipment		(544,902)		(1,018,213)
Net cash from investing activities		(464,650)		(1,018,213)

Cash flows from financing activities:
Proceeds from issuance of common stock		21,009		63,122
Payment of debt issuance costs		-		(56,600)
Principal payments on capital leases		(76,397)		-
Buy back of common stock		-		(1,857,546)
Proceeds from long term debt		-		3,000,000
Payments on long-term debt		(2,165,444)		(1,860,678)
Net cash from financing activities		(2,220,832)		(711,702)

Effect of exchange rates on cash and cash equivalents		6,244		(28,099)

Net decrease in cash and cash equivalents		(978,052)		(1,064,960)

Cash and cash equivalents, beginning		3,414,880		4,479,840
Cash and cash equivalents, ending	$	2,436,828	$	3,414,880

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

	F-7

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 1 – Nature of Operations and Ability to Continue as a Going Concern

Nature of Operations

The Company is primarily engaged in the development, marketing and manufacturing of detection, sensing and analysis technology, precision instruments and optical components as well as contract research. The Company’s products and services are used in a broad range of application markets including the homeland security, industrial and medical markets sectors. The products and services are sold throughout the United States and internationally.

Liquidity

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. However, the Company has failed to comply with the financial covenants set forth in the terms of its outstanding agreements and sustained a substantial loss from operations. These factors raise substantial doubt over the Company’s ability to continue as a going concern.

The Company is currently in default of the financial covenants set forth in the terms of its outstanding indebtedness for its fiscal fourth quarter ended September 30, 2012 and has been in continuing default for each of its quarters in the year ended September 30, 2013. These covenants require the Company to maintain specified ratios of earnings before interest, taxes, depreciation and amortization (EBITDA) to fixed charges and to total/senior debt. A default gives the lenders the right to accelerate the maturity of the indebtedness outstanding. Furthermore, the Company’s lenders, may, at their option, impose default interest rates with respect to their debt outstanding. To date, the lenders have not taken any such actions. However, the Company cannot predict when or whether a resolution of this situation will be achieved.

	While the Company has continued to be current with all principal and interest payments with Santander, we have not paid approximately $

	300,000

	in interest owed to Massachusetts Capital Resources Company (“MCRC”), its subordinated lender.

Because of the uncertainty of any resolution of the covenant violations and possibility of an acceleration of the indebtedness by the lenders, the Company has reclassified all of its outstanding indebtedness as a current liability for the fiscal years ended September 30, 2013 and 2012. The Company’s ability to continue as a going concern is dependent upon its ability to generate future profitable operations and positive cash flows and/or to obtain the necessary financing from shareholders or other sources to meet its obligations and repay its liabilities arising from normal business operations when they become due.

In view of the matters described in the preceding paragraphs, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon the continued operations of the Company. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

The Company has taken and will continue to take actions to improve its liquidity including the sale of certain businesses and other initiatives designed to conserve cash and right-size the cost structure of its various business units. While the Company is actively pursuing sales transactions, there can be no assurance that any such transactions will occur. The Company does not currently have cash available to satisfy its obligations under its indebtedness if it were to be accelerated or payment demanded. If the Company is not able to resolve its current defaults under its outstanding indebtedness and improve its liquidity through the actions described above, it may not have sufficient liquidity to meet its anticipated cash needs for the next twelve months.

	F-8

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 2 – Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Dynasil Corporation of America (“Dynasil” or the “Company”) and its wholly-owned subsidiaries: Optometrics Corporation (“Optometrics”), Evaporated Metal Films Corp (“EMF”), Dynasil Products, formerly known as RMD Instruments Corp. (“Dynasil Products”), Radiation Monitoring Devices, Inc. (“RMD”), Hilger Crystals, Ltd (“Hilger”) and Dynasil Biomedical Corp (“Dynasil Biomedical”). All significant intercompany transactions and balances have been eliminated.

Revenue Recognition

Revenue from research and development activities is derived generally from the following types of contracts: reimbursement of costs plus fees, fixed price or time and material type contracts. 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 represented by agreed billing amounts. Recognition of losses on projects is taken as soon as the loss is reasonably determinable. The Company has an accrual for contract losses in the amount of $ 109,000 and $ 90,162 as of September 30, 2013 and 2012, respectively.

Allowance for Doubtful Accounts Receivable

The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by a review of their current credit information. The Company continuously monitors collections and payments from our customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been minimal, within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates as in the past. A significant change in the liquidity or financial position of any significant customers could have a material adverse effect on the collectability of accounts receivable and future operating results. When all collection efforts have failed and it is deemed probable that a customer account is uncollectible, that balance is written off against the existing allowance.

	F-9

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 2 – Summary of Significant Accounting Policies (continued)

Shipping and Handling Costs

The amounts billed for shipping and included in net revenue were approximately $ 100,000 and $ 118,800 for 2013 and 2012, respectively.

Research and Development

The Company expenses research and development costs as incurred. Research and development costs include salaries, employee benefit costs, direct project costs, supplies and other related costs. Substantially all the Contract Research segment’s cost of revenue relates to research contracts performed by RMD which are in turn billed to the contracting party. Amounts of research and development included within cost of revenue for the years ended September 30, 2013 and 2012 were $ 12,172,000 and $ 15,411,000 , respectively. Remaining amounts are recorded within selling, general and administrative expenses on the consolidated statements of operations.

Costs in Excess of Billings and Unbilled Receivables

Costs in excess of billings and unbilled receivables relate to research and development contracts and consists of actual costs incurred plus fees in excess of billings at provisional contract rates.

Patent Costs

Costs incurred in filing, prosecuting and maintaining patents (principally legal fees) are expensed as incurred and recorded within selling, general and administrative expenses on the consolidated statements of operations. Such costs aggregated approximately $ 422,000 and $ 393,000 for the years ended September 30, 2013 and 2012, respectively.

Inventories

Inventories are stated at the lower of average cost or market. Cost is determined using the first-in, first-out (FIFO) method and includes material, labor and overhead. Inventories consist primarily of raw materials, work-in-process and finished goods.

A significant decrease in demand for the Company's products could result in a short-term increase in the cost of inventory purchases and an increase of excess inventory quantities on hand. In addition, as technologies change or new products are developed, product obsolescence could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, although the Company makes every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of the inventory and reported operating results. The Company records, as a charge to cost of revenues, any amounts required to reduce the carrying value to net realizable value.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost or at fair market value for acquired assets. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets.

The estimated useful lives of assets for financial reporting purposes are as follows: building and improvements, 8 to 25 years; machinery and equipment, 5 to 10 years; office furniture and fixtures, 5 to 10 years; transportation equipment, 5 years. Maintenance and repairs are charged to expense as incurred; major renewals and betterments are capitalized. When items of property, plant and equipment are sold or retired, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is included in income.

	F-10

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 2 – Summary of Significant Accounting Policies (continued)

Goodwill

The Company annually assesses goodwill impairment at the end of the fourth quarter of the fiscal year by applying a fair value test. In the first step of testing for goodwill impairment, the Company estimates the fair value of each reporting unit. The reporting units have been determined as RMD which is the Contract Research reportable segment, Dynasil Products which is the Instruments reportable segment and Hilger Crystals, which is a component of the Optics reportable segment. The Company compares the fair value with the carrying value of the net assets assigned to each reporting unit. If the fair value is less than its carrying value, then the Company performs a second step and determines the fair value of the goodwill. In this second step, the fair value of goodwill is determined by deducting the fair value of a reporting unit’s identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if that reporting unit had just been acquired and the purchase price were being initially allocated. If the fair value of the goodwill is less than its carrying value for a reporting unit, an impairment charge is recorded to earnings.

To determine the fair value of each of the reporting units as a whole, the Company uses a discounted cash flow analysis, which requires significant assumptions and estimates about the future operations of each reporting unit. Significant judgments inherent in this analysis include the determination of appropriate discount rates, the amount and timing of expected future cash flows and growth rates. The cash flows employed in the discounted cash flow analyses are based on financial forecasts developed internally by management. The discount rate assumptions are based on an assessment of the Company’s risk adjusted discount rate, applicable for each reporting unit. In assessing the reasonableness of the determined fair values of the reporting units, the Company evaluates its results against its current market capitalization.

In addition, the Company evaluates a reporting unit for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events or circumstances include the following:

	•	a significant adverse change in legal status or in the business climate,

	•	an adverse action or assessment by a regulator,

	•	a more likely than not expectation that a segment or a significant portion thereof will be sold, or

	•	the testing for recoverability of a significant asset group within the segment.

Intangible Assets

The Company's intangible assets consist of acquired customer relationships, trade names, acquired backlog, know-how and provisionally patented technologies. The Company amortizes its intangible assets with definitive lives over their useful lives, which range from 4 to 15 years, based on the time period the Company expects to receive the economic benefit from these assets.

The Company has a trade name related to its UK subsidiary that has been determined to have an indefinite life and is therefore not subject to amortization and is reviewed at least annually for potential impairment. The fair value of the Company’s trade name is estimated and compared to its carrying value to determine if impairment exists. The Company estimates the fair value of this intangible asset based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of this asset. This approach is dependent on a number of factors, including estimates of future sales, royalty rates in the category of intellectual property, discount rates and other variables. Significant differences between these estimates and actual results could materially affect the Company’s future financial results.

	F-11

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 2 – Summary of Significant Accounting Policies (continued)

Recovery of Long-Lived Assets

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 (other than goodwill and any indefinite lived assets) or whether the remaining balances of those assets should be evaluated for possible impairment. Long-lived assets include, for example, customer relationships, trade names, backlog, know-how and provisionally patented technologies. Events or changes in circumstances that may indicate that an asset may be impaired include the following:

	•	a significant decrease in the market price of an asset or asset group,

	•	a significant adverse change in the extent or manner in which an asset or asset group is being used or in its physical condition,

	•	a significant adverse change in legal factors or in the business climate that could affect the value of an asset or asset group, including an adverse action or assessment by a regulator,

	•	an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset,

	•	a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group,

	•	a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life, or

	•	an impairment of goodwill at a reporting unit.

If an impairment indicator occurs, the Company performs a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. The Company groups its long-lived assets for this purpose at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets or asset groups. If the carrying values are in excess of undiscounted expected future cash flows, the Company measures any impairment by comparing the fair value of the asset or asset group to its carrying value.

To determine fair value the Company uses discounted cash flow analyses and estimates about the future cash flows of the asset or asset group. This analysis includes a determination of an appropriate discount rate, the amount and timing of expected future cash flows and growth rates. The cash flows employed in the discounted cash flow analyses are typically based on financial forecasts developed internally by management. The discount rate used is commensurate with the risks involved. The Company may also rely on third party valuations and or information available regarding the market value for similar assets.

If the fair value of an asset or asset group is determined to be less than the carrying amount of the asset or asset group, impairment in the amount of the difference is recorded in the period that the impairment occurs. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized.

Deferred Financing Costs

Deferred financing costs, net of approximately $ 114,000 and $ 165,000 at September 30, 2013 and 2012 include accumulated amortization of $ 142,000 and $ 91,000 , respectively. Amortization expense for the years ended September 30, 2013 and 2012 was $ 51,000 and $ 42,000 , respectively, and was recorded as interest expense. Future amortization will be $ 51,000 in fiscal 2014, $ 42,000 in fiscal 2015, $ 11,000 in fiscal 2016, and $ 10,000 in fiscal 2017.

	F-12

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 2 – Summary of Significant Accounting Policies (continued)

Advertising

The Company expenses all advertising costs as incurred. Advertising expense for the years ended September 30, 2013 and 2012 was approximately $ 128,000 and $ 118,000 , respectively.

Retirement Plans

The Company has retirement savings plans available to substantially all full time employees which are intended to qualify as deferred compensation plans under Section 401(k) of the Internal Revenue Code (the “401k Plans”). Pursuant to the 401k Plans, employees may contribute up to the maximum amount allowed by the 401k Plans or by law. The Company at its sole discretion may from time to time make discretionary matching contributions as it deems advisable. The Company’s EMF subsidiary has a defined benefit pension plan covering hourly employees. The plan provides defined benefits based on years of service and final average salary. As of September 30, 2006, the plan was frozen. The Company may make contributions to the plan to satisfy minimum Employee Retirement Income Security Act (“ ERISA” ) funding requirements. Pension costs and obligations are calculated using various actuarial assumptions and methodologies as prescribed under ASC 715. To assist in developing these assumptions and methodologies, the Company uses the services of an independent consulting firm. To determine the benefit obligations, the assumptions the Company uses include, but are not limited to, the selection of the discount rate.

The projected unit credit cost method is used to calculate each member’s plan benefit as it accrues recognizing future salary increases (if applicable) to assumed retirement age. Each member’s service cost is the present value of the benefit which will accrue during the year using expected future salary for salary related benefits. The projected benefit obligation (PBO) is the present value of projected benefits based on service accrued to date. In accordance with authoritative guidance, the Company recognizes the funded status of the plan in its financial statements and the gains or losses and prior service costs or credits that arise during the period, but are not recognized as components of net periodic cost, as a component of other comprehensive income, net of tax.

Income Taxes

Dynasil Corporation of America and its wholly owned U.S. subsidiaries file a consolidated federal income tax return and various state returns. The Company’s U.K. subsidiary files tax returns in the U.K.

The Company uses the asset and liability approach to account for deferred income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss and tax credit carry-forwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates, and tax laws, in the respective tax jurisdiction then in effect.

In assessing the ability to realize the net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based upon the Company’s current losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against its U.S. net deferred tax assets.

	F-13

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 2 – Summary of Significant Accounting Policies (continued)

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 September 30, 2013 and 2012, the Company has no unrecorded liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statement of operations. As of September 30, 2013 and 2012, the Company had no accrued interest or penalties related to uncertain tax positions.

Earnings Per Common Share

Basic earnings (loss) per common share is computed by dividing the net income applicable or loss attributable to common shares after preferred dividends paid, if applicable, by the weighted average number of common shares outstanding during each period. 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 year ended September 30, 2013, 1,053,700 shares of potential common stock related to restricted stock and stock options were excluded from the calculation of dilutive shares since there was a loss from operations and the inclusion of potential shares would be anti-dilutive. If the Company had not been in a loss position as of September 30, 2013, 423,168 shares of restricted stock would have been considered in the denominator used to calculate diluted earnings per common share.

For the year ended September 30, 2012, 922,317 shares of potential common stock related to restricted stock and stock options were excluded from the calculation of dilutive shares since there was a loss from operations and the inclusion of potential shares would be anti-dilutive. If the Company had not been in a loss position as of September 30, 2012, 127,834 shares of restricted stock would have been considered in the denominator used to calculate diluted earnings per common share.

The computations of the weighted shares outstanding for the years ended September 30 are as follows:

	2013	2012
Weighted average shares outstanding
Basic	14,812,858	14,811,294
Effect of dilutive securities
Stock Options	-	-
Dilutive Average Shares Outstanding	14,812,858	14,811,294

Stock Based Compensation

Stock-based compensation cost is measured using the fair value recognition provisions of the FASB authoritative guidance, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options, based on estimated fair values. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized over the requisite service period of the award.

Foreign Currency Translation

The operations of Hilger, the Company’s foreign subsidiary, use their local currency as its functional currency. Assets and liabilities of the Company’s foreign operations, denominated in their local currency, Great Britain Pounds (GBP), are translated at the rate of exchange at the balance sheet date. Revenue and expense accounts are translated at the average exchange rates during the period. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in the foreign currency translation adjustment, a component of accumulated other comprehensive income in stockholders’ equity. Gains and losses generated by transactions denominated in foreign currencies are recorded in the accompanying statement of operations in the period in which they occur.

	F-14

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 2 – Summary of Significant Accounting Policies (continued)

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Accumulated comprehensive income (loss) represents cumulative translation adjustments related to Hilger, the Company’s foreign subsidiary and cumulative adjustments pertaining to the Company’s Defined Benefit Pension Plan. The Company presents comprehensive income and losses in the consolidated statements of operations and comprehensive income (loss).

Financial Instruments

The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments. The carrying amounts for fixed rate long-term debt and variable rate long term debt approximate fair value because the underlying instruments are primarily at current market rates available to the Company for similar borrowings.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. In the normal course of business, the Company extends credit to certain customers. Management performs initial and ongoing credit evaluations of their customers and generally does not require collateral.

Concentration of Credit Risk

The Company maintains allowances for potential credit losses and has not experienced any significant losses related to the collection of its accounts receivable. As of September 30, 2013 and 2012, approximately $ 1,315,000 and $ 1,608,000 or 34 % and 28 % of the Company’s accounts receivable are due from foreign sales.

The Company maintains cash and cash equivalents at various financial institutions in New Jersey, Massachusetts and New York. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $ 250,000 . At September 30, 2013 and 2012 , the Company's uninsured bank balances totaled $ 2,168,000 and $ 3,153,000 . The Company has not experienced any significant losses on its cash and cash equivalents.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. Currently, GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, although early adoption is permitted. This ASU will be applied prospectively to all unrecognized tax benefits that exist at the effective date. We have not yet adopted this ASU and we are currently evaluating the effect it will have on our consolidated financial statements.

	F-15

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 2 – Summary of Significant Accounting Policies (continued)

In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU permits the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the U.S. government treasury obligation rate and the London Interbank Offered Rate (LIBOR). This ASU also removes the restriction on using different benchmark rates for similar hedges. This ASU is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company does not currently have any hedging arrangements and therefore will not be materially impacted by the new guidance.

In April 2013, the FASB issued ASU No. 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. This ASU clarifies when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The ASU requires an organization to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. This ASU is effective for reporting periods beginning after December 15, 2013, although early adoption is permitted. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. When a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity, the parent is required to apply the guidance in subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. This ASU is effective prospectively for fiscal years and interim periods beginning after December 15, 2013. This ASU will be applied prospectively to derecognition events occurring after the effective date. Early adoption is permitted. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.

Cash and Cash Equivalents

The Company generally considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Reclassifications

Certain amounts as previously reported have been reclassified to conform to the current year financial statement presentation.

	F-16

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 3 – Assets Held for Sale

As of September 30, 2013, the Company had determined to dispose of substantially all of its Instruments reporting segment. The assets held for sale at September 30, 2013 included fixed assets, inventory, and intangible customer assets totaling $ 2.9 million offset by customer deposits of approximately $ 100,000 .

Note 4 – Inventories

Inventories, net of reserves, at September 30, 2013 and 2012 consisted of the following:

	2013		2012
Raw Materials	$	2,132,962	$	2,096,681
Work-in-Process		703,873		885,328
Finished Goods		303,409		289,691
	$	3,140,244	$	3,271,700

Note 5 - Property, Plant and Equipment

Property, plant and equipment at September 30, 2013 and 2012 consist of the following:

	2013		2012
Land	$	185,602	$	185,445
Building and improvements		3,409,638		3,381,094
Machinery and equipment		7,702,351		7,173,521
Office furniture and fixtures		852,265		437,755
Transportation equipment		53,419		53,419
		12,203,275		11,231,234
Less accumulated depreciation		(7,429,496)		(6,247,084)
	$	4,773,779	$	4,984,150

Depreciation expense for the years ended September 30, 2013 and 2012 was $ 1,104,477 and $ 865,789 .

	F-17

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 6 – Intangible Assets

Intangible assets at September 30, 2013 and 2012 consist of the following:

	Useful	Gross		Accumulated
September 30, 2013	Life (years)	Amount		Amortization		Net
Acquired Customer Base	5 to 15	$	5,145,638	$	2,645,715	$	2,499,923
Know How	15	$	512,000	$	179,283		332,717
Trade Names	15 or Indefinite	$	547,802	$	75,856		471,946
Biomedical Technologies	5	$	300,000	$	120,003		179,997
		$	6,505,440	$	3,020,857	$	3,484,583

	Useful	Gross		Accumulated
September 30, 2012	Life (years)	Amount		Amortization		Net
Acquired Customer Base	5 to 15	$	7,858,775	$	2,257,533	$	5,601,242
Know How	15		512,000		145,147		366,853
Trade Names	15 or Indefinite		558,435		63,222		495,213
Biomedical Technologies	5		300,000		60,003		239,997
		$	9,229,210	$	2,525,905	$	6,703,305

In the second quarter of 2013, as a result of a decision to dispose of a significant portion of the Products reporting unit, the Company performed an interim impairment test of long lived assets and goodwill associated with its Dynasil Products reporting unit. Under step two of the impairment testing, the income method was used to allocate the fair values of all of the assets and liabilities of this reporting unit, with the remaining residual fair value allocated to goodwill. The result of this impairment test was to write off $ 2.8 million of the Acquired Customer Base intangible asset.

Amortization expense for the years ended September 30, 2013 and 2012 was $ 491,974 and $ 802,511 respectively. Estimated amortization expense for each of the next five fiscal years is as follows:

	2014		2015		2016		2017		2018		Thereafter		Total
Acquired Customer Base	$	233,079	$	233,079	$	233,079	$	233,079	$	233,079	$	1,334,528	$	2,499,923
Know How		34,214		34,214		34,214		34,214		34,214		161,647		332,717
Trade Names		14,600		14,600		14,600		14,600		14,600		61,161		134,161
Biomedical Technologies		60,000		60,000		59,997		-		-		-		179,997
	$	341,893	$	341,893	$	341,890	$	281,893	$	281,893	$	1,557,336	$	3,146,798

Note 7 – Goodwill

The changes to goodwill during the years ended September 30, 2013 and 2012 are summarized as follows:

	Contract
	Research		Optics		Instruments		Total
Goodwill at September 30, 2011	$	4,938,625	$	1,283,775	$	6,299,571	$	12,521,971
Goodwill impairment on Instruments		-		-		(2,284,499)		(2,284,499)
Currency translation on Hilger Crystals		-		16,688		-		16,688
Goodwill at September 30, 2012	$	4,938,625	$	1,300,463	$	4,015,072	$	10,254,160
Goodwill impairment on Instruments		-		-		(4,015,072)		(4,015,072)
Currency translation on Hilger Crystals		-		1,895		-		1,895
Goodwill at September 30, 2013	$	4,938,625	$	1,302,358	$	-	$	6,240,983

	F-18

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 7 – Goodwill (continued)

method was used to allocate the fair values of all of the assets and liabilities of this reporting unit, with the remaining residual fair value allocated to goodwill. The result of this impairment test was to write off Product’s remaining goodwill totaling approximately $ 4.0 million.

Determining the fair value using a discounted cash flow method requires significant estimates and assumptions, including market conditions, discount rates, and long-term projections of cash flows. The Company’s estimates are based upon historical experience, current market trends, projected future volumes and other information. The Company believes that the estimates and assumptions underlying the valuation methodology are reasonable; however, different estimates and assumptions could result in a different estimate of fair value. In estimating future cash flows, the Company relies on internally generated projections for a defined time period for revenue and operating profits, including capital expenditures, changes in net working capital, and adjustments for non-cash items to arrive at the free cash flow available to invested capital. A terminal value utilizing a constant growth rate of cash flows is used to calculate a terminal value after the explicit projection period. The future projected cash flows for the discrete projection period and the terminal value are discounted at a risk adjusted discount rate to determine the fair value of the reporting unit.

With respect to the Company's annual goodwill impairment testing performed during the fourth quarter of fiscal year 2013, step one of the testing determined the estimated fair value of RMD (included in the Contract Research segment) and Hilger Crystals (included in the Optics segment) r eporting units exceeded their carrying value by more than 20 %. Accordingly, the Company concluded that no impairment had occurred and no further testing was necessary.

The step one test for the RMD reporting unit and the resulting calculation of the indicated fair value was performed as described above based on certain specific assumptions. The Company relied on a weighted average cost of capital of approximately 13 % for this reporting unit which takes into consideration certain industry and specific premiums. The Company utilized a long term growth rate of approximately 3.0 % for this reporting unit which considers industry research and management’s representations as to the prospects for long term growth in this industry.

The step one test for the Hilger Crystal reporting unit and the resulting calculation of the indicated fair value was performed as described above based on certain specific assumptions. The Company relied on a weighted average cost of capital of 16 % for this reporting unit which takes into consideration certain industry and specific premiums. The Company utilized a long term growth rate of approximately 3.0 % for this reporting unit which considers industry research and management’s representations as to the prospects for long term growth in this industry.

In connection with the annual fair value test of goodwill, performed at the end of the fourth quarter of fiscal year 2012, the step one analysis indicated that the fair value of Dynasil Products was less than its carrying value. The Company proceeded to a step two analysis, which included valuing the tangible and intangible assets and liabilities of Dynasil Products to determine the implied fair value of goodwill. The result of this assessment indicated that the implied fair value of goodwill was less than its carrying value. As a result, the Company recognized a pre-tax impairment charge of $ 2.3 million during the year ended September 30, 2013.

Note 8 – Fair Value Measurement

The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

	F-19

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 8 – Fair Value Measurement (continued)

Under the FASB’s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

Assets and liabilities measured at fair value are to be categorized into one of the three hierarchy levels based on the inputs used in the valuation. The Company classifies assets and liabilities in their entirety based on the lowest level of input significant to the fair value measurement. There were no transfers between levels for all periods presented. The three levels are defined as follows:

	·	Level 1: Observable inputs based on quoted prices (unadjusted) in active markets for identical assets or liabilities.

	·	Level 2: Observable inputs based on quoted prices for similar assets and liabilities in active markets, or quoted prices for identical assets and liabilities in inactive markets.

	·	Level 3: Unobservable inputs that reflect an entity’s own assumptions about what inputs a market participant would use in pricing the asset or liability based on the best information available in the circumstances.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The FASB fair value guidance also applies to certain assets that indirectly impact the consolidated financial statements, including pension plan assets. While the Company does not have direct control over these assets, the Company is indirectly impacted by subsequent fair value adjustments to these assets and the actual return on these assets not only affects the net periodic benefit cost but also the amount included in the consolidated balance sheet. The Company uses the fair value hierarchy to measure the fair value of assets held in the pension plan.

The following table presents the pension plan assets financial instruments carried at fair value as of September 30, 3013 and 2012 in accordance with the fair value hierarchy:

	Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)
September 30, 2013

Money Market Separate Account	$	-	$	315,222	$	-

Total plan assets	$	-	$	315,222	$	-

September 30, 2012
Money Market Separate Account	$	-	$	295,357	$	-

Total plan assets	$	-	$	295,357	$	-

	F-20

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 8 – Fair Value Measurement (continued)

Acquired Customer Base was also impaired.

At September 30, 2012, goodwill for the Dynasil Products reporting unit was deemed to be impaired and written down to its fair value of $ 4,015,072 at September 30, 2012 based on significant unobservable inputs (Level 3).

The fair value measurements were calculated using a discounted cash flow approach, which included unobservable inputs classified as Level 3 within the fair value hierarchy. The amount and timing of future cash flows were based on the Company’s operational budgets. The Company used the assistance of independent consulting firms to develop valuation assumptions.

Note 9 – Debt

Current Debt Status

The Company is in default of certain financial covenants set forth in the terms of its outstanding indebtedness as of September 30, 2013. While the Company has continued to be current with all principal and interest payments with Santander (including $ 2.2 million in principal payments paid in 2013), it has not paid approximately $ 300,000 in interest owed to Massachusetts Capital Resources Company (“MCRC”), its subordinated lender. Based on the covenant default situation, the Company has reclassified all of its outstanding indebtedness as current liabilities.

Bank Debt

The Company has a Loan and Security Agreement (the "Bank Loan Agreement") with Santander Bank, N.A. (“Santander”, the “Bank” or the “Lender”) that provides three borrowing facilities: a five-year $ 9 million term loan (the "Term Loan") at an interest rate of 5.58 %; a $ 3 million working capital line of credit (the "Working Capital Line of Credit") at an interest rate of Prime or one month LIBOR plus 2.75% and a monthly fee calculated at the rate of 0.25% per annum of the unused Working Capital Line of Credit ; and a $ 5 million acquisition line of credit (the "Acquisition Line of Credit") at an interest rate of one month LIBOR plus 3.5% and a monthly fee calculated at the rate of 0.25% per annum of the unused Acquisition Line of Credit . Interest on advances under the Working Capital Line of Credit is payable monthly and such advances were required to be repaid in full by July 7, 2012 in accordance with the terms of the agreement. The Acquisition Line of Credit was for future acquisitions under the terms specified in the Bank Loan Agreement. Advances under the Acquisition Line of Credit are repayable monthly based on a 7 -year straight line amortization plus interest, with a balloon payment due on July 7, 2015.

Dynasil's obligations under the Bank Loan Agreement are guaranteed by EMF, Optometrics, Dynasil Products, RMD Research and Dynasil and each of such subsidiaries have granted the bank a security interest in substantially all its personal property. In addition, EMF has granted a mortgage in the Bank's

favor as to EMF's leasehold property in Ithaca, New York and 65% of the outstanding shares of Hilger are pledged as collateral to the Bank. The Bank Loan Agreement also requires maintenance of certain financial and nonfinancial covenants.

The Term Loan is to be repaid with equal principal payments of $ 107,143 per month plus interest and matures on July 7, 2015.

The Company borrowed $ 4 million under the Acquisition Line of Credit to fund the acquisition of Hilger Crystals in July 2010. The Acquisition Loan is to be repaid with equal principal payments of $ 47,619 per month and matures on July 7, 2015 .

	F-21

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 9 – Debt (continued)

Bank Debt (continued)

As of September 30, 2013 and 2012, the Company had no funds available under the Working Capital or Acquisition Lines of Credit.

On June 29, 2012, the Company entered into a letter agreement (the “Waiver Letter”) with the Bank as well as Amendment No. 3 to the Loan and Security Agreement, dated July 7, 2010 as amended on April 1, 2011 and April 12, 2012 (the “Original Loan Agreement”). Under the Waiver Letter, the Lender agreed to waive non-compliance by the Company with certain financial covenants under the Bank Loan Agreement as of June 30, 2012, subject to the Company’s compliance with the terms of Amendment No. 3, including the requirement that the Company would raise, on or before September 30, 2012, at least

$ 2,000,000 in gross proceeds from the sale of its capital stock and/or the incurrence of new indebtedness which is subordinated to the indebtedness in favor of the Lender, on terms and conditions acceptable to the Lender in its sole discretion.

Amendment No. 3 to the Bank Loan Agreement also included revisions to certain financial covenants as follows.

Amendment to Leverage Ratio Covenants

For the Consolidated Maximum Leverage Ratio (Consolidated Total Funded Debt to Consolidated EBITDA, as defined in the Amendment), the Amendment (i) revised the required ratio for September 30, 2012 from 3.25x to 4.5x; (ii) revised the required ratio for December 31, 2012 from 3.00x to 4.5x; and (iii) revised the required ratio for March 31, 2013 and for each rolling four quarters thereafter from 3.00x to 4.0x.

The Amendment also includes a new Consolidated Maximum Adjusted Leverage Ratio covenant, which is Consolidated Total Funded Debt (excluding subordinated debt) to Consolidated EBITDA, as defined in the Amendment. The Amendment requires the Company to maintain a Consolidated Maximum Adjusted Leverage Ratio equal to or less than (i) 3.25x to 1.00x for each of the rolling four quarter periods ending on September 30, 2012 and December 31, 2012, and (ii) 3.00x to 1.00x for each rolling four quarter period ending on or after March 31, 2013.

Amendment to Fixed Charge Coverage Ratio Covenants

The Consolidated Fixed Charge Coverage Ratio is defined as Consolidated EBITDA (as defined in the Amendment) for the applicable period divided by the sum of (a) the Company’s consolidated interest expense for such period, plus (b) the aggregate principal amount of scheduled payments on the Company’s indebtedness made during such period (excluding any repayment of the Entine Indebtedness discussed below), plus (c) the sum of all cash dividends and other cash distributions to the Company’s shareholders during such period, plus (d) the sum of all taxes paid in cash by the Company during such period, less (e) up to $ 75,000 paid to the IRS, to the extent characterized as interest expense, in connection with certain historical tax filings (the “IRS Payments”).

	F-22

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 9 – Debt (continued)

Bank Debt (continued)

For the purposes of calculating the Consolidated Fixed Charge Coverage Ratio, Consolidated EBITDA will be (i) at September 30, 2012, the actual Consolidated EBITDA for the 3 months then ended times 4; (ii) at December 31, 2012, the actual Consolidated EBITDA for the 6 months then ended times 2; and (iii) at March 31, 2013, the actual Consolidated EBITDA for the 9 months then ended times 4/3 (provided that the add-backs for Entine Indebtedness discussed below repayment and the IRS Payments are not annualized).

See Current Debt Status above for discussion on Company default of these covenants as of September 30, 2013.

Subordinated Debt

On July 31, 2012, the Company entered into a Note Purchase Agreement (the “Agreement”) with Massachusetts Capital Resource Company (“MCRC”). Pursuant to the terms of the Agreement, the Company issued and sold to MCRC a $ 3,000,000 subordinated note (the “Subordinated Note”) for a purchase price of $ 3,000,000 .

The Subordinated Note matures on July 31, 2017 , unless accelerated pursuant to an event of default. The Subordinated Note bears interest at the rate of ten percent ( 10 %) per annum, with interest to be payable monthly on the last day of each calendar month in each year, the first such payment was due and paid on August 31, 2012. Under the terms of the Agreement, beginning on and with September 30, 2015, and on the last day of each calendar month thereafter through and including July 31, 2017, Company will redeem, without premium, $ 130,434 in principal amount of the Subordinated Note together with all accrued and unpaid interest then due on the amount redeemed.

See Current Debt Status above for discussion on Company default of these covenants as of September 30, 2013.

	F-23

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 9 – Debt (continued)

Bank Debt (continued)

Debt at September 30, 2013 and 2012 is summarized as follows:

	2013		2012
Note payable to Bank in monthly installments of $107,143 through July, 2015 followed by a balloon payment of the remaining principal amount. The interest rate is fixed at 5.58% for the life of the loan, and the note is secured by substantially all assets.	$	4,928,572	$	6,214,286

Note payable to Bank in monthly installments of $47,619 through July, 2015 followed by a balloon payment of the remaining principal amount. The interest rate is floating based on one month LIBOR plus 3.5%. The rate at September 30, 2013 was 3.68%. The rate at September 30, 2012 was 3.79%, and the note is secured by substantially all assets.		1,890,476		2,761,905

Subordinated note payable to Masschusetts Capital Resource Corporation in monthly installments of $25,000 through July, 2015 for interest only, followed by monthly payments of interest and principle through July 2017. The interest rate is fixed at 10.00% for the life of the loan.		3,000,000		3,000,000

Note payable to Ithaca Urban Renewal Agency for Lease of land in Ithaca, New York for 99 years with the options to purchase said land for $26,640 after May 2008.		-		8,301
Total Debt	$	9,819,048	$	11,984,492
Less current portion		(9,819,048)		(11,984,492)
Long term portion	$	-	$	-

As previously disclosed, all outstanding indebtedness as of September 30, 2013 has been classified as current based on default of covenants; however the aggregate maturities of debt based on the payment terms of the agreement are as follows:

2014		1,857,144
2015		5,092,339
2016		1,565,208
2017		1,304,357
	$	9,819,048

Put Obligation

On February 27, 2012, Dr. Gerald Entine, a former owner of RMD Instruments, LLC and RMD Instruments Corp. (collectively, “RMD”), exercised a put right to require the repurchase of a total of 928,773 shares of Company common stock held by certain entities affiliated with Dr. Entine (collectively, “Entine”) for an aggregate purchase price of $ 1,857,546 (the “Entine Indebtedness”). This put right originated from the Company’s acquisition of RMD in July 2008 and is set forth in the Asset Purchase Agreement dated July 1, 2008 by and among the Company, RMD Instruments Corp., RMD Instruments, LLC and Gerald Entine 1988 Family Trust and the other parties named therein.

On June 7, 2012, the Company issued the Entine entities three separate promissory notes (the “Entine Promissory Notes”) for $ 1,857,546 which satisfied the put obligation. The Entine Promissory Notes had a three-year term with an interest rate of 10 % per annum. In August 2012, the Company used a portion of the proceeds of the Subordinated Note (discussed above) to repay the Entine Promissory Notes in the aggregate principal amount of $ 1,857,546 .

	F-24

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 10 – Income Taxes

Income (loss) before the provision (benefit) for income taxes consists of the following:

		2013		2012
US	$	(8,675,878)	$	(4,014,238)
Foreign		(354,253)		(330,549)
Total	$	(9,030,131)	$	(4,344,787)

The provision (benefit) for income taxes in the accompanying consolidated financial statements consists of the following:

	2013		2012
Current
Federal	$	(216,275)	$	(374,432)
State		48,235		112,024
Foreign		(22,621)		65,318
	$	(190,661)	$	(197,090)

Deferred
Federal	$	-	$	200,313
State		-		59,351
Foreign		(112,299)		(103,598)
		(112,299)		156,066
Income tax expense (benefit)	$	(302,960)	$	(41,024)

A reconciliation of the federal statutory rate to the Company's effective tax rate is as follows:

	2013			2012
Tax due at statutory rate		34.00	%		34.00	%

State tax provision, net of federal		4.96	%		5.22	%
Valuation allowance		-35.28	%		-35.98	%
Permanent differences		-0.23	%		-0.86	%
Tax credits generated		0.28	%		0.50	%
Foreign rate differential and other		-0.38	%		-1.93	%
Total		3.35	%		0.95	%

The Company’s effective tax rate differs from the federal, statutory rate in 2013 and 2012 primarily due to a full valuation allowance on the U.S. deferred tax assets recorded during the year.

	F-25

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 10 – Income Taxes (continued)

Net deferred tax assets (liabilities) consisted of the following at September 30, 2013:

	Domestic		Foreign		Worldwide

Credits	$	1,473,068	$	-	$	1,473,068
NOLs		243,400		36,447		279,847
Stock compensation		337,456		-		337,456
Accruals		541,362		-		541,362
Intangibles		2,564,415		-		2,564,415
Other		233,030		-		233,030
Gross deferred tax assets		5,392,731		36,447		5,429,178

Valuation allowance		(4,848,636)		-		(4,848,636)
Deferred tax assets, net		544,095		36,447		580,542

Depreciation		(544,095)		(70,858)		(614,953)
Intangibles		-		(98,360)		(98,360)
Gross deferred tax liabilities		(544,095)		(169,218)		(713,313)

Net deferred tax asset (liability)	$	-	$	(132,771)	$	(132,771)

Net deferred tax assets (liabilities) consisted of the following at September 30, 2012:

	Domestic		Foreign		Worldwide

Credits	$	1,362,543	$	-	$	1,362,543
NOLs		170,522		41,868		212,390
Stock compensation		170,362		-		170,362
Accruals		497,335		-		497,335
Intangibles		73,681		-		73,681
Other		205,154		-		205,154
Gross deferred tax assets		2,479,597		41,868		2,521,465

Valuation allowance		(1,700,949)		-		(1,700,949)
Deferred tax assets, net		778,648		41,868		820,516

Depreciation		(778,648)		(65,948)		(844,596)
Intangibles		-		(220,989)		(220,989)
Gross deferred tax liabilities		(778,648)		(286,937)		(1,065,585)

Net deferred tax asset (liability)	$	-	$	(245,069)	$	(245,069)

	F-26

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 10 – Income Taxes (continued)

As of September 30, 2013 and 2012, the Company has no federal net operating losses. As of September 30, 2013 and 2012 the Company has state net operating losses of $ 4.2 million and $ 2.7 million, respectively. The state net operating losses begin expiring in 2031 . At September 30, 2013 and 2012, the Company has foreign net operating loss carryforwards of approximately $ 182,000 which can be carried forward indefinitely.

As of September 30, 2013 and 2012, the Company has federal research credits of $ 1.3 million and $ 1.2 million, respectively. The federal credits begin expiring in fiscal year 2028 . As of September 30, 2013 and 2012, the Company has state research credits of $ 148,000 and $ 197,000 , respectively. The state credits begin expiring in fiscal year 2023 .

As of September 30, 2013 and 2012, the Company has no unrecorded liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statement of operations. As of September 30, 2013 and 2012, the Company has no accrued interest or penalties related to uncertain tax positions.

The Company is subject to taxation in the United States and the United Kingdom. At September 30, 2013, domestic tax years from fiscal 2010 through fiscal 2013 remain open to examination by the taxing authorities and tax years 2012 and 2013 remain open in the United Kingdom.

Note 11 – Stockholders’ Equity

Temporary Equity

As part of the July 1, 2008 RMD Instruments, LLC acquisition, the Company issued one million shares of Dynasil common stock to the members of the seller. Commencing July 1, 2010, the seller's members were able to tender these shares of Dynasil common stock to the Company for repurchase by it at a repurchase price of $ 2.00 per share during a two year period ending July 1, 2012, upon no less than ninety (90) days prior notice to the Company. As of September 30, 2011, the 1,000,000 shares of redeemable common stock valued at its redemption value of $ 2.00 per share, or $ 2,000,000 , were included in temporary equity to properly reflect the repurchase requirement that was not within the Company’s control.

See Note 9 for discussion of the redemption of 928,773 shares during the year ended September 30, 2012. There were an additional 71,227 shares of common stock outstanding that were subject to the Put Right, as discussed in Note 9. The notice period for these shares expired on April 2, 2012 and the amount of $ 142,454 previously recorded as temporary equity associated with these shares was reclassified to equity.

Stock Based Compensation

The Company adopted Stock Incentive Plans in 1996, 1999 and 2010 which provide for, among other incentives, the granting to officers, directors, employees and consultants options to purchase shares of the Company’s common stock. The Plans also allow eligible persons to be issued shares of the Company’s common stock either through the purchase of such shares or as a bonus for services rendered to the Company. Shares are generally issued at the fair market value on the date of issuance. The maximum number of shares of common stock which may be issued under the 2010 Stock Incentive Plan is 6,000,000 , of which 3,868,124 and 4,289,436 shares of common stock are available for future purchases under the plan at September 30, 2013 and 2012, respectively. Options are generally exercisable at the fair market value or higher on the date of grant over a three to five year period currently expiring through 2017 .

	F-27

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 11 – Stockholders’ Equity (continued)

Stock Based Compensation (continued)

The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model. There were no option grants in the year ended September 30, 2013. The weighted average assumptions for grants during the year ended September 30, 2012 used in the Black-Scholes option pricing model were as follows:

	2012
Expected term in years	5 years
Risk-free interest rate	2.64	%
Expected volatility	93.62	%
Expected dividend yield	0.00	%

A summary of stock option activity for the years ended September 30, 2013 and 2012 is presented below:

		Weighted Average	Weighted Average
	Options	Exercise Price per	Remain Contractual
	Outstanding	Share ($)	Term (in Years)
Balance at September 30, 2012	794,483	3.34	1.75
Outstanding and exercisable at September 30, 2012	794,483	3.34	1.75
Granted	-	-
Exercised	-	-
Cancelled	(163,951)	3.39
Balance at September 30, 2013	630,532	3.33	1.06
Outstanding and exercisable at September 30, 2013	630,532	3.33	1.06

			Weighted	Weighted			Weighted
			Average	Average			Average
Range of		Options	Contractual	Exercise		Options	Exercise
Exercise Prices		Outstanding	Life (years)	Price		Exercisable	Price
$	2.00 - 2.99	200,000	0.84	$	2.00	200,000	$	2.00
	3.00 - 3.99	115,730	1.49		3.16	115,730		3.16
	4.00 - 4.99	275,000	1.03		4.00	275,000		4.00
	5.00 - 5.99	29,528	1.03		5.53	29,528		5.53
	6.00 - 6.65	10,274	1.17		6.65	10,274		6.65
$	2.00 - 6.65	630,532	1.06	$	3.33	630,532	$	3.33

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

During the year ended September 30, 2013, no stock options were granted nor exercised. During the year ended September 30, 2013, no stock options vested. During the year ended September 30, 2012, 43,960 stock options were granted with a weighted average grant date fair value of $ 1.34 per share. During the year ended September 30, 2012, 138,373 options were exercised in a cashless exercise with an intrinsic value of $ 92,710 , for which the Company recognized no tax benefit. During the year ended September 30, 2012, 192,085 options vested with a fair value of $ 135,684 . The intrinsic value of the options outstanding and the exercisable options at September 30, 2013 and 2012 was $ 0 and $ 0 , respectively, as the market price was below the exercise prices.

	F-28

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 11 – Stockholders’ Equity (continued)

Stock Based Compensation (continued)

Stock compensation expense for the years ended September 30, 2013 and 2012 is presented below:

Stock Compensation Expense	2013		2012
Stock Grants	$	231,272	$	312,503
Restricted Stock Grants		173,688		503,815
Option Grants		9,813		81,502
Employee Stock Purchase Plan		3,588		37,778
Total	$	418,361	$	935,598

At September 30, 2013 there was approximately $ 240,000 in unrecognized stock compensation cost, which is expected to be recognized over a weighted average period of six months.

A summary of restricted stock activity for the year ended September 30, 2013 and 2012 is presented below:

Restricted Stock Activity for the Year		Weighted-Average
ended September 30, 2013	Shares	Grant-Date Fair Value
Nonvested at September 30, 2012	127,834	$	1.92

Granted	404,000	$	0.67
Vested	(84,666)	$	1.38
Cancelled	(24,000)	$	3.59
Nonvested at September 30, 2013	423,168	$	0.77

Restricted Stock Activity for the Year		Weighted-Average
ended September 30, 2012	Shares	Grant-Date Fair Value
Nonvested at September 30, 2011	403,000	$	4.02

Granted	104,000	$	1.10
Vested	(127,166)	$	3.72
Cancelled	(252,000)	$	4.03
Nonvested at September 30, 2012	127,834	$	1.92

Employee Stock Purchase Plan

On September 28, 2010, the Company adopted an Amended and Restated Employee Stock Purchase Plan. The existing plan was amended to extend the termination date to September 28, 2020. The Employee Stock Purchase Plan permits substantially all employees to purchase common stock at a purchase price of 85% of the fair market value of the shares. Under the Plan, a total of 450,000 shares have been reserved for issuance of which 284,858 and 256,236 shares have been issued as of September 30, 2013 and 2012, respectively .

	F-29

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 11 – Stockholders’ Equity (continued)

Employee Stock Purchase Plan (continued)

On December 16, 2011, the Company amended the Amended and Restated Employee Stock Purchase Plan to change the maximum dollar amount of stock able to be purchased through the Plan by any employee per calendar year from $ 5,000 to $ 20,000 per calendar year. During the years ended September 30, 2013 and 2012, 28,622 shares and 47,440 shares of common stock were issued under the Plan for aggregate purchase prices of $ 21,009 and $ 63,122 , respectively.

Note 12 – Retirement Plans

401(k) Plans

Defined Benefit Pension Plan

Pension Obligations

EMF has a defined benefit pension plan covering hourly employees. The plan provides defined benefits based on years of service and final average salary. As of September 30, 2006, the plan was frozen.

The changes in benefit obligations and plan assets under the pension plan were as follows as of and for the years ended September 30, 2013 and 2012:

	2013		2012
Change in benefit obligation:
Benefit obligation at beginning of fiscal year	$	640,800	$	397,760
Service costs		-		-
Interest costs		23,805		20,659
Benefits paid		(9,378)		(8,621)
Actuarial gain		(90,039)		231,002
Benefit obligation at end of fiscal year	$	565,188	$	640,800

Change in plan assets:
Fair value of plan assets at beginning of fiscal year	$	295,357	$	308,089
Actual return on plan assets		(20,879)		(38,532)
Employer contribution		50,122		34,421
Benefits paid		(9,378)		(8,621)
Fair value of plan assets at end of year	$	315,222	$	295,357

Funded status at end of year	$	(249,966)	$	(345,443)

Amounts recognized in the consolidated balance sheets consist of the following as of September 30, 2013 and 2012:

		2013			2012
Long-term liabilities		$	(249,966)		$	(345,443)

	F-30

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 12 – Retirement Plans (continued)

Defined Benefit Pension Plan (continued)

Amounts recognized in accumulated other comprehensive income as of September 30, 2013 and 2012 consist of the following:

	2013		2012
Net losses/(gains)	$	92,513	$	243,262
Prior service cost				102,181
	$	92,513	$	345,443

The following table summarizes the pension plan, which has a projected benefit obligation that exceeds plan assets:

	2013		2012
Projected benefit obligation in excess of plan assets:
Projected benefit obligation	$	565,188	$	640,800
Fair value of plan assets		315,222		295,357

At September 30, 2013 the accumulated benefit obligation was the same as the projected benefit obligation.

The following table summarizes the components of the net periodic pension cost at September 30, 2013 and 2012:

	2013		2012
Interest cost	$	23,805	$	20,659
Expected return on assets		11,549		(15,189)
Amortization of net loss		11,804		17,788
Net periodic pension cost	$	47,158	$	23,258

Assumptions

Weighted-average assumptions used to determine benefit obligations at September 30, 2013 and 2012 were:

	2013		2012
Discount rate	4.75	%	3.75	%
Expected return on plan assets	2.60	%	2.60	%
Rate of compensation increase	not applicable		not applicable

The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the long-term capital market assumptions. The overall return for each asset class was developed by combining a long-term inflation component and the associated expected real rates. The development of the capital market assumptions utilized a variety of methodologies, including, but not limited to, historical analysis, stock valuation models such as dividend discount models and earnings yields’ models, expected economic growth outlook, and market yields analysis.

Plan Assets

The primary investment objective of the Pension Plan is to ensure, over the long-term life of the plan, an adequate pool of assets to support the benefit obligations to participants, retirees and beneficiaries. A secondary objective of the plan is to achieve a level of investment return consistent with a prudent level of portfolio risk that will minimize the financial effect of the Pension Plan on the Company. The Company utilizes the service of an investment manager to manage the assets of the Pension Plan and the Company has established investment guidelines with the investment manager. The Company believes that the selected investment portfolio will enable the Company to maintain the asset value of the Plan given that benefit accruals have been frozen. As of September 30, 2013 and 2012, the assets of the Pension Plan were invested entirely in short-term fixed income securities.

	F-31

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 12 – Retirement Plans (continued)

Defined Benefit Pension Plan (continued)

Investment securities, in general, are exposed to various risks such as interest rate, credit and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported.

Cash Flows

Benefits expected to be paid in each of the next five fiscal years and in aggregate for the five fiscal years thereafter are as follows:

2014	$	13,000
2015		16,000
2016		21,000
2017		21,000
2018		21,000
2019-2023		160,000
	$	252,000

The contributions expected to be paid to the plan during the next fiscal year are $ 58,000 . The measurement date used to determine pension benefits for the plan was September 30, 2013.

Note 13 - Related Party Transactions

During the years ended September 30, 2013 and 2012, building lease payments of $ 69,000 and $ 114,000 , respectively, were paid to Optometrics Holdings, LLC in which Laura Lunardo, Optometrics’ COO had a 50 % interest. Ms. Lunardo sold her interest in the building in May of 2013.

During the years ended September 30, 2013 and 2012, building lease payments of $ 880,000 and $ 853,000 , respectively were paid to Charles River Realty, dba Bachrach, Inc., which is owned by Gerald Entine and family. Dr. Entine is a former director and employee of the Company, as well as a greater than 5% beneficial owner of the Company’s stock.

Prior to joining the Board of Directors in July of 2012, Dr. Hagan was providing consulting services to RMD through his consulting company, Hagan & Associates LLC (“H&A”). During the years ended September 30, 2013 and 2012, H&A was paid $ 36,000 and $ 73,000 , respectively, in fees. This consulting arrangement is expected to continue into the future.

In 2013 and 2012, the Company was awarded grants from the National Institutes of Health and the Department of Defense to develop new and improved monitors to detect blood loss and potentially fatal hemorrhage in trauma victims. The Company has used the Mayo Clinic in Rochester, MN as its primary subcontractor to conduct animal and human trials with respect to these grants. Dr. Michael J. Joyner of the Mayo Clinic is a co-investigator under these grants. He is also a member of the Company's Board of Directors. In fiscal year 2013 and 2012, the Mayo Clinic received approximately $ 35,000 and $ 50,000 , respectively, under these grants. A small fraction of Dr. Joyner’s Mayo salary is charged to these grants.

	F-32

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 13 - Related Party Transactions (continued)

The subcontract awards to, and the work performed by, the Mayo Clinic are administered by the Mayo Foundation for Medical Education and Research and adheres to the approval and conflicts-of-interest policies of both the Mayo Clinic and the Company.

The intellectual property rights to certain of the technologies purchased by the Company in April 2011 when it established Dynasil Biomedical and acquired intellectual property assets from Dr. Daniel Ericson are jointly owned with the Mayo Clinic or persons affiliated with the Mayo Clinic. Specifically, Dynasil Biomedical's blood storage technology was invented by Dr. Daniel Ericson and Dr. Michael Joyner. Dr. Ericson assigned his ownership rights to such technology to Dynasil Biomedical and because Dr. Joyner is an employee of the Mayo Clinic his ownership rights in such technology are assigned to the Mayo Clinic. In April 2011, the Mayo Foundation for Medical Education and Research and Dynasil Biomedical entered into an Inter-Institutional Agreement, which sets forth the terms on which the parties may work together to seek to commercialize this technology.

Note 14 – Lease Agreements

Capital Leases

The Company has entered into long-term capital lease agreements for purchases of various computer and telephone equipment at a weighted average interest rate of 7.6 %. At September 30, 2013 and 2012, the remaining principal payments due under all capital leases were $ 357,000 and $- 0 -, respectively. Aggregate minimum annual principal obligations at September 30, 2013, under non-cancelable leases are as follows:

	2014		2015		2016		2017		2018		Total

Capital Lease Obligations	$	124,383	$	133,543	$	59,722	$	23,920	$	14,988	$	356,556

Property Leases

The Company has non-cancelable operating lease agreements, primarily for property, that expire through 2014. One of the Company’s facilities is leased from a company controlled by the former owner of RMD, who is also a former director of the Company and the former President of the RMD subsidiary. This building is leased as a month-to-month tenancy and will continue until terminated by either the Company with not less than six months’ prior written notice or the facility’s owner with not less than three years’ prior written notice. Rent expense for the years ended September 30, 2013 and 2012 amounted to $ 1,243,000 and $ 1,281,000 , respectively. Future non-cancelable minimum lease payments under property leases as of September 30, 2013 are as follows:

Years ending September 30,

2014	$	688,000
2015		140,000
2016		143,000
2017		147,000
2018		134,000
thereafter		622,000

	F-33

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 15 - Vendor Concentration

The Company purchased $ 1,195,482 and $ 1,712,212 , respectively, of its raw materials from one supplier during the years ended September 30, 2013 and 2012 . As of September 30, 2013 and 2012 , amounts due to that supplier included in accounts payable were $ 146,862 and $ 186,323 , respectively.

Note 16 – Supplemental Disclosure of Cash Flow Information

	2013		2012
Cash Paid during the year for:
Interest	$	548,421	$	596,129
Income taxes	$	59,763	$	418,179

Non cash activities:
Assets purchased under capital leases	$	432,953	$	-

	F-34

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 17 – Segment, Customer and Geographical Reporting

Segment Financial Information

Operating segments are based upon Dynasil’s internal organizational structure, the manner in which the operations are managed, the criteria used by the Chief Operating Decision Makers (CODM) to evaluate segment performance and the availability of separate financial information. During the fourth quarter of fiscal year 2012, the Company changed its internal reporting structure and adjusted it reportable segments. Dynasil now reports four reportable segments: contract research (“Contract Research”), optics (“Optics”), instruments (“Instruments”) and biomedical (“Biomedical”). Within these segments, there is a segregation of reportable units based upon the organizational structure used to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure. Dynasil’s Contract Research segment is one of the largest small business participants in U.S. government-funded research. The Optics segment manufactures optical materials, components and coatings. The Instruments segment manufactures specialized instruments used in various applications in the medical, industrial, and homeland security/defense sectors. The Biomedical segment is developing technologies for a wide spectrum of applications, including hematology, hypothermic core cooling and tissue sealants. The Company’s segment information is summarized below:

Results of Operations for the Fiscal Year Ended September 30,
2013
	Contract Research			Optics			Instruments			Biomedical			Total
Revenue	$	21,888,746		$	15,564,766		$	5,104,812		$	194,508		$	42,752,832
Gross Profit		9,821,711			5,647,680			2,421,846			194,508			18,085,745
SG&A		9,345,214			5,624,291			3,486,729			969,532			19,425,766
Impairment of goodwill & long-lived assets		-			-			6,829,072			-			6,829,072
Operating Income (Loss)		476,497			23,389			(7,893,955)			(775,024)			(8,169,093)
GM %		44.9	%		36.3	%		47.4	%		100.0	%		42.3	%

Depreciation and Amortization		316,864			765,018			454,569			60,000			1,596,451
Capital expenditures		31,439			506,371			7,092			-			544,902

Intangibles, Net		332,717			882,296			2,089,573			179,997			3,484,583
Goodwill		4,938,625			1,302,358			-			-			6,240,983
Total Assets	$	9,831,209		$	12,380,248		$	4,253,926		$	211,843		$	26,677,226

Results of Operations for the Fiscal Year Ended September 30,
2012
	Contract Research			Optics			Instruments			Biomedical			Total
Revenue	$	25,273,308		$	16,055,952		$	6,452,603		$	105,287		$	47,887,150
Gross Profit		9,862,413			5,875,551			3,684,320			83,459			19,505,743
SG&A		9,523,642			5,398,350			5,065,794			939,149			20,926,935
Impairment of goodwill		-			-			2,284,499			-			2,284,499
Operating Income (Loss)		338,771			477,201			(3,665,973)			(855,690)			(3,705,691)
GM %		39.0	%		36.6	%		57.1	%		79.3	%		40.7	%

Depreciation and Amortization		237,623			796,847			575,246			60,003			1,669,719
Capital expenditures		348,314			462,445			207,454			-			1,018,213

Intangibles, Net		366,853			960,821			5,135,634			239,997			6,703,305
Goodwill		4,938,625			1,300,463			4,015,072			-			10,254,160
Total Assets	$	12,870,151		$	11,588,145		$	12,537,403		$	469,729		$	37,465,428

	F-35

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013 and 2012

Note 17 – Segment, Customer and Geographical Reporting (continued)

Customer Financial Information

For the years ended September 30, 2013 and 2012, the top three customers for the Contract Research segment were each various agencies of the U.S. Government. For the years ended September 30, 2013 and 2012, these customers made up 57.3 % and 69.6 %, respectively, of Contract Research revenue.

For the Optics segment, there was no customer whose revenue represented more than 10 % of the total segment revenues for the years ended September 30, 2013 and 2012.

For the Instruments segment, there was one customer whose revenue represented 18.1 % and 18.5 %, respectively, of the Instruments segment revenue in the years ended September 30, 2013 and 2012.

For the Biomedical segment, there was one customer whose revenue represented 100 % of the revenue for the year ended September 30, 2013. The Biomedical segment had no revenue or customers in the year ended September 30, 2012.

Geographic Financial Information

Revenues by geographic location in total and as a percentage of total revenue, for the years ended September 30, 2013 and 2012 are as follows:

	2013					2012
Geographic Location	Revenue		% of Total			Revenue		% of Total
United States	$	35,017,754		82	%	$	39,520,178		83	%
Europe		3,718,683		9	%		4,274,119		9	%
Other		4,016,395		9	%		4,092,853		8	%
	$	42,752,831		100	%	$	47,887,150		100	%

Note 18 – Subsequent Events

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

On or about October 1, 2013, Dynasil Biomedical formed Xcede, a joint venture with Mayo Clinic, to spin out and separately fund the development of its tissue sealant technology. Xcede has initiated financing efforts and has received funding from internal sources and outside investors. To date, Xcede is 90 % owned by Dynasil Biomedical and Dynasil Biomedical holds a majority of the seats on Xcede’s board of directors.

On November 7, 2013, the Company sold its Lead Paint detector business to Protec Instrument Corporation, a Delaware corporation (“Protec”), which is a wholly owned subsidiary of Laboratoires Protec S.A., a French corporation and former European distributor of the lead paint detector products. The sales price totaled approximately $ 1.4 million including the assumption of certain liabilities by Protec. The transaction also resulted in payment of approximately $ 0.4 million in satisfaction of outstanding accounts receivable. Concurrently with the sale, the Company and Protec entered into a transition services agreement pursuant to which the Company will provide certain transitional services to Protec for up to five months after closing. The Company used $ 1.25 million of the proceeds to repay amounts owed to Santander.

The Company expects to record no material gain or loss in connection with the transaction in the first quarter of fiscal 2014. Substantially all the proceeds were used to repay bank indebtedness.

	F-36

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no disputes or disagreements of any nature between the Company or its management and its public auditors with respect to any aspect of accounting or financial disclosure.

ITEM 9A. 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 included controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2013. Based on this evaluation, our management concluded that as of September 30, 2013, these disclosure controls and procedures were not effective as a result of the material weaknesses in our internal control over financial reporting discussed in detail below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

Management's Annual Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

	•	pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

	•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

	•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of inherent limitations, no matter how well designed and operated, internal control over financial reporting may not prevent or detect misstatements and can only provide reasonable assurance of achieving the desired control objectives. In addition, the design of internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

	35

Our management performed the evaluation of our internal control over financial reporting under the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—An Integrated Framework (September 1992).

Material Weaknesses

As disclosed in our Annual Report on Form 10-K for the year end September 30, 2012, management previously identified the following material weaknesses:

Inadequate and ineffective monitoring controls.

Management did not sufficiently monitor internal controls over financial reporting, specifically:

	•	we lacked personnel with an appropriate level of knowledge, experience and training in contract management and to provide reasonable assurance that transactions were being properly recorded, and adequate supervision, reviews and monitoring activities performed as necessary to permit the preparation of the financial statements in accordance with GAAP;

	•	we did not have sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training who could execute appropriate monitoring and review controls particularly in situations where transactions were complex or non-routine;

	•	we have had significant turnover in several key financial roles in our business units. The finance team has not had sufficient time to complete the reorganization of the finance and accounting departments, train employees on their new roles and responsibilities, and design and implement all controls necessary to mitigate the risk of a material misstatement;

	•	at our RMD division, our senior research staff was not accustomed to being wholly involved in the bid proposal, budget preparation and contract management which led to contract overruns due to lack of visibility of contract costs-to-date;

	•	our time reporting system for contract revenue and cost recognition was a manual entry system; and

	•	we did not have sufficient personnel to monitor the timely review of period-end account reconciliations to ensure appropriate and timely recording of required adjustments.

Inadequate and ineffective controls over the periodic financial close process.

We have not designed or maintained effective internal controls over the financial statement close and reporting process. Such controls are necessary to ensure the accurate and timely preparation of financial statements in accordance with GAAP. Specifically, the following deficiencies contributed to material weaknesses in this area:

	•	we lacked a purchase order and receiving system to record vendor purchase orders and provide visibility into receipts in order to properly accrue for goods received, but for which there is not yet an invoice received; and

	•	our design and implementation of certain controls are incomplete or overly reliant on manual reviews.

Inadequate and ineffective controls over cash accounts and accounts receivable function at RMD division

We have not designed or maintained effective internal controls over certain controller functions at our RMD division, specifically, following the acquisition of RMD Research and RMD Instruments in 2008, certain legacy bank accounts continued to be used for client payment purposes and were not fully subject to all the entity-level controls of the Company.

	36

The foregoing material weaknesses resulted in a reasonable possibility that a material misstatement in our annual or interim consolidated financial statements may not be prevented or detected on a timely basis.

Material Weakness Remediation

Management identified the following measures to strengthen our internal control over financial reporting and to address the material weaknesses described above. We began implementing certain of these measures in the first quarter of fiscal 2013 and continued to develop remediation plans and implement additional measures throughout our fiscal year 2013.

	·	Continuing our efforts to retain and recruit qualified finance professionals necessary to properly maintain and control our financial reporting. In July 2013, we hired a new Vice President of Finance at our RMD division; in January 2013, we hired a new Chief Financial Officer; and in March 2013, we hired a new Corporate Controller.

	·	Continuing to assess adequacy and expertise of the finance, tax and accounting staff;

	·	Enhancing procedures to help ensure that the proper accounting for all complex, non-routine transactions is researched, detailed in memoranda and reviewed by senior management on a timely basis prior to recording;

	·	Ensuring that our finance resources are familiarized with policies and procedures to effectively monitor compliance;

	·	Improving the periodic financial close process through the use of a detailed financial close plan and enhanced and more timely review of manual journal entries, account reconciliations, estimates and judgments and consolidation schedules;

	·	Implementing new information technology components to more effectively utilize our information technology systems, eliminate some manual controls over financial reporting; and improve our monthly management reporting;

	·	Implementing improved internal controls and timekeeping and billing practices at our RMD division. Following an internal review of practices and internal control at this division, under the direction of our Audit Committee, we introduced new timekeeping practices and procedures that are more automated through an electronic time-keeping system integrated with our payroll and human resource systems. Legacy bank accounts relating to the acquisition in 2008 have been closed and improvements in the controller function of this division have been implemented, including new personnel, increased training and improved controls; and

	·	Implementing a comprehensive purchase order and receiving system to record vendor purchase orders to provide visibility into receipts in order to properly accrue for goods received.

The Company believes that the steps described above have enhanced the overall effectiveness of our internal control over financial reporting and will remediate the previously identified material weaknesses. However, certain controls designed and implemented during the year to address the previously identified material weaknesses in the period-end financial reporting process 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 September 30, 2013 that, collectively, the control deficiencies that existed in the prior year still exist and aggregate to the material weaknesses described in management’s report above; 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.

	37

To address the material weaknesses in our internal control over financial reporting described above, we performed additional analyses and other post-closing procedures designed to provide reasonable assurance that our consolidated financial statements were prepared in accordance with GAAP. As a result of these procedures, we believe that the consolidated financial statements included in the Annual Report on Form 10-K for the year ended September 30, 2013 fairly present, in all material respects, our financial position, results of operations and cash flow for the periods presented in conformity with GAAP.

Changes in Internal Control over Financial Reporting

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

ITEM 9B. OTHER INFORMATION

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item 10 is hereby incorporated by reference to our definitive proxy statement to be filed by us within 120 days after the close of our fiscal year.

We have adopted a Code of Conduct that applies to all employees including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The text of our Code of Conduct is posted in the “Investor Information—Corporate Governance” section of our website, www.dynasilcorp.com.

We intend to disclose on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics that are required to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 is hereby incorporated by reference to our definitive proxy statement to be filed by us within 120 days after the close of our fiscal year.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item 12 is hereby incorporated by reference to our definitive proxy statement to be filed by us within 120 days after the close of our fiscal year.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item 13 is hereby incorporated by reference to our definitive proxy statement to be filed by us within 120 days after the close of our fiscal year.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item 14 is hereby incorporated by reference to our definitive proxy statement to be filed by us within 120 days after the close of our fiscal year.

	38

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

a) (1) The financial statements are included under Part II, Item 8 of this Report.

(2) Schedules are omitted because they are not applicable, or are not required, or because the information is included in the consolidated financial statements and the notes thereto.

(3) EXHIBITS –

The exhibits are listed below under Part IV, Item 15(b) of this Report.

(b) EXHIBITS

2.01 Asset Purchase Agreement, dated July 1, 2008 between Dynasil Corporation of America, RMD Instruments Corp, RMD Instruments, LLC, Gerald Entine 1988 Family Trust, Fritz Wald and Doris Wald, and Jacob H. Paster, filed as Exhibit 10.1 to Form 8-K filed on July 7, 2008 and incorporated herein by reference.

2.02 Plan of Merger, dated July 1, 2008 by and among Dynasil Corporation of America, RMD Acquisition Sub, Inc., Radiation Monitoring Devices, Inc., Gerald Entine 1988 Family Trust, Fritz Wald and Doris Wald, and Jacob H. Paster, filed as Exhibit 10.2 to Form 8-K filed on July 7, 2008 and incorporated herein by reference.

2.03 Share Purchase Agreement, dated July 19, 2010 among Hilger Crystals Limited, Newport Spectra-Physics Limited, Newport Corporation and the Company, filed as Exhibit 10.1 to Form 8-K filed on July 23, 2010 and incorporated herein by reference.

3.01 Certificate of Incorporation of the Company, filed as Exhibit A to the Definitive Proxy Statement filed on January 4, 2008 and incorporated herein by reference.

3.02 Certificate of Merger of Foreign Corporation into a Domestic Corporation, dated February 29, 2008, filed as Exhibit 3.02 to Form 8-A filed on December 15, 2010 and incorporated herein by reference.

3.03 Certificate of Amendment of Certificate of Incorporation, dated March 6, 2008, filed as Exhibit 3.03 to Form 8-A filed on December 15, 2010 and incorporated herein by reference.

3.04 Certificate of Amendment of Certificate of Incorporation, dated February 26, 2009, filed as Exhibit 3.1 to Form 10-Q filed on May 15, 2009 and incorporated herein by reference.

3.05 Certificate of Designation of Preferred Stock of Dynasil Corporation of America, dated March 27, 2009, filed as Exhibit 3.05 to Form 8-A filed on December 15, 2010 and incorporated herein by reference.

3.06 Bylaws of the Company, filed as Exhibit B to the Definitive Proxy Statement filed on January 4, 2008 and incorporated herein by reference.

10.01* Employment Agreement of Craig T. Dunham, dated October 1, 2004, filed as Exhibit 10.9 to Form 10-KSB filed on December 21, 2004 and incorporated herein by reference.

10.02* Amendment to Employment Agreement of Craig T. Dunham, dated November 8, 2007, filed as Exhibit 10.1 to Form 8-K filed on November 13, 2007 and incorporated herein by reference.

10.03* Employment Agreement of Gerald Entine, filed as Exhibit 10.3 to Form 8-K filed on July 7, 2008 and incorporated herein by reference.

10.04* Employment Agreement of Richard Johnson, dated November 30, 2009, filed as Exhibit 10.1 to Form 8-K filed on December 1, 2009 and incorporated herein by reference.

	39

10.05* Employment Letter dated April 13, 2011, between the Company and Steven Ruggieri, filed as Exhibit 10.1 to Form 8-K filed on April 19, 2011 and incorporated herein by reference.

10.06* Separation Agreement, dated November 16, 2011, between the Company and Dr. Gerald Entine, filed as Exhibit 10.1 to Form 10-Q filed on February 14, 2012 and incorporated herein by reference.

10.07* Separation Agreement, dated July 6, 2013, between the Company and Steven K. Ruggieri, filed as Exhibit 10.07 to Form 10-K filed on January 15, 2013 and incorporated herein by reference.

10.08* 2010 Stock Incentive Plan, filed as Exhibit 99 to the Definitive Proxy Statement filed on January 5, 2010 and incorporated herein by reference.

10.09 Subordinated Term Loan Note with RMD Instruments, LLC, dated September 30, 2008, filed as Exhibit 10.1 to Form 8-K filed on October 6, 2008 and incorporated herein by reference.

10.10 Amendment to Subordinated Term Loan Note with RMD Instruments, LLC, dated December 19, 2008, filed as Exhibit 10.07 to Form 10K-SB filed on December 30, 2008 and incorporated herein by reference.

10.11 Amendment to Subordinated Term Note with RMD Instruments, LLC dated May 11, 2009, filed as Exhibit 10.1 to Form 10-Q filed on May 15, 2009 and incorporated herein by reference.

10.12 Loan and Security Agreement between the Company and Santander Bank, N.A., dated July 7, 2010, filed as Exhibit 10.1 to Form 8-K filed on July 14, 2010 and incorporated herein by reference.

10.13 Amendment No. 1 To Loan and Security Agreement between the Company and Santander Bank, dated April 1, 2012, filed as Exhibit 10.1 to Form 10-Q filed on May 16, 2012 and incorporated herein by reference.

10.14 Amendment No. 2 To Loan and Security Agreement between the Company and Santander Bank, dated April 12, 2012, filed as Exhibit 10.1 to Form 8-K filed on April 13, 2012 and incorporated herein by reference.

10.15 Amendment No. 3 to Loan and Security Agreement between the Company and Santander Bank, dated June 29, 2012, filed as Exhibit 10.1 to Form 8-K filed on July 5, 2012 and incorporated herein by reference.

10.16 Amendment No. 4 to Loan and Security Agreement between the Company and Sovereign Bank, dated September 26, 2013, filed herewith.

10.17 A Waiver Letter Agreement between the Company and Santander Bank, dated June 29, 2012, filed as Exhibit 10.2 to Form 8-K filed on July 5, 2012 and incorporated herein by reference.

10.18 Note Purchase Agreement between the Company and Massachusetts Capital Resource Company, dated July 31, 2012, filed as Exhibit 10.1 to Form 8-K filed on August 6, 2012 and incorporated herein by reference.

10.19 Amendment No. 1 to Note Purchase Agreement between the Company and Massachusetts Capital Resource Company, dated September 26, 2013, filed herewith.

10.20 Lease Agreement between Dynasil Corporation of America and Optometrics Holding LLC, dated March 8, 2005, filed as Exhibit 2.2 to Form 8-K filed on May 24, 2005 and incorporated herein by reference.

10.21 Lease Agreement between RMD Instruments, Inc. and Charles River Realty, dated July 1, 2008, filed as Exhibit 10.5 to Form 8-K filed on July 7, 2008 and incorporated herein by reference.

	40

10.22 Lease Agreement between Radiation Monitoring Devices, Inc. and Charles River Realty, dated July 1, 2008, filed as Exhibit 10.6 to Form 8-K filed on July 7, 2008 and incorporated herein by reference.

10.23* Amended and Restated Employee Stock Purchase Plan dated December 16, 2011, filed as Appendix A to Definitive Proxy Statement filed January 11, 2012 and incorporated herein by reference.

10.24 Omnibus Amendment to Leases, dated December 6, 2012, files as Exhibit 10.1 to Form 8-K filed on December 12, 2012 and incorporated herein by reference.

10.25* Employment Letter dated January 4, 2013 between the Company and Thomas Leonard, filed as Exhibit 10.1 to Form 8-K filed on January 10, 2013 and incorporated herein by reference.

10.26* Restricted Stock Award Agreement dated June 10, 2013 between the Company and Peter Sulick, filed as Exhibit 10.1 to Form 10-Q filed on August 12, 2013 and incorporated herein by reference.

10.27 Asset Purchase Agreement by and among the Company and RMD Instruments Corp. and Protec Instrument Corporation, dated as of November 7, 2013, filed herewith.

21.1 Subsidiaries of the Company, filed herewith.

23.1 Consent of McGladrey LLP, filed herewith.

31.1(a) Rule 13a-14(a)/15d-14(a) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

31.1(b) Rule 13a-14(a)/15d-14(a) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

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) furnished herewith.

99.1 Press release, dated December 20, 2013 issued by Dynasil Corporation of America announcing the filing of it’s Annual Report on Form 10-K.

101** The following materials from Dynasil Corporation of America’s Annual Report on Form 10-K for the year ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of September 30, 2013 and September 30, 2012, (ii) Consolidated Statements of Operations and Comprehensive Loss for the years ended September 30, 2013 and 2012, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2013 and 2012; (iv) Consolidated Statements of Cash Flows for the years ended September 30, 2013 and 2012, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text.

** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

* Management contract or compensatory plan or arrangement.

	41

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act, 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

Peter Sulick, Interim President, Interim CEO (Principal Executive Officer)

DATED:

December 20, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature		Title	Date

BY:	/s/ Thomas C. Leonard	CFO (Principal Financial and	December 20, 2013
	Thomas C. Leonard	Accounting Officer)

BY:	/s/ Peter Sulick	Chairman of the Board of Directors,	December 20, 2013
	Peter Sulick	Interim President, Interim CEO
		(Principal Executive Officer)

BY:	/s/ Craig Dunham	Director	December 20, 2013
	Craig Dunham

BY:	/s/ Lawrence Fox	Director	December 20, 2013
	Lawrence Fox

BY:	/s/ William K. Hagan	Director	December 20, 2013
	William K. Hagan

BY:	/s/ Michael Joyner	Director	December 20, 2013
	Michael Joyner

BY:	/s/ David Kronfeld	Director	December 20, 2013
	David Kronfeld

BY:	/s/ Alan Levine	Director	December 20, 2013
	Alan Levine

	42

EXECUTION VERSION

CONSENT, LIMITED WAIVER AND AMENDMENT NO. 4 TO

LOAN AND SECURITY AGREEMENT

Consent, Limited Waiver and Amendment No. 4 to Loan and Security Agreement, dated as of September 26, 2013 (the “Amendment”), is by and between DYNASIL CORPORATION OF AMERICA, a Delaware corporation (the “Borrower”), and SOVEREIGN BANK, N.A., a national banking association (the “Lender”), with an address at 3 Terry Drive, Suite 102, Newtown, PA 18940.

BACKGROUND

WHEREAS, the Lender and the Borrower made, executed and delivered a Loan and Security Agreement dated July 10, 2010, as amended by a certain Amendment No. 1 to Loan and Security Agreement dated as of April 1, 2011, as further amended by that certain Amendment No. 2 to Loan and Security Agreement dated as of April 12, 2012 and as further amended by a certain Amendment No. 3 to Loan and Security Agreement dated as of June 29, 2012 (as amended, the “Existing Loan Agreement”);

WHEREAS, the Borrower has requested that the Lender: (a) consent to the transfer of certain assets of Dynasil Biomedical Corp. (“DBM”) to a newly formed subsidiary of DBM (“Xcede Technologies, Inc.”); (b) waive any requirements that Xcede Technologies, Inc. join the Existing Loan Agreement as a guarantor and grant security in its assets to secure its guaranty; (c) exclude Xcede Technologies, Inc., its assets, operations and financial results from being subject to the terms of Existing Loan Agreement; and (d) to effect the foregoing, to waive and amend certain provisions of the Existing Loan Agreement as more fully set forth herein; and

WHEREAS, the Lender is willing to consent to the asset transfer, and to grant the waivers and amendments described above, and as more particularly set forth herein, all subject to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual promises herein contained, and each intending to the legally bound thereby, the parties hereby agree as follows:

1. Capitalized Terms . Except as expressly defined herein, all capitalized terms herein which are defined in the Existing Loan Agreement shall have the same meanings herein as therein.

2. Amendments to Existing Loan Agreement . Section 1(a) of the Existing Loan Agreement is hereby amended so that the following definitions shall be inserted or amended, as the context requires, as follows:

“Excluded Subsidiary” shall mean Xcede Technologies, Inc., a Delaware corporation, in which, as of the Effective Date, Dynasil Biomedical Corp. shall own 2,700,000 shares of common stock.

The definition “Subsidiary” shall be amended by inserting, at the end of that definition, the following new sentence:

“Any Excluded Subsidiary shall not be deemed a Subsidiary for any purpose under this Agreement, including, without limitation, for the purposes of compliance with the requirements of Section 12(e) and Section 13 hereof.”

3. Consent . Subject to the satisfaction of the terms and conditions set forth in Section 5 hereof, and in reliance on the representations set forth in Section 6 hereof, the Lender hereby consents to the transfer of the property described on Exhibit A annexed hereto (the “Xcede Assets”), and agrees to release the Lender’s security interest in the Xcede Assets. On the Effective Date, the Lender shall, deliver and file, or authorize the Borrower to file, a UCC-3 release in the form of Exhibit B annexed hereto.

4. Limited Waivers . Subject to the satisfaction of the terms and conditions of Section 5 hereof, and in reliance on the representation contained in Section 6 hereof, on the Effective Date, with respect to the creation , existence and future operation of the Excluded Subsidiary, the Lender waives compliance with any requirement (and any resulting Default or Event of Defaults that would result from such non-compliance) of the Existing Loan Agreement, including, without limitation: (i) Section 12(e) to the extent the formation of the Excluded Subsidiary would be prohibited unless such Excluded Subsidiary would become a Guarantor and execute and deliver to Lender a Subsidiary Security Agreement; (ii) Section 12(e)(iii) to the extent transfer of the Xcede Assets constitutes a disposition of assets by the Borrower or by Guarantor outside the ordinary course of business; (iii) Section 12(e)(v) to the extent that any future transactions of the Excluded Subsidiary, including, without limitation, any capital raising, debt raising or operational activities approved by the Borrower or any Guarantor may constitute a transaction outside the ordinary course of its respective business; (iv) Section 12(g)(i) to the extent the transfer of the Xcede Assets to the Excluded Subsidiary constitutes an acquisition of, or investment in, stock of any Person; (v) Section 12(c) to the extent that any future financing or equity raising activity of the Excluded Subsidiary approved by the Borrower or any Guarantor may constitute permission to create a lien, claim, security interest or other encumbrance on any of the Borrower or any Guarantor’s assets; and (vi) Sections 10(r) and 11(i) to the extent that the transfer of intellectual property to the Excluded Subsidiary as part of the Xcede Assets may constitute a breach of such warranty, representation or covenant. The grant by the Lender of the above waivers shall not be construed as, and does not constitute, a waiver of any other existing Default or Event of Default under the Existing Loan Agreement.

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

(a) the execution and delivery of this Amendment by the Borrower and the Lender;

(b) the execution and delivery of a pledge agreement (the “Pledge Agreement”) pursuant to which DBM grants to the Lender a first priority pledge of all of DBM’s shares of common stock in Xcede Technologies, Inc., together with the original stock certificate(s) and stock power(s) executed in blank by DBM (the “Pledged Collateral”).

(c) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed and shall be in form and substance satisfactory to the Lender;

(d) Massachusetts Capital Resources Company shall have consented in writing to the matters described herein, shall have agreed to release its liens on the Xcede Assets, shall have agreed to a junior lien on the Pledged Collateral, and shall executed and delivered a consent, limited waiver and amendment to the existing note purchase agreement with the Borrower which shall be in form and substance reasonably satisfactory to the Lender;

(e) The Borrower shall have paid $300,000 as a prepayment on the Term Loan, which shall be applied to the unpaid principal balance thereof in inverse order of maturity; and

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

The date on which all of the conditions this Section 5 shall have been satisfied shall be the “Effective Date.”

6. Representations and Warranties . The Borrower hereby represents and warrants, to the Lender as follows:

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

(b) the Borrower has the power and authority to execute, deliver and perform its obligations under this Amendment (and DBM has the power and authority to execute, deliver and perform its obligations under the Pledge Agreement);

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

(d) this Amendment and the other loan documents executed in connection herewith and therewith, including, without limitation, the Pledge Agreement, (the “ Loan Documents ”) to which the Borrower or any of its Affiliates is a party, as each Loan Document is amended by this Amendment, constitute the legal, valid and binding obligation of the Borrower and such Subsidiaries, enforceable against such Person in accordance with its terms;

(e) no Event of Default shall exist solely as a result of the consummation of the transactions contemplated hereby; and

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

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

8. Existing Defaults and Events of Default. Except as expressly set forth herein, the execution, delivery and effectiveness of this Amendment shall not directly or indirectly (i) be construed to continue to defer any enforcement action with respect to any pending or future any Default or Event of Default, (ii) constitute a consent or waiver of any past, present or future violations of any provisions of the Existing Loan Agreement or any other Loan Documents (iii) amend, modify or operate as a waiver of any provision of the Existing Loan Agreement or any other Loan Documents or any right, power or remedy of the Lender, or (iv) constitute a course of dealing or other basis for altering any Obligations or any other contract or instrument. Except as expressly set forth herein, the Lender reserves all of its rights, powers, and remedies under the Existing Loan Agreement, the other Loan Documents and applicable law. The Lender has not waived (regardless of any delay in exercising such rights and remedies) any Default or Event of Default that may be continuing on the date hereof or any Event of Default that may occur after the date hereof, and Lender has not agreed to forbear with respect to any of its rights or remedies concerning any Events of Default), that may have occurred or are continuing as of the date hereof, or that may occur after the date hereof.

9. No Defenses or Counterclaims. The Borrower warrants and represents to the Lender, on behalf of itself and its Subsidiaries, that none of the Borrower or its Subsidiaries has any claims, counterclaims, offsets or defenses to the Loan Documents or the Loans and other Liabilities to the Lender, or if any such Person does have any claims, counterclaims, offsets or defenses to the Loan Documents or the Obligations, the same are hereby waived, relinquished and released in consideration of the execution and delivery of this Amendment by the Lender.

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

11. Successors and Assigns . This Amendment shall be binding upon and inure to the benefit of the Borrower and its successors and assigns and the Lender and its successors and assigns.

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

13. GOVERNING LAW . THIS AMENDMENT SHALL BE GOVERNED BY AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW JERSEY, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

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

15. Reaffirmation . The Borrower , on behalf of itself and its Subsidiaries, hereby ratifies and reaffirms all of its payment and performance obligations, contingent or otherwise, under each of the Loan Documents to which it is a party (after giving effect hereto). The Borrower hereby consents to this Amendment and acknowledges that each of the Loan Documents remains in full force and effect and is hereby ratified and reaffirmed. The execution of this Amendment shall not operate as a waiver of any right, power or remedy of the Lender, constitute a waiver of any provision of any of the Loan Documents or serve to effect a novation of the Obligations.

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

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

	DYNASIL CORPORATION OF AMERICA

	By:	/s/ Thomas C. Leonard
	Name:	Thomas C. Leonard
	Title:	Chief Financial Officer

	SOVEREIGN BANK, N.A .

	By:	/s/ Martin M. Murphy
	Name:	Martin M. Murphy
	Title:	Vice President

EXECUTION VERSION

CONSENT, LIMITED WAIVER AND AMENDMENT NO. 1 TO
NOTE PURCHASE AGREEMENT

Consent, Limited Waiver and Amendment No. 1 to Note Purchase Agreement, dated as of September 26, 2013 (the “Amendment”), is by and between DYNASIL CORPORATION OF AMERICA, a Delaware corporation (the “Borrower”), and MASSACHUSETTS CAPITAL RESOURCE COMPANY (the “Lender”), with an address at 420 Boylston Street, Boston, Massachusetts .

BACKGROUND

WHEREAS, the Lender and the Borrower made, executed and delivered a Note Purchase Agreement dated July 31, 2012 (the “Existing Loan Agreement”);

NOW, THEREFORE, in consideration of the mutual promises herein contained, and each intending to the legally bound thereby, the parties hereby agree as follows:

1. Capitalized Terms . Except as expressly defined herein, all capitalized terms herein which are defined in the Existing Loan Agreement shall have the same meanings herein as therein.

2. Amendments to Existing Loan Agreement . Section 6.01 of the Existing Loan Agreement is hereby amended so that the following definitions shall be inserted or amended, as the context requires, as follows:

“Excluded Subsidiary” shall mean Xcede Technologies, Inc., a Delaware corporation, in which, as of the Effective Date, Dynasil Biomedical Corp. shall own 2,700,000 shares of common stock.

The definition “Subsidiary” shall be amended by inserting, at the end of that definition, the following new sentence:

3. Consent . Subject to the satisfaction of the terms and conditions set forth in Section 5 hereof, and in reliance on the representations set forth in Section 6 hereof, the Lender hereby consents to the transfer of the property described on Exhibit A annexed hereto (the “Xcede Assets”), and agrees to release the Lender’s security interest in the Xcede Assets. On the Effective Date, the Lender shall deliver and file, or authorize the Borrower to file, a UCC-3 release in the form of Exhibit B annexed hereto.

4. Limited Waivers . Subject to the satisfaction of the terms and conditions of Section 5 hereof, and in reliance on the representation contained in Section 6 hereof, on the Effective Date, with respect to the creation, existence and operation of the Excluded Subsidiary, the Lender waives compliance with any requirement (and any resulting Default or Event of Defaults that would result from such non-compliance) of the Existing Loan Agreement including, without limitation: (i) Section 4.01(q) to the extent that the Excluded Subsidiary will not become a Guarantor and will not execute and deliver to Lender a Guarantor Security Agreement; (ii) Section 4.02(e) to the extent transfer of the Xcede Assets constitutes a material disposition of assets by the Borrower or by any Guarantor outside the ordinary course of business; (iii) Section 4.02(b) to the extent that any future transactions of the Excluded Subsidiary, including, without limitation, any capital raising, debt raising or operational activities approved by the Borrower or any Guarantor may constitute a transaction proscribed by thereunder; (iv) Section 4.02(f) to the extent the transfer of the Xcede Assets to the Excluded Subsidiary in exchange for the issuance of shares of the Excluded Subsidiary constitutes an acquisition of, or investment in, stock of any Person; (v) Section 4.02(a) to the extent that any future financing or equity raising activity of the Excluded Subsidiary approved by the Borrower or any Guarantor may constitute permission to create a lien, claim, security interest or other encumbrance on the assets of any Excluded Subsidiary of the Borrower or any Guarantor; (vi) Section 4.02(i) to the extent the Excluded Subsidiary may issue shares to investors not owned or controlled by the Borrower or any Guarantor; (vii) Section 4.02(c) to the extent the Excluded Subsidiary assumes the lease of DBM for the premises at 1815 14th Street NW, Rochester, MN; (viii) Section 4.01(f) to the extent that Borrower or any Guarantor may not provide access to Lender to inspect the books and records and/or the property of the Excluded Subsidiary; and (ix) the remainder of Section 4.01 to the extent that Borrower or any Guarantor shall fail to cause the Excluded Subsidiary to perform or comply with any other requirement that could be imposed upon each Subsidiary under that Section . The grant by the Lender of the above waivers shall not be construed as, and does not constitute, a waiver of any other existing Default or Event of Default under the Existing Loan Agreement.

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

(a) the execution and delivery of this Amendment by the Borrower and the Lender;

(b) the execution and delivery of a pledge agreement (the “Pledge Agreement”) pursuant to which DBM grants to the Lender a second priority pledge of all of DBM’s shares of common stock in Xcede Technologies, Inc., (the “Pledged Collateral”), subject only to the prior lien of Sovereign Bank, N.A.

(d) Sovereign Bank, N.A. shall have consented in writing to the matters described herein, shall have agreed to release its liens on the Xcede Assets, shall have agreed to a senior lien on the Pledged Collateral, and shall executed and delivered a consent, limited waiver and amendment to its existing loan and security agreement with the Borrower which shall be in form and substance reasonably satisfactory to the Lender; and

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

The date on which all of the conditions this Section 5 shall have been satisfied shall be the “Effective Date.”

6. Representations and Warranties . The Borrower hereby represents and warrants, to the Lender as follows:

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

(e) no Event of Default shall exist solely as a result of the consummation of the transactions contemplated hereby; and

11. Successors and Assigns . This Amendment shall be binding upon and inure to the benefit of the Borrower and its successors and assigns and the Lender and its successors and assigns.

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

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

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

	DYNASIL CORPORATION OF AMERICA

	By:	/s/ Thomas C. Leonard
	Name:	Thomas C. Leonard
	Title:	Chief Financial Officer

	MASSACHUSETTS CAPITAL RESOURCE COMPANY

	By:	/s/ Suzanne L. Dwyer
	Name:	Suzanne L. Dwyer
	Title:	Vice President

ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT, dated as of November 7, 2013, is among Protec Instrument Corporation, a Delaware corporation (the “ Purchaser ”), which is a wholly owned subsidiary of Laboratoires Protec S.A., a French corporation, Dynasil Corporation of America, a Delaware corporation (“ Dynasil ”), and RMD Instruments Corp., a Delaware corporation, which is a wholly owned subsidiary of Dynasil (“ RMD ” and together with Dynasil, the “ Sellers ”). References to the Sellers or a Seller herein means Dynasil or RMD, or both of them.

RECITALS:

WHEREAS, the Sellers are engaged, among other things, in the conception, design, prototype building and testing, manufacture, assembly, marketing and/or sale of the Products and the Technology (the “ Business ”);

WHEREAS, pursuant to this Agreement, the Sellers are selling to the Purchaser, and the Purchaser is buying from the Sellers, certain assets and liabilities of the Business, subject to the terms and conditions set forth herein; and

WHEREAS, simultaneously with the execution and delivery of this Agreement, RMD and the Purchaser are entering into a Transition Services Agreement (the “ Transition Services Agreement ”) pursuant to which RMD and the Purchaser will cooperate for an initial period of three (3) months following the closing of the transactions contemplated herein with respect to the conduct of certain aspects of the Business.

NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein, and intending to be legally bound hereby, the Purchaser and the Sellers hereby agree as follows:

ARTICLE I
Definitions

Section 1.1. Certain Definitions . The following terms, as used herein, have the meanings set forth below.

“ Affiliate ” of any specified Person means any other Person directly or indirectly Controlling or Controlled by or under direct or indirect common Control with such specified Person.

“ Agreement ” means this Asset Purchase Agreement.

“ Applicable Benefit Laws ” means all Laws or other legislative, administrative or judicial promulgations, including those of a jurisdiction outside the United States, applicable to any Seller Benefit Plan or ERISA Affiliate Plan.

“ Closing ” means the consummation of the purchase and sale of the Assets (as defined in Section 2.1 of this Agreement) and the assignment and assumption of the Assumed Liabilities (as defined in Section 2.3(b)(i) of this Agreement) that is occurring concurrently with the execution and delivery of this Agreement by the Parties.

“ COBRA Coverage ” means continuation coverage required under Section 4980B of the Code and Part 6 of Title I of ERISA and any applicable state Law.

“ Code ” means the United States Internal Revenue Code of 1986, as amended, and the regulations thereunder.

“ Confidential Information ” means any data or information concerning the Business, without regard to form, regarding (for example and including) (a) proprietary software; (b) research and development records and plans, product and services pricing and other details, marketing materials and plans, licenses, prices, costs, Contracts, suppliers, customers, and customer lists; (c) the identity, skills, knowledge and compensation of employees, contractors, and consultants; (d) specialized training; (e) such of the following as are not now in the public domain: discoveries, developments, trade secrets, processes, formulas, data, lists, and all other works of authorship, mask works, ideas, concepts, know-how, designs, and techniques, whether or not any of the foregoing is or are patentable, copyrightable, or registrable under any intellectual property Laws or industrial property Laws in the United States or any other country; and (f) all other data and information in any way relating to the Business that are customarily considered confidential information. Notwithstanding the foregoing, no data or information constitutes “Confidential Information” if such data or information is in the public domain through means that do not involve a breach by the Sellers of any covenant or obligation set forth in this Agreement.

“ Contract ” means any contract, sub-contract, agreement, lease, license, commitment, sale and purchase order, note, loan agreement or any other instrument, arrangement, or understanding of any kind, whether written or oral, and whether express or implied.

“ Control ” means, when used with respect to any specified Person, the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by Contract or otherwise.

“ Employee Benefit Plan ” means, with respect to a Person, each plan, fund, program, agreement, arrangement or scheme (whether or not covered by ERISA and whether subject to U.S. or non-U.S. laws), including such of the foregoing as are maintained or required to be maintained under applicable Laws, that is at any time sponsored or maintained or required to be sponsored or maintained by such Person or to which such Person makes or has made, or has or has had an obligation to make, contributions providing benefits to the entity’s current and former employees, directors, managers, officers, consultants, independent contractors, contingent workers or leased employees or the dependents of any of them (whether written or oral), or with respect to which such Person has any liability or obligation, including (a) each deferred compensation, bonus, incentive compensation, pension, retirement, employee stock ownership, stock purchase, stock option, profit sharing or deferred profit sharing, stock appreciation, phantom stock plan, other equity compensation plan, or “welfare” plan (within the meaning of Section 3(1) of ERISA; (b) each “pension” plan (within the meaning of Section 3(2) of ERISA, determined without regard to whether such plan is tax-qualified under the Code); (c) each severance plan or agreement, and each other plan providing health, vacation, supplemental unemployment benefits, hospitalization, medical, dental, disability or life insurance, death or survivor benefits, fringe benefits or legal benefits; and (d) each other employee benefit plan, fund, program, agreement or arrangement, in each case regardless whether of an individual or collective nature, and including, for the avoidance of doubt, contractual stipulations in employment or other service agreements and commitments based on work custom.

“ Environmental Laws ” means all Laws and common law relating to pollution or protection of health, safety or the environment.

“ ERISA ” means the United States Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder.

“ ERISA Affiliate ” means any Person that together with the Sellers would be deemed a “single employer” within the meaning of Section 414 of the Code.

“ ERISA Affiliate Plan ” means each Employee Benefit Plan sponsored or maintained or required to be sponsored or maintained at any time by any ERISA Affiliate, or to which such ERISA Affiliate makes or has made, or has or has had an obligation to make, contributions at any time, or with respect to which such ERISA Affiliate has any liability or obligation.

“ Excepted Claims ” means the representations and warranties contained in Sections 4.1 and 5.1 (Organization), Sections 4.2 and 5.2 (Authorization), Section 4.6 (Sufficiency of and Title to Assets) and Section 4.12 (Tax Returns; Taxes).

“ Governmental Entity ” means any (i) nation, state, commonwealth, county, city, town, village, district, or other jurisdiction of any nature; (ii) federal, state, local, municipal, foreign, or other government; (iii) federal, state, local or foreign governmental or quasi-governmental authority of any nature (including any agency, branch, department, board, commission, court or tribunal); (iv) multi-national or supra-national organization or body; (v) body exercising, or entitled or purporting to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power, including any court or arbitrator; (vi) self-regulatory organization; or (vii) official of any of the foregoing.

“ HUD Certification ” means the PCS certification from the U.S. Department of Housing and Urban Development with respect to the LPX and LPX-Pro Lead Paint Analysers.

“ Indemnified Party ” means a Purchaser Indemnified Party or a Seller Indemnified Party.

“ Intellectual Property ” means any or all of the following and all rights, arising out of or associated therewith: (a) all United States, international and foreign patents and applications therefor and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (b) all trade secrets, inventions (whether patentable or not), invention disclosures, improvements, proprietary information, know-how, technology, technical data, technical information and customer lists, and all documentation relating to any of the foregoing throughout the world; (c) all copyrights, copyright registrations and applications therefor, and all other rights corresponding thereto throughout the world; (d) all industrial designs and any registrations and applications therefor throughout the world; (e) all internet domain name registrations and applications; (f) all trade names, logos, slogans, designs, common law trademarks and service marks, trademark and service mark registrations and applications therefor throughout the world; (g) all rights in or to databases and data collections throughout the world; (h) all moral and economic rights of authors and inventors, however denominated, throughout the world; and (h) any similar or equivalent intellectual property or proprietary rights to any of the foregoing anywhere in the world.

“ Knowledge ” means, with respect to the Sellers, all facts known by Peter Sulick, Michael O’Neill, senior management of the Sellers and the Transferred Employees following reasonable inquiry and diligence of appropriate records and personnel with respect to the matters at hand.

“ Labor Laws ” means all Laws governing or concerning labor relations, unions and collective bargaining, conditions of employment, employee classification, employment discrimination and harassment, wages, hours or occupational safety and health, including ERISA.

“ Laws ” means all laws, statutes, common law, rules, codes, regulations, restrictions, ordinances, orders, decrees, approvals, directives, judgments, rulings, injunctions, writs, awards and decrees of, or issued or entered by, all Governmental Entities.

“ Leased Real Property ” means the parcels of real property used in connection with the Business of which a Seller is the lessee or sublessee (together with all fixtures and improvements thereon), all of which are listed in Schedule 1.1A .

“ Licenses ” means all notifications, licenses, permits (including environmental, construction and operation permits), franchises, certificates, approvals, exemptions, classifications, registrations and other similar documents and authorizations issued by any Governmental Entity, and applications therefor.

“ Liens ” means all mortgages, liens, pledges, security interests, charges, claims, restrictions and encumbrances of any nature whatsoever.

“ Material Adverse Effect ” means any state of facts, change, event, effect or occurrence (when taken together with all other states of facts, changes, events, effects or occurrences) that has had or is reasonably likely to have a materially adverse effect on the financial condition, results of operations, properties, assets or liabilities (including contingent liabilities) of the Business or the Assets; provided, however, that in each case, no state of facts, change, event, effect or occurrence resulting directly or indirectly from the following, either alone or in combination, shall be deemed to constitute, or be taken into account in determining whether there has been, such a material adverse effect: (a) general changes in economic, geographic, market, financial, credit or capital market, regulatory or political conditions in the United States or anywhere else in the world, including changes in interest rates or foreign exchange rates (to the extent not disproportionate with respect to a Seller, the Business or the Assets in any material respect); (b) terrorism, war or the outbreak or worsening of hostilities, or natural disasters anywhere in the world, whether commencing before or after the date of this Agreement (to the extent not disproportionate with respect to a Seller, the Business or the Assets in any material respect); (c) changes in the Law or accounting regulations or principles or interpretations thereof as of the date of this Agreement (to the extent not disproportionate with respect to a Seller, the Business or the Assets in any material respect); (d) any failure by a Seller to meet any internal or published projections, forecasts or revenue or earnings predictions with respect to the Business; (e) changes as a result of any action consented to or taken at the request of the Purchaser; (f) any matter that is set forth in the Disclosure Schedule; or (g) the execution or announcement of this Agreement, including the identity of the Purchaser, or the taking of any action contemplated or required by this Agreement, or the consummation of the transactions contemplated hereby.

“ Non-Assignable Contracts ” means Assumed Contracts (as defined in Section 2.1(b) of this Agreement) that require third-party consents for assignment that have not been obtained by the Sellers and the Nuclear Contracts.

“ Nuclear Licenses ” means the following Licenses necessary for the conduct of the Business by the Purchaser after the Closing: (i) licenses authorizing the possession of nuclear sources and the distribution of a device that contains a sealed nuclear source; and (ii) a Sealed Source and Device Registration, in each case issued by the Commonwealth of Massachusetts Executive Office of Health and Human Services, Department of Public Health, Bureau of Environmental Health, Radiation Control Program.

“ Owned Real Property ” means the parcels of real property which a Seller owns (together with all fixtures and improvements thereon).

“ Party ” or “ Parties ” means, individually, the Purchaser and each Seller, and, collectively, the Purchaser and the Sellers.

“ Permitted Liens ” means (a) Liens for Taxes not yet due and payable or for Taxes immaterial in amount that are being contested in good faith; (b) Liens of landlords, carriers, warehousemen, mechanics, materialmen and repairmen incurred in the ordinary course of business consistent with past practice for sums (i) not yet delinquent or (ii) immaterial in amount and being contested in good faith; (c) liens incurred or deposits made in connection with workers’ compensation, unemployment insurance and other similar types of social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return of money bonds and similar obligations, in each case in the ordinary course of business, consistent with past practice; (d) in the case of the Real Property, zoning, building, or other restrictions, variances, covenants, rights of way, encumbrances and easements, none of which, individually or in the aggregate, (i) interfere in any material respect with the present use of or occupancy of the affected parcel by the Sellers or (ii) have more than an immaterial effect on the value thereof or its use; (e) liens, assessments and governmental charges not yet due and payable; (f) liens arising pursuant to any Assumed Contracts (as defined in Section 2.1(b) of this Agreement) unrelated to a breach thereof by Seller; and (g) liens that will be paid off or otherwise terminated at or before the Closing.

“ Person ” means any individual, corporation, partnership, joint venture, limited liability company, trust, unincorporated organization or Governmental Entity.

“ Products ” means:

(a) RMD’s products called the LPA-1 and LPA-1B Lead Paint Analysers and the LTR1000 Lead Tracer;

(b) RMD’s products called the LPX or LPX-Pro Lead Paint Analyser;

(c) all accessories and devices related to: (i) the products listed in clauses (a) and (b) above; and (ii) any and all X-Ray fluorescence technology based or derived products or prototypes or designs developed and/or manufactured by a Seller or any Affiliate of a Seller relating to the products listed in clauses (a) and (b) above; and

(d) all circuitry, algorithms, software, designs, graphical user interfaces, plans, specifications, bills of materials and related information, and other systems used for signal processing, and the operation and control and manufacture and repair of such devices and products, in each case relating primarily to the Business.

“ Purchaser Ancillary Documents ” means any certificate, agreement, document or other instrument, other than this Agreement, being executed and delivered by the Purchaser in connection with the transactions contemplated hereby.

“ Purchaser Indemnified Parties ” means the Purchaser and its Affiliates, their respective officers, directors, employees, agents and representatives and the heirs, executors, successors and assigns of any of the foregoing.

“ Real Property ” means the Leased Real Property and the Owned Real Property.

“ Registered Intellectual Property ” means all United States, international and foreign: (a) patents and patent applications (including provisional and patent cooperation treaty (PCT) applications); (b) registered trademarks and service marks, applications to register trademarks and service marks, intent-to-use applications, or other registrations or applications related to trademarks and service marks; (c) registered copyrights and applications for copyright registration; and (d) domain name registrations.

“ Seller Ancillary Documents ” means any certificate, agreement, document or other instrument, other than this Agreement, to be executed and delivered by a Seller in connection with the transactions contemplated hereby.

“ Seller Benefit Plan ” means each Employee Benefit Plan sponsored or maintained or required to be sponsored or maintained or required to be maintained at any time by a Seller.

“ Seller Indemnified Parties ” means the Sellers and their Affiliates, their respective officers, directors, employees, agents and representatives and the heirs, executors, successors and assigns of any of the foregoing.

“ Seller Intellectual Property ” means any Intellectual Property that is owned by or licensed to a Seller that is used primarily by a Seller in the conduct of the Business, that is owned by and has been developed by the Sellers primarily for the conduct of the Business (including, without limitation, the design, development, manufacture, assembly, testing and sale of the Products) or which, but for ownership or a valid license thereto, would be infringed by the manufacture and distribution of any Products.

“ Seller Licensed Intellectual Property ” means any Seller Intellectual Property that is not Seller Owned Intellectual Property but is licensed to a Seller.

“ Seller Owned Intellectual Property ” means all Seller Intellectual Property owned or purported to be owned by a Seller (i.e., excluding Seller Licensed Intellectual Property).

“ Seller Registered Intellectual Property ” means all Seller Owned Intellectual Property that is Registered Intellectual Property.

“ Taxes ” means all taxes, assessments, charges, duties, fees, levies and other charges of a Governmental Entity, including income, franchise, capital stock, net worth, real property, personal property, tangible, intangible, commercial activity, withholding, employment, payroll, social security, social contribution, unemployment compensation, disability, transfer, sales, use, excise, gross receipts, goods and services, value-added and all other taxes of any kind for which a Seller or any of its Affiliates or the Purchaser may have any liability imposed by any Governmental Entity, whether disputed or not, and any related charges, interest or penalties imposed by any Governmental Entity.

“ Tax Return ” means any report, return, declaration or other information, in whatever form or medium, required to be supplied to a Governmental Entity in connection with Taxes, including estimated returns and reports of every kind with respect to Taxes.

“ Technology ” means:

(a) the Seller Intellectual Property, whether Seller Registered Intellectual Property or otherwise, to the extent related to the Products;

(b) the Sellers’ X-Ray fluorescence technology using either a radioactive source or an X-Ray tube; the design of the head- or other source-containing structure of the Products; the location, design and specifications of the detector of the Products; the algorithms and related signal processing of the Products; and the application-related software and any other component or assembly or sub-assembly necessary for the operation and performance of the Products consistent with the specifications for the Products; and

(c) the software and hardware, whether mechanical or electrical or electronic, used in the design, manufacture and testing of the Products, assembly jigs and tools, quality assurance and testing equipment and procedures and related software, systems and jigs, and the printed circuit boards and designs related thereto.

ARTICLE II
PURCHASE AND SALE

Section 2.1. Agreement to Purchase and Sell . Subject to the terms and conditions hereof, at the Closing, the Sellers are hereby selling, assigning, transferring and delivering to the Purchaser, and the Purchaser is purchasing and acquiring from the Sellers, all right, title and interest of the Sellers in and to, except for the Excluded Assets (as defined in Section 2.2 of this Agreement), all of the assets, properties and rights of every kind, nature, character and description, whether real, personal or mixed, whether tangible or intangible, and wherever situated, only to the extent such assets, properties and rights are related to or are used or held for use primarily in the Business (such assets, properties and rights, being referred to as the “ Assets ”), free and clear of all Liens other than Permitted Liens. The Assets shall include Sellers’ rights, title and interest in and to all of the following Assets, but only insofar as they primarily relate to, or are used primarily with respect to, the Products, the Technology or the Business:

(a) the fixed assets, equipment, furnishings, computer hardware and fixtures, manufacturing equipment and instrumentation, metrology, quality assurance and quality control equipment and documentation and assembly jigs, including those listed in Schedule 2.1(a) ;

(b) the Contracts listed in Schedule 2.1(b) (the “ Assumed Contracts ”); provided, however, that the Assumed Contracts identified with an asterisk on Schedule 2.1(b) (the “ Nuclear Contracts ”) shall not be assigned to the Purchaser until such time as the Purchaser has obtained the Nuclear Licenses;

(d) all Seller Intellectual Property, including the items listed in Schedule 2.1(d) (excluding all internet domain names registered in the name of a Seller), related goodwill, and the right to sue for infringement or unauthorized use of any of the foregoing, past, present or future);

(e) all assets that are causes of action, lawsuits, judgments, claims and demands of any nature, whether arising by way of counterclaim or otherwise;

(f) all express or implied guarantees, warranties, representations, covenants, indemnities and similar rights made or owing to the Sellers or any of their Affiliates;

(g) files, correspondence, records, data (including production management data), plans, reports (including relating to markets, market participants and competitors of the Business) and recorded knowledge, including customer, supplier, customer purchasing history, price and mailing lists, development, manufacturing and testing protocols, technical worksheets and reports, designs, specifications, tests, test results, and other documentation, either written or contained in any machine readable electronic support; and copies of all accounting or other books and records of the Sellers in whatever media retained or stored, including computer programs, databases and disks;

(h) all records of any and all regulatory approvals and/or licenses that may be useful to the Purchaser in seeking similar regulatory approvals and licenses, including those listed in Schedule 2.1(h) under the headings: Regulatory Compliance, Qualifications & Registrations;

(i) current accounting information validating the reporting of all costs and cost allocations included in any financial information or data supplied to the Purchaser including those listed in Schedule 2.1(i) under the headings: Bill of Materials & Components Specifications, Vendor List and Supplier Information (which, to the extent such exists, shall include vendor qualification, product or component identification, with pricing, delivery information, payment terms and minimum order quantities);

(j) all personnel records of the Transferred Employees, including those listed in Schedule 2.1(j) (provided, however, that the Sellers may retain copies of all such records);

(k) the detailed production management data, including all components of the bill of materials of each of the Products actually sold or marketed and or proposed to be developed for eventual sale, including those listed in Schedule 2.1(k) under the headings Bill of Materials & Components Specifications;

(l) contact management software programs and all the historical data therein, including those listed in Schedule 2.1(l) under the headings Software Assets and Customer Information; and

(m) detailed descriptions of all manufacturing and test protocols for the Products, together with any and all test benches that are or have been used for the Products and or any components and or any assemblies or sub-assemblies related thereto, and a listing of such items, including those listed in Schedule 2.1(m) under the headings Technical Documentation for Design, Assembly, Testing, Repair, Calibration and Resourcing, and QA/QC Compliance.

Section 2.2. Excluded Assets . Notwithstanding anything to the contrary in Section 2.1 , the Assets shall not include the following assets, properties and rights of the Sellers or any of their Affiliates (collectively, the “ Excluded Assets ”):

(a) all cash, cash equivalents and accounts receivable of the Sellers for sales completed and delivered prior to the Closing;

(b) all deposits, advances, pre-paid expenses and credits of the Sellers with respect to the Business, the Products and/or the services of the Business, all of which are set forth on Schedule 2.2(b) , which schedule shall also include a balance sheet as of the Closing Date reflecting all such items;

(c) all inventory, finished goods, components and work-in-progress in Seller’s possession on the Closing Date, and all Products on loan to customers as of the Closing Date, all of which are set forth on Schedule 2.2(c) ; provided , however, that if any of the Excluded Assets listed in this Section 2.2(c) are in Seller’s possession or on loan to customers on the date of expiration or termination of the Transition Services Agreement, such Excluded Assets shall be transferred in accordance with the Transition Services Agreement and subject to the Purchaser having obtained the Nuclear Licenses;

(d) all employment agreements and employment relationships as well as ownership and other rights with respect to the Seller Benefit Plans and the ERISA Affiliate Plans;

(e) the Leased Real Property and all licenses, permits, approvals, easements and other rights relating thereto;

(f) the Contracts set forth on Schedule 2.2(f) ;

(g) the rights that accrue to the Sellers hereunder;

(h) all rights to the name “Dynasil” and “RMD Instruments” and any variations thereof;

(i) rights to refunds of Taxes paid by the Sellers, whether paid directly by a Seller or indirectly by a third party on behalf of a Seller, regardless of whether such rights have arisen or hereafter arise;

(j) insurance policies of the Sellers (and any cash or surrender value thereon) and any pre-paid expenses with respect thereto; and

(k) the assets described on Schedule 2.2(k) (the “ Excluded Fixed Assets ”).

Section 2.3. Assumption of Assumed Liabilities .

(a) Except as provided in Section 2.3(b) , the Purchaser shall not assume, in connection with the transactions contemplated hereby, any liability or obligation of the Sellers or any of their Affiliates or the Business whatsoever, whether known or unknown, disclosed or undisclosed, accrued or hereafter arising, absolute or contingent, and the Sellers (or the applicable Affiliate) shall retain responsibility for all such liabilities and obligations.

(b) Effective as of the Closing, the Purchaser shall assume:

(i) the obligations of the Sellers under each Assumed Contract, to the extent such obligations are not required to be performed on or prior to the date of the Closing, do not arise out of any breach or default thereunder by the Sellers prior to the Closing Date, are set forth in writing in such Assumed Contract (except in the case of Assumed Contracts that are oral Contracts, in which case Seller has provided Purchaser with a complete, correct and true summary of the terms of such oral Contracts), and accrue and relate to the operations of the Business subsequent to the Closing Date (the “ Assumed Liabilities ”), provided that if the Purchaser is required to perform any obligations of the Sellers under Contracts other than the Assumed Contracts, the Purchaser shall notify the Sellers thereof and invoice the Sellers for the Purchaser’s actual costs in connection therewith and the Sellers shall immediately pay each such invoice; and

(ii) except as set forth in Section 6.2 , all liabilities with respect to Transferred Employees (as defined in Section 6.2(b) of this Agreement) arising after the Closing.

Section 2.4. Specifically Excluded Liabilities . Specifically, and without in any way limiting the generality of Section 2.3(a) , the Assumed Liabilities shall not include, and in no event shall the Purchaser assume, agree to pay, discharge or satisfy any other liability or obligation hereunder or otherwise have any responsibility for, any other liability or obligation of the Sellers or any of their Affiliates or of the Business (together with all other liabilities that are not Assumed Liabilities, the “ Specifically Excluded Liabilities ”), including, without limitation, the following Specifically Excluded Liabilities:

(a) relating to any liability or obligation to creditors of the Sellers or any Affiliate of the Sellers;

(b) except as set forth in Section 6.2 , relating to or arising out of the employment, or termination of employment, of any Seller Employee by either Seller;

(c) for Taxes with respect to any period owing, or alleged by a Governmental Authority to be owing, by the Sellers or any of their Affiliates;

(d) relating to guarantees of any indebtedness of any Person;

(e) relating to, resulting from, or arising out of, (i) claims made in pending or future suits, actions, investigations or other legal, governmental or administrative proceedings or (ii) claims based on violations of Law (including any state corporate Law, state or federal securities Law, Environmental Law, workers’ compensation, employment practices or health and safety matters), breach of Contract, or any other actual or alleged failure of the Sellers to perform any obligation (under any Law, License or Contract), in each case arising out of, or relating to (w) acts or omissions that shall have occurred, (x) services performed or products sold, (y) the ownership or use of the Assets, or (z) the operation of the Business, in each case prior to the Closing (including, without limitation, with respect to products liability for products designed, manufactured, distributed or sold prior to the Closing);

(f) pertaining to any Excluded Asset;

(g) relating to, resulting from, or arising out of, any non-Business operations of the Sellers or any of their Affiliates or any former operation of the Sellers or any of their Affiliates (or their respective predecessors);

(h) under or relating to any Seller Benefit Plan or ERISA Affiliate Plan including any obligation or liability to make any payment or payments to any Person, including any Governmental Entity, as a result of the transactions contemplated hereby, whether or not such liability or obligation arises prior to, on or following the date of the Closing;

(i) arising or incurred in connection with the negotiation, preparation and execution hereof and the transactions contemplated hereby and any fees and expenses of counsel, accountants, brokers, financial advisors or other experts of the Sellers or any of their Affiliates; and

(j) relating to the spent sealed nuclear sources recovered after resourcing is performed on the LPA and LeadTracer, in each case prior to or on the date of Closing.

Such Specifically Excluded Liabilities shall include all claims, actions, litigation and proceedings relating to any or all of the foregoing and all costs and expenses in connection therewith.

ARTICLE III
PURCHASE PRICE; ALLOCATIONS

Section 3.1. Purchase Price . The aggregate amount to be paid for the Assets shall be $1,100,000 (the “ Base Purchase Price ”), as adjusted as provided below in Section 3.2(a) (as adjusted, the “ Purchase Price ”). In addition to the foregoing payment, as consideration for the sale, assignment, transfer and delivery of the Assets, the Purchaser shall assume and discharge the Assumed Liabilities (if any).

Section 3.2. Payment of Purchase Price and Outstanding Invoices . At the Closing:

(a) the Purchaser shall pay to the Sellers, to an account designated by the Sellers, an amount in cash equal to (i) the Base Purchase Price minus (ii) the aggregate amount of deposits, advances and credits of the Sellers set forth on Schedule 2.2(b) minus (iii) the aggregate replacement value of the Excluded Fixed Assets as set forth on Schedule 2.2(k) ; and

(b) the Purchaser shall pay to RMD, to an account designated by RMD, an amount in cash equal to the aggregate unpaid amounts previously invoiced to the Purchaser by RMD with respect to products and services purchased or ordered by the Purchaser from RMD and actually shipped as of the Closing Date.

Section 3.3. Allocation of Purchase Price . Within sixty (60) days after the Closing Date, the Purchaser shall deliver to the Sellers a schedule allocating the Purchase Price (including any Assumed Liabilities treated as consideration for the Assets for Tax purposes) (the “ Allocation Schedule ”). The Allocation Schedule shall be prepared in accordance with Section 1060 of the Code. The Allocation Schedule shall be deemed final unless the Sellers notify the Purchaser in writing that the Sellers object to one or more items reflected in the Allocation Schedule within fifteen (15) days after delivery of the Allocation Schedule to the Sellers. In the event of any such objection, the Sellers and the Purchaser shall negotiate in good faith to resolve such dispute; provided, however, that if the Sellers and the Purchaser are unable to resolve any dispute with respect to the Allocation Schedule within thirty (30) days after the delivery of the Allocation Schedule to the Sellers, such dispute shall be resolved by an impartial nationally recognized firm of independent certified public accountants mutually appointed by the Purchaser and the Sellers. The fees and expenses of such accounting firm shall be borne equally by the Purchaser, on the one hand, and the Sellers, on the other hand. The Sellers and the Purchaser agree to file their respective IRS Forms 8594 and all federal, state and local Tax Returns in accordance with the Allocation Schedule.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLERS

The Sellers jointly and severally represent and warrant to the Purchaser that, except as set forth in the Sellers’ Disclosure Schedule (the “ Disclosure Schedule ”), the statements contained in this Article IV are true and correct as of the date hereof. The Disclosure Schedule shall be arranged in sections and subsections corresponding to the numbered and lettered sections and subsections contained in this ‎Article IV , and any reference in this Article IV to items “set forth in the Disclosure Schedule” or “the Disclosure Schedule contains” or words of similar effect shall be deemed to mean the section or subsection of the Disclosure Schedule corresponding to the section or subsection of this Agreement where such reference appears. The disclosures in any section or subsection of the Disclosure Schedule shall qualify other sections or subsections in this ‎ Article IV only to the extent that it is reasonably apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections and only to the extent that the relation between the disclosure and the related section is reasonably apparent. The Disclosure Schedule shall qualify the statements made in the corresponding section and subsection of this Article IV whether or not the specific section or subsection of this ‎ Article IV contains the words “except as set forth in the Disclosure Schedule” or words of similar effect. Notwithstanding any of the foregoing or anything in this Agreement to the contrary, the Sellers are only making representations and warranties in this Agreement with respect to the RMD product called the LTR1000 Lead Tracer under Sections 4.5 , 4.6 , 4.9 , 4.10 , 4.17 and 4.24(c) .

Section 4.1. Organization; Conduct of the Business . Each Seller is a corporation duly formed and validly existing under the Laws of the State of Delaware and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. RMD is a wholly owned subsidiary of Dynasil. The Business is primarily conducted by RMD, and no Person other than the Sellers conducts any part of the Business or owns any Assets.

Section 4.2. Authorization . Each Seller has full corporate or other requisite power and authority to execute and deliver this Agreement and the Seller Ancillary Documents to which it is a party and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Seller Ancillary Documents by the Sellers party thereto and the performance by the Sellers of their obligations hereunder and thereunder and the consummation of the transactions provided for herein and therein have been duly and validly authorized by all necessary corporate or other requisite action on the part of the Sellers. This Agreement and the Seller Ancillary Documents have been duly executed and delivered by the Sellers party thereto and constitute the valid and binding agreements of the Sellers party thereto, enforceable against the Sellers party thereto in accordance with their respective terms, except to the extent that enforceability thereof may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar Laws affecting the enforcement of creditors’ rights generally and by general principles of equity.

Section 4.3. Absence of Restrictions and Conflicts . Except as set forth in Section 4.3 of the Disclosure Schedule , the execution, delivery and performance by each Seller of this Agreement and the Seller Ancillary Documents to which it is a party, the consummation of the transactions contemplated hereby and thereby and the fulfillment of and compliance with the terms and conditions hereof and thereof do not or shall not (as the case may be), with the passing of time or the giving of notice or both, (a) contravene or conflict with any term or provision of such Seller’s corporate charter or bylaws, (b) violate in any material respect any provision of any Contract to which such Seller is a party or by which it is bound that relates to the Business or the Assets, (c) contravene or conflict with any judgment, decree or order of any Governmental Entity applicable to such Seller, (d) contravene or conflict in any material respect with any Law or arbitration award applicable to such Seller, or (e) result in the creation or imposition of any Lien (other than a Permitted Lien) on any Asset.

Section 4.4. Required Consents . Section 4.4 of the Disclosure Schedule sets forth a list of each action, consent, approval, notification, waiver, authorization, order or filing (each, a “ Required Consent ” and collectively, the “ Required Consents ”) under any Law, License or Contract to which a Seller is a party that is necessary with respect to the execution, delivery and performance of this Agreement or the Seller Ancillary Documents to which such Seller is a party. Except as set forth on Section 4.4 of the Disclosure Schedule , no consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required with respect to any Seller in connection with the execution, delivery or performance of this Agreement or the Seller Ancillary Document to which such Seller is a party.

Section 4.5. Personal Property . All equipment and other items of tangible personal property and assets included in the Assets reasonably necessary for the Business as currently conducted (a) are in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted and (b) were acquired and are usable in the regular and ordinary course of business. All of the Assets are in the possession of one of the Sellers. Section 4.5(a) of the Disclosure Schedule sets forth the location of any personal property included in the Assets that are not held at the Sellers’ Watertown, Massachusetts facilities. No Person other than the Sellers owns any equipment or other tangible personal property or asset that is necessary to the operation of the Business. Since January 1, 2013, neither Seller has sold, transferred or disposed of any assets that would have been Assets on the date hereof, except for the sale of inventory in the ordinary course and assets having a fair market value of less than $25,000, individually and in the aggregate.

Section 4.6. Sufficiency of and Title to Assets . Except as set forth on Section 4.6 of the Disclosure Schedule and except for the Excluded Assets, the Nuclear Licenses and the HUD Certification, the Assets constitute all of the assets (whether real, personal or mixed and whether tangible or intangible) necessary for the conduct of the Business in accordance with the Sellers’ past practices and as presently conducted by the Sellers. The Sellers have (and shall convey to the Purchaser at the Closing) good and marketable title to, or in the case of leased personal property, valid leasehold interests in, the Assets, free and clear of all Liens except Permitted Liens, and the Purchaser’s use of the Assets in the same manner as currently used by the Sellers will not require the Purchaser to pay any royalties, commissions or similar obligations to any Person. The information contained in the Schedules referred to in Sections 2.1 and 2.2 are true and accurate.

Section 4.7. Revenue Schedule; No Undisclosed Liabilities .

(a) Section 4.7 of the Disclosure Schedule contains a list of all revenues and, to the Sellers’ Knowledge, the associated cost of sales of all Products sold or services rendered by the Business for (i) its 2010 fiscal year, (ii) its 2011 fiscal year, (iii) its 2012 fiscal year and (iv) the current fiscal year-to-date to and including September 30, 2013.

(b) As of the date hereof, to the Sellers’ Knowledge, there are no liabilities of the Sellers of any kind whatsoever, whether accrued, contingent, absolute or otherwise (other than the Assumed Liabilities), that by operation of law, custom or practical necessity (such as the maintenance of good business relations with suppliers) would become liabilities of the Purchaser.

Section 4.8. Absence of Certain Changes . Except as set forth in Section 4.8 of the Disclosure Schedule , since October 1, 2012, the Business has been conducted in the ordinary course consistent with past practice and there has not been (a) any Material Adverse Effect, (b) any damage, destruction, loss or casualty to property or assets of the Business or the Assets with a value in excess of $10,000, whether or not covered by insurance or (c) sales or licensing of the products and services of the Business on terms and conditions inconsistent with past practices, including offering discounts, extended service periods or enhanced services.

Section 4.9. Legal Proceedings . There is no suit, action, claim, investigation, arbitration, proceeding or investigation pending or, to the Knowledge of the Sellers, threatened against either Seller that relates to any Asset or the Business. Neither Seller is subject to any judgment, decree, injunction, rule or order of any Governmental Entity or arbitral tribunal relating to any Asset or the Business.

Section 4.10. Compliance with Law . Since October 1, 2012, each Seller has been and is currently in compliance with all Laws applicable to the Business, in all materials respects, and has filed all material reports and has all Licenses required to be filed with any Governmental Entity in connection with the conduct of the Business. To the Knowledge of the Sellers, all products designed, manufactured, sold, leased, licensed or delivered with respect to the Business prior to the Closing are and at all times have been in material conformity with the Sellers’ Massachusetts Sealed Source and Device license and PCS certification then in effect.

Section 4.11. Contracts .

(a) Section 4.11(a) of the Disclosure Schedule lists each of the following Contracts (collectively, the “ Material Contracts ”):

(i) any Contract (A) relating to the Seller Intellectual Property (other than OTC Software, as defined in Section 4.17(a) ), (B) granting a right of first refusal, right of first offer or comparable right to purchase any assets or properties of the Business, (C) relating to a joint venture, partnership or other arrangement involving a sharing of profits, losses, costs or liabilities of the Business with another Person, or (D) that individually requires aggregate expenditures or receipt by the Seller with respect to the Business in any one year of more than $25,000; and

(ii) any agreement (other than this Agreement) for the disposition of a material portion of the assets the Business, other than for the sale of inventory in the ordinary course of business.

(b) All of such Material Contracts are valid, in full force and effect and binding against the applicable Seller and, to the Sellers’ Knowledge, the other parties thereto in accordance with their respective terms. None of the Sellers or, to the Knowledge of the Sellers, any other party thereto is in default of any of its obligations under any such Material Contracts.

Section 4.12. Tax Returns; Taxes .

(a) All material Tax Returns due and relevant to the Business have been filed by the Sellers through the date hereof in accordance with all applicable Laws (pursuant to an extension of time property granted by a Governmental Entity or otherwise) and have been duly filed and are true, correct and complete in all respects.

(b) To the Sellers’ Knowledge, there are no Taxes, deposits and other payments for which either Seller has or may have liability that may in any manner become material liabilities of the Purchaser under a successor liability theory or otherwise.

(c) Other than Permitted Liens, there are no Liens for Taxes on the Assets, nor is there any such Lien that is pending or, to the Knowledge of the Sellers, threatened.

Section 4.13. Employees and Independent Contractors . Section 4.13 of the Disclosure Schedule contains a true, correct and complete list of all employees and independent contractors who perform any services for the Business as of the date hereof, specifying their position, date of hire, work location, hours of service and employee benefit coverages selected. All such Persons classified by a Seller as independent contractors have been properly classified in accordance with all applicable Laws.

Section 4.14. Seller Benefit Plans . RMD does not maintain any Employee Benefit Plans or ERISA Affiliate Plans, and the Purchaser will not incur any liability or have any obligation with respect to any Seller Benefit Plan.

Section 4.15. Labor Relations . Neither Seller is a party to or bound by any labor or collective bargaining agreement that involves any of the Seller Employees, and no such agreement is currently being negotiated. Each Seller is in compliance in all material respects with all Labor Laws and related regulations except to the extent that non-compliance would not result in a Material Adverse Effect. Neither Seller is a party to, or otherwise bound by, any consent decree, settlement agreement, or conciliation agreement with any Governmental Entity relating to any of the Seller Employees.

Section 4.16. Environmental, Health and Safety Matters . Each Seller has complied in all material respects with all Environmental Laws applicable to the Business, Assets and Products.

Section 4.17. Intellectual Property .

(a) Section 4.17(a) of the Disclosure Schedule is a complete and correct list of: (i) all Seller Registered Intellectual Property and (ii) all software owned by a third party comprising Seller Licensed Intellectual Property except for licenses for commercially available software licensed under “shrinkwrap” or “clickwrap” agreements for less than $10,000 per year (“ OTC Software ”).

(b) All of the Seller Owned Intellectual Property is owned exclusively by one of the Sellers, and the Sellers have the full right to the Seller Owned Intellectual Property for any purpose in connection with the Business, free from any Liens and any requirement of any past, present or future royalty payments, license fees, charges or other payments, or conditions or restrictions whatsoever, other than non-exclusive rights granted to customers and purchasers of Products in the ordinary course of business. Immediately after the Closing, the Purchaser shall own or have a license to all the Seller Intellectual Property (other than the Excluded Assets) free from Liens (other than restrictions on the use of Seller Licensed Intellectual Property imposed in the applicable license agreements) and on the same terms and conditions as in effect prior to the Closing, except with respect to any Seller Licensed Intellectual Property licensed under a Non-Assignable Contract or as set forth in Section 4.17(b) of the Disclosure Schedule .

(c) Section 4.17(c) of the Disclosure Schedule sets forth all licenses currently in effect pursuant to which a Seller has licensed any Seller Intellectual Property to a third party (other than non-exclusive licenses granted to purchasers of Products in the ordinary course of business) or has licensed any Seller Licensed Intellectual Property from a third party (other than licenses for OTC Software). The Sellers have provided the Purchaser with true, correct and complete copies of all such licenses.

(d) To the Knowledge of the Sellers, none of the Seller Intellectual Property nor the conduct of the Business infringes or otherwise violates any Intellectual Property rights of any Person. To the Knowledge of the Sellers, none of the Seller Intellectual Property is being infringed, misappropriated, or otherwise used or available for use by any Person without a license or permission from a Seller.

(e) Within five (5) years prior to the date hereof, no claim or demand of any Person has been made or, to the Knowledge of the Sellers, threatened, nor is there any litigation that is pending or, to the Knowledge of the Sellers, threatened, that (i) challenges the rights of either Seller in respect of the Seller Owned Intellectual Property, (ii) asserts that a Seller is infringing or otherwise in conflict with, or is required to pay any royalty, license fee, charge or other amount in regard to, any Intellectual Property or (iii) claims that a Seller’s use of any Seller Licensed Intellectual Property is in breach of the underlying license agreement. None of the Seller Owned Intellectual Property, and to the Sellers’ Knowledge none of the Seller Licensed Intellectual Property, is subject to any outstanding order, ruling, decree, judgment or stipulation by or with any court, tribunal, arbitrator or other Governmental Entity naming a Seller or such Seller Intellectual Property, or has been the subject of any litigation within the last five years, whether or not resolved in favor of the Sellers.

(f) The items of Seller Registered Intellectual Property that have been duly registered with, filed in or issued by, as the case may be, the United States Patent and Trademark Office, the United States Copyright Office or other filing offices, domestic or foreign, and that are listed in Section 4.17(a)(i) of the Disclosure Schedule as being issued and outstanding (and not listed as being abandoned, cancelled or expired), remain in full force and effect.

(g) All Seller Owned Intellectual Property was developed by (i) an employee of a Seller or its Affiliate working within the scope of his or her employment at the time of such development under an agreement requiring assignment of such Intellectual Property, and all such Seller Owned Intellectual Property has been assigned to, or ownership has vested in, Seller, or (ii) agents, consultants, contractors or other Persons who have executed appropriate instruments of assignment in favor of one of the Sellers as assignee that have conveyed to such Seller exclusive ownership of all intellectual property rights in the Seller Intellectual Property.

(h) Section 4.17(h) of the Disclosure Schedule sets forth all instruments of assignment and employment agreements that (i) relate to the assignment of any type of Intellectual Property used in the Business and (ii) cannot, as a matter of law, be assigned to the Purchaser.

Section 4.18. Customers . Section 4.18 of the Disclosure Schedule contains a true, correct and complete list of the names of the twenty (20) largest customers of the Business for each of the fiscal years ended September 30, 2012 and September 30, 2013, in each case based on gross sales. The Sellers maintain good commercial relations with each of the customers of the Business and, to the Knowledge of the Sellers, no event has occurred that could materially and adversely affect relations with any such customer. Except as set forth on Section 4.18 of the Disclosure Schedule , no customer (or former customer) of the Business during the prior twelve (12) months has canceled, terminated or, to the Knowledge of the Sellers, made any threat to cancel or otherwise terminate any of such customer’s Contracts with a Seller relating to the Business or to decrease such customer’s usage of the Products or any services of the Sellers relating to the Business. Neither Seller has received any notice and neither Seller has any Knowledge to the effect that any current customer or supplier of the Business may terminate or materially alter its business relations with the Seller, either as a result of the transactions contemplated hereby or otherwise. RMD maintains true, accurate and complete files of customers that have purchased a Product containing a radioactive source; such files include at least the name and address of such customer, the customer’s radiation license number, the Product serial number and radioactive source serial number; such files have been made available to the Purchaser; and such files shall be included in the Assets transferred to the Purchaser at the Closing. All of the Seller’s customer information made available to Purchaser is consistent with the data and files in the various customer relationship management software used in the Business from time to time.

Section 4.19. Licenses . Section 4.19(a) of the Disclosure Schedule is a true, correct and complete list of all Licenses related to the conduct of the Business held by the Sellers. Except as set forth in Section 4.19(b) of the Disclosure Schedule , the Sellers own or possess all Licenses that are necessary to enable them to carry on the Business as presently conducted.

Section 4.20. Warranties. There is no pending or, to the Knowledge of the Sellers, threatened claim alleging any breach of any warranty or guaranty with respect to the Products. All Products designed, manufactured, sold, leased, licensed or delivered, and all services provided by the Sellers with respect to the Business, are and at all times have been in material conformity with all specifications, applicable contractual commitments and all express and implied warranties. Notwithstanding the foregoing, the Sellers acknowledge and agree to their, and assume unreservedly, full and complete liability for any and all claims relating to any and all Products sold prior to the Closing.

Section 4.21. Agents . Neither Seller, nor any officer, member, director or employee of either Seller, nor any Affiliate of the Sellers has employed any broker, finder or investment banker or incurred any liability for any investment banking fees, financial advisory fees, brokerage fees or finders’ fees in connection with the transactions contemplated hereby.

Section 4.22. Restrictions on Business Activities . There is no Contract, judgment, injunction, order or decree relating to the Business to which a Seller is a party or otherwise binding upon it or the Business under which such Seller is: (a) restricted from selling, licensing, or otherwise distributing the Technology or the Products to any customer or class of customers; (b) required to buy from, license or otherwise acquire any technology, Intellectual Property, data or content from any vendor or class of vendors, in any geographic area, during any period of time or in any segment of the market; or (c) required to sell, license or otherwise distribute the Technology or the Products to any customer or class of customers at prices guaranteed to be lower than those charged to any other customer.

Section 4.23. Solvency . The fair value of the assets of each Seller separately exceeds that Seller’s liabilities, and each Seller separately is able to meet its obligations as they become due and that each Seller is not insolvent within the meaning of any federal or state laws relating to creditors’ rights or bankruptcy.

Section 4.24. Product Documentation .

(a) The algorithm for the LPA-1 and LPA-1B Lead Paint Analysers, developed by Sellers and their consultants, including Richard Brisk and Dr. Gerald Entinne, including the principal and material formulae, mathematical equations and calculations and notes thereto written in assembly language on an 8051 processor, are in existence and will be transferred to Purchaser under this Agreement (the “ LPA Product Documentation ”). The LPA Product Documentation is sufficient for the usage and engineering of such products and for the making of modifications thereto by anyone who is versed in assembly level language on an 8051 processor.

(b) Section 4.24(b) of the Disclosure Schedule contains a true, correct and complete description of the components of the algorithm that has been documented by the Sellers, which such description includes all formulae, mathematical equations and calculations, together with all adaptations, modifications and revisions thereto, including all notes relating to the foregoing, resulting from all process testing, developed by the Sellers and their consultants, including Paul Bennett, for the LPX and LPX Pro Lead Paint Analysers (the “ LPX Product Documentation ”). The LPX Product Documentation is sufficient for the usage and engineering of such products and for the making of modifications thereto.

(c) Section 4.24(c) of the Disclosure Schedule contains a true, correct and complete description of the components of the algorithm developed and that have been documented by the Sellers and their consultants, including Paul Bennett, for the LTR1000 Lead Tracer, including the principal and material formulae, mathematical equations and calculations and notes thereto (the “ Lead Tracer Documentation ”). The Lead Tracer Documentation is sufficient for the usage and engineering of such product and for the making of modifications thereto.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER

The Purchaser hereby represents and warrants to the Sellers as follows as of the date hereof and the Closing Date:

Section 5.1. Organization . The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted.

Section 5.2. Authorization . The Purchaser has full power and authority to execute and deliver this Agreement and the Purchaser Ancillary Documents, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and the Purchaser Ancillary Documents by the Purchaser, the performance by the Purchaser of its obligations hereunder and thereunder, and the consummation of the transactions provided for herein and therein have been duly and validly authorized by all necessary corporate action on the part of the Purchaser. This Agreement and the Purchaser Ancillary Documents are being duly executed and delivered by the Purchaser and constitute the valid and binding agreements of the Purchaser, enforceable against the Purchaser in accordance with their respective terms, except to the extent that enforceability thereof may be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium and other similar Laws affecting the enforcement of creditors’ rights generally and by general principles of equity.

Section 5.3. Absence of Restrictions and Conflicts . The execution, delivery and performance of this Agreement and the Purchaser Ancillary Documents, the consummation of the transactions contemplated hereby and thereby and the fulfillment of, and compliance with, the terms and conditions hereof and thereof do not or shall not (as the case may be), with the passing of time or the giving of notice or both, (a) contravene or conflict with any term or provision of the certificate of formation or limited liability company agreement of the Purchaser; (b) violate or conflict with, constitute a breach of or default under, result in the loss of any benefit under, permit the acceleration of any obligation under or create in any party the right to terminate, modify or cancel any Contract to which the Purchaser is a party; (c) contravene or conflict with any judgment, decree or order of any Governmental Entity to which the Purchaser is a party or by which the Purchaser is bound; or (d) contravene or conflict with any statute, Law, rule or regulation applicable to the Purchaser. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required with respect to the Purchaser in connection with the execution, delivery or performance of this Agreement or the Purchaser Ancillary Documents or the consummation of the transactions contemplated hereby or thereby, except as may be required by applicable antitrust or merger control laws.

Section 5.4. Agents . No broker, finder or investment banker is entitled to investment banking fees, financial advisory fees, brokerage fees or finders’ fees in connection with the transactions contemplated hereby based on agreements made by or on behalf of the Purchaser.

Section 5.5. Legal Proceedings . There are no actions, suits, claims, investigations or other legal proceedings pending or, to the Purchaser’s knowledge, threatened against or by Purchaser that challenge or seek to prevent, enjoin or otherwise delay the transactions contemplated hereby.

Section 5.6. Sufficiency of Funds . The Purchaser has sufficient cash on hand or other sources of immediately available funds to enable it to make payment of the Purchase Price and consummate the transactions contemplated by this Agreement.

Section 5.7. Solvency . The fair value of the assets of the Purchaser exceeds the Purchaser’s liabilities, and the Purchaser is able to meet its obligations as they become due and the Purchaser is not insolvent within the meaning of any federal or state laws relating to creditors’ rights or bankruptcy.

Section 5.8. Nuclear Licenses and HUD Certification . The Purchaser acknowledges that in order for it to operate the Business as conducted immediately prior to the Closing and to sell the LPX and LPX-Pro Lead Paint Analysers after the Closing, the Purchaser must obtain the Nuclear Licenses and the HUD Certification, respectively. The Purchaser acknowledges that it shall be solely responsible for making all filings and other submissions and taking all other actions necessary or desirable to obtain the Nuclear Licenses and the HUD Certification and that the Sellers shall have no liability if the Purchaser fails to obtain the Nuclear Licenses and/or the HUD Certification.

Section 5.9. No Other Representations or Warranties . The Purchaser acknowledges that the Sellers have not made and are not making any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except as provided in Article IV , and that it is not relying and has not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied, except for the representations and warranties in Article IV .

ARTICLE VI
CERTAIN COVENANTS AND AGREEMENTS

Section 6.1. Consents .

(a) Until the expiration or earlier termination of the Transition Services Agreement:

(i) the Sellers shall use commercially reasonable efforts to cooperate and assist with the Purchaser’s efforts to obtain the consent of the third parties required under each Non-Assignable Contract listed in Schedule 6.1(a)(i) , such consents to be effective upon the termination of the Transition Services Agreement, provided that neither Seller shall be required to pay any consideration therefor;

(ii) the Sellers shall use commercially reasonable efforts to cooperate and assist with the Purchaser’s efforts to obtain the consent of the third parties required under each Non-Assignable Contract listed in Schedule 6.1(a)(ii) , provided that neither Seller shall be required to pay any consideration therefor;

(iii) the Sellers shall make the benefit of each Non-Assignable Contract available to the Purchaser to the extent reasonably practicable, so long as the Purchaser fully cooperates with the Sellers and pays all of the Sellers’ ordinary course and documented out-of-pocket and other costs and expenses incurred under each Non-Assignable Contract;

(iv) the Sellers shall perform under each Non-Assignable Contract in accordance with the terms thereof, but in any event Sellers (1) will not engage in any practice, take any action, embark on any course of inaction, or enter into any transaction with respect to any Non-Assignable Contract outside the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency) (except as consented to by the Purchaser) and (2) Sellers will enforce, at the request of Purchaser and at the sole expense and for the account of the Purchaser, any right of the Sellers arising from any Non-Assignable Contract against the other party or parties thereto (including the right to elect or terminate such Non-Assignable Contract in accordance with the terms thereof); and

(v) the Purchaser shall use commercially reasonable efforts to cooperate with the Sellers to fulfill the terms of each Non-Assignable Contract.

Nothing in this Agreement shall constitute a sale, assignment, transfer or conveyance to, or assumption by, the Purchaser of the Non-Assignable Contracts. With respect to any Non-Assignable Contract as to which the necessary approval or consent for the assignment or transfer to the Purchaser is obtained following the Closing, the Sellers shall transfer such Non-Assignable Contract to the Purchaser by execution and delivery of an instrument of conveyance reasonably satisfactory to the Purchaser within five (5) Business Days following receipt of such approval or consent. The Parties agree that neither Seller shall have any obligation to incur any out-of-pocket expenses in connection with this Section 6.1(a) and that to the extent any such expenses are incurred at the Purchaser’s request, the Purchaser agrees to promptly reimburse the Sellers upon presentation of reasonably documented expenses. The Seller and the Purchasers agree that neither Seller shall have any liability under any Non-Assignable Contract after the Closing, except for liability arising from fraud, gross negligence or willful misconduct, and the Purchaser shall indemnify the Sellers with respect to any Non-Assignable Contract in accordance with Section 8.2(d) .

(b) If any Party receives after the Closing any funds properly belonging to another Party in accordance with the terms of this Agreement, including payments with respect to any receivables of the Sellers, the recipient will promptly so advise the other Party, will segregate and hold such funds in trust for the benefit of the other Party and will promptly deliver such funds to an account or accounts designated in writing by such other Party.

Section 6.2. Employee Matters .

(a) Each Seller acknowledges that the Purchaser at or before Closing shall have extended offers of employment to the employees, officers and consultants of the Sellers (the “ Seller Employees ”) listed on Schedule 6.2(a) (the “ Designated Employees ”). The Sellers hereby consent to the hiring of each Designated Employee by the Purchaser, and the Sellers shall terminate the employment of each Designated Employee that accepts an offer of employment from the Purchaser. The Purchaser may employ any of the Designated Employees upon those terms that it may establish in its sole discretion.

(b) After the Closing Date, the Purchaser shall become responsible for any and all wages, salaries, and other cash compensation payable to each Designated Employee who is hired by the Purchaser (each, a “ Transferred Employee ”) for periods following the Closing Date on such terms and conditions as the Purchaser and each Transferred Employee may agree. To the extent applicable, each Seller and its Affiliates shall take all steps reasonably necessary to, including arranging for continued group health plan coverage for the statutory coverage period for each Transferred Employee, to ensure that such COBRA Coverage is available to such individuals. Each Seller and its Affiliates shall take all actions reasonably necessary to prevent the Purchaser from becoming under applicable Law a “successor employer” for purposes of COBRA Coverage. The Purchaser and Sellers agree that the Seller Employees are not third-party beneficiaries of this Agreement.

(c) After the Closing Date, the Sellers shall remain responsible for (i) any and all wages, salaries and other cash compensation (including, without limitation, accrued vacation leave and sick leave, bonuses, commissions and other incentive-based cash compensation) payable to the Seller Employees and any former employees, officers and consultants of Seller (“ Former Seller Employees ”) for periods on and prior to the Closing and (ii) any severance, retention bonus or change in control payment payable to any of the Seller Employees or Former Seller Employees that become due or owed as a result of the consummation of the transactions contemplated by this Agreement.

(d) For a period beginning on the Closing Date and ending on the six (6)-month anniversary of the Closing Date (the “ Restricted Period ”), (i) the Purchaser agrees not to, and shall cause its Affiliates not to, directly or indirectly, (A) employ or hire any person listed on Schedule 6.2(d)(i) (each such individual, a “ Seller Restricted Person ”) or (B) call upon, solicit or communicate with any Seller Restricted Person for the purpose or with the intent of enticing, or in a manner reasonably likely to entice, such Seller Restricted Person away from the Sellers or any Affiliate of the Sellers, and (ii) each Seller agrees not to, and shall cause its Affiliates not to, directly or indirectly, (A) employ or hire any Transferred Employee or (B) call upon, solicit or communicate with any Transferred Employee for the purpose or with the intent of enticing, or in a manner reasonably likely to entice, such Transferred Employee away from the Purchaser or any Affiliate of the Purchaser; provided, that the foregoing shall not prevent a Seller or the Purchaser (or any of their Affiliates) from (x) placing general advertisements in trade or other publications or on the Internet offering employment or (y) hiring any employee of the other, who for the one (1)-month period prior to the date of hire was not, to the knowledge of the hiring party, based on inquiry of the prospective employee, employed by the other Party or its Affiliates. Notwithstanding the foregoing, during the Restricted Period, (i) the Purchaser may from time to time engage a Seller Restricted Person to provide consulting services to the Purchaser solely with respect to the Products and the Technology and (ii) the Sellers may from time to time engage a Transferred Employee to provide consulting services to the Sellers or their Affiliates solely with respect to the Sellers’ Navigator business or any ISO (International Organization for Standardization) audit of a Seller or any of its Affiliates, in each case at the Hourly Consulting Rate and on written terms (including the time period during which such services may be performed) satisfactory to the Sellers and such Seller Restricted Person (in the case of a consultancy pursuant to clause (i)) or the Purchaser and such Transferred Employee (in the case of a consultancy pursuant to clause (ii)), in their sole discretion. “ Hourly Consulting Rate ” with respect to a Seller Restricted Person or a Transferred Employee shall mean an amount equal to 135% of such Seller Restricted Person’s or Transferred Employee’s then current annual salary divided by 2,000.

Section 6.3. Transfer Taxes; Expenses . Any Taxes or recording fees payable as a result of the purchase and sale of the Assets or any other action contemplated hereby shall be shared equally by the Purchaser, on the one hand, and the Sellers, on the other hand. The Parties shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications and other documents regarding Taxes and all transfer, recording, registration and other fees that become payable in connection with the transactions contemplated hereby that are required or permitted to be filed.

Section 6.4. Confidentiality . From and after the Closing, the Sellers will treat as confidential and will not use or disclose any Confidential Information or Seller Intellectual Property (other than Excluded Assets), except as may be required to be disclosed by Law or any Governmental Entity or a national securities exchange. From and after the Closing, the Purchaser will treat as confidential and will not disclose or use any confidential information of the Sellers or any of their Affiliates (other than the Confidential Information) provided to the Purchaser or its representatives in connection with the transactions contemplated by this Agreement.

Section 6.5. Publicity . No Party (or any of their respective Affiliates) shall issue any press release or make any other public announcement with respect to this Agreement or the transactions contemplated hereby without the prior consent of the other Parties, except as may be required by Law in which case the Party proposing to issue such press release or make such public announcement shall use its reasonable best efforts to consult in good faith with the other Parties, and give the other Parties a reasonable opportunity to comment thereon, before making any such public announcement.

Section 6.6. Non-Competition . For a period beginning on the Closing Date and ending on the three (3)-year anniversary of the Closing Date, the Sellers and their Affiliates shall (1) refrain from conducting the Business (other than pursuant to the Seller Ancillary Documents) and (2) refrain from competing directly or indirectly in any manner whatsoever in the field of developing, offering, manufacturing, selling or consulting with respect to any products directed at the applications of the Products or using any of the Technologies or any technology substantially similar to the Technologies.

ARTICLE VII
CLOSING

Section 7.1. Closing . The Closing is taking place on November 4, 2013 (the “ Closing Date ”) concurrently with the execution and delivery of this Agreement by the electronic delivery of executed documents.

Section 7.2. Closing Deliveries .

(a) At the Closing, the Sellers shall deliver to the Purchaser all other documents reasonably required to be entered into by the Sellers pursuant hereto or reasonably requested by the Purchaser to convey the Assets to the Purchaser or to otherwise consummate the transactions contemplated hereby.

(b) At the Closing, the Purchaser shall have delivered, or caused to be delivered, to the Sellers all other documents reasonably required to be entered into or delivered by the Purchaser at or prior to the Closing to consummate the transaction contemplated hereby.

ARTICLE VIII
INDEMNIFICATION

Section 8.1. Indemnification Obligations of the Sellers . Subject to the other provisions of this Article VIII , the Sellers shall, jointly and severally, indemnify, defend and hold harmless the Purchaser Indemnified Parties from, against, and in respect of, any and all claims, liabilities, obligations, damages, losses, costs, expenses, penalties, fines and judgments (at equity or at law, including statutory and common) whenever arising or incurred (including amounts paid in settlement, costs of investigation and reasonable attorneys’ fees and expenses) (collectively, “ Losses ”) arising out of or relating to:

(a) any breach or inaccuracy of any representation or warranty made by the Sellers in this Agreement or in any Seller Ancillary Document (other than the Transition Services Agreement) (without regard, for the sole purpose of calculating the amount of Losses, to any qualification or exception contained in such representation or warranty relating to materiality or Material Adverse Effect);

(b) any breach of any covenant, agreement or undertaking made by either Seller in this Agreement or in any Seller Ancillary Document (other than the Transition Services Agreement);

(c) any Third Party Claim (as defined in Section 8.3(a) below) based upon, resulting from or arising out of the Business, Products or Technology (other than the Assumed Liabilities) as conducted or otherwise existing or arising on or prior to the Closing Date;

(d) any Excluded Assets or liabilities that are not Assumed Liabilities, including, without limitation, the Specifically Excluded Liabilities; or

(e) non-compliance by the Parties with any applicable bulk sales Law.

The Losses of the Purchaser Indemnified Parties described in this Section 8.1 as to which the Purchaser Indemnified Parties are entitled to indemnification are collectively referred to as “ Purchaser Losses ”.

Section 8.2. Indemnification Obligations of the Purchaser . Subject to the other provisions of this Article VIII , the Purchaser shall indemnify and hold harmless the Seller Indemnified Parties from, against and in respect of any and all Losses whenever arising or incurred (including amounts paid in settlement, costs of investigation and reasonable attorneys’ fees and expenses) arising out of or relating to:

(a) any breach or inaccuracy of any representation or warranty made by the Purchaser in this Agreement or in any Purchaser Ancillary Document (other than the Transition Services Agreement);

(b) any breach of any covenant, agreement or undertaking made by the Purchaser in this Agreement or in any Purchaser Ancillary Document (other than the Transition Services Agreement);

(d) any breach of, or non-performance under, any Non-Assignable Contract by either Seller after the Closing, except in the case of fraud, gross negligence or willful misconduct; or

(e) any Liability arising out of the ownership or operation of the Assets or the Business after the Closing.

The Losses of the Seller Indemnified Parties described in this Section 8.2 as to which the Seller Indemnified Parties are entitled to indemnification are collectively referred to as “ Seller Losses ”.

Section 8.3. Indemnification Procedure .

(a) Third Party Claims . If any Indemnified Party receives notice of the assertion or commencement of any action, suit, claim or other legal proceeding made or brought by any Person who is not a party to this Agreement or an Affiliate of a party to this Agreement or a representative of the foregoing (a “ Third Party Claim ”) against such Indemnified Party with respect to which the Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnified Party shall give the Indemnifying Party prompt written notice thereof. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Third Party Claim in reasonable detail and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnified Party shall provide to the Indemnifying Party as promptly as practicable thereafter such information and documentation as may be reasonably requested by the Indemnifying Party to support and verify the claim asserted. The Indemnifying Party shall have the right to participate in, or by giving written notice to the Indemnified Party, to assume the defense of any Third Party Claim at the Indemnifying Party’s expense and by the Indemnifying Party’s own counsel, and the Indemnified Party shall cooperate in good faith in such defense. In the event that the Indemnifying Party assumes the defense of any Third Party Claim, subject to Section 8.3(b) , it shall have the right to take such action as it deems necessary to avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third Party Claim in the name and on behalf of the Indemnified Party. The Indemnified Party shall have the right, at its own cost and expense, to participate in the defense of any Third Party Claim with counsel selected by it subject to the Indemnifying Party's right to control the defense thereof. If the Indemnifying Party elects not to compromise or defend such Third Party Claim or fails to promptly notify the Indemnified Party in writing of its election to defend as provided in this Agreement, the Indemnified Party may, subject to Section 8.3(b) , pay, compromise, defend such Third Party Claim and seek indemnification for any and all Losses based upon, arising from or relating to such Third Party Claim. The Sellers and the Purchaser shall cooperate with each other in all reasonable respects in connection with the defense of any Third Party Claim, including making available records relating to such Third Party Claim and furnishing, without expense (other than reimbursement of actual out-of-pocket expenses of the Indemnified Party) to the defending Party, management employees of the non-defending Party as may be reasonably necessary for the preparation of the defense of such Third Party Claim.

(b) Settlement of Third Party Claims . Notwithstanding any other provision of this Agreement, the Indemnifying Party shall not enter into settlement of any Third Party Claim without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed), except as provided in this Section 8.3(b) . If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnified Party and provides, in customary form, for the unconditional release of each Indemnified Party from all liabilities and obligations in connection with such Third Party Claim and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to that effect to the Indemnified Party. If the Indemnified Party fails to consent to such firm offer within ten (10) days after its receipt of such notice, the Indemnified Party may continue to contest or defend such Third Party Claim and in such event, the maximum liability of the Indemnifying Party as to such Third Party Claim shall not exceed the amount of such settlement offer. If the Indemnified Party fails to consent to such firm offer and also fails to assume defense of such Third Party Claim, the Indemnifying Party may settle the Third Party Claim upon the terms set forth in such firm offer to settle such Third Party Claim, and the Indemnifying Party shall be liable to the extent of such settlement offer. If the Indemnified Party has assumed the defense pursuant to Section 8.3(a) , it shall not agree to any settlement without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed).

(c) Direct Claims . Any claim by an Indemnified Party on account of a Loss which does not result from a Third Party Claim (a “ Direct Claim ”) shall be asserted by the Indemnified Party giving the Indemnifying Party prompt written notice thereof. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have thirty (30) days after its receipt of such notice to respond in writing to such Direct Claim. During such thirty (30)-day period, the Indemnified Party shall provide to the Indemnifying Party as promptly as practicable thereafter such information and documentation as may be reasonably requested by the Indemnifying Party to support and verify the Direct Claim asserted. If the Indemnifying Party does not so respond within such thirty (30)-day period, the Indemnifying Party shall be deemed to have rejected such claim, in which case the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement.

Section 8.4. Survival Period . The representations and warranties of the Parties contained herein shall not be extinguished by the Closing, but shall survive the Closing for, and all claims for indemnification in connection therewith shall be asserted not later than, eighteen (18) months following the Closing Date; provided, however, that the representations and warranties with respect to the Excepted Claims shall survive until, and all claims for indemnification in connection therewith shall be asserted not later than, the expiration of the applicable statutes of limitations. Each covenant herein shall survive until, and all claims for indemnification in connection therewith shall be asserted not later than, the expiration of the period contemplated by its terms. Notwithstanding any of the foregoing, if, prior to the close of business on the last day a claim for indemnification may be asserted hereunder, an Indemnifying Party shall have been properly notified in writing of a claim for indemnification hereunder and such claim shall not have been finally resolved or disposed of at such date, such claim shall continue to survive and shall remain a basis for indemnification hereunder until such claim is finally resolved or disposed of in accordance with the terms hereof.

Section 8.5. Limits . Notwithstanding anything to the contrary set forth herein, the Purchaser Indemnified Parties shall not make a claim against the Sellers for indemnification under Section 8.1(a) for Purchaser Losses unless and until the aggregate amount of such Purchaser Losses exceeds $24,000 (the “ Purchaser Basket ”), in which event the Purchaser Indemnified Parties may claim indemnification for all Purchaser Losses in excess of the Purchaser Basket; provided, however, that the Excepted Claims shall not be subject to the Purchaser Basket.

Section 8.6. Ceiling on Claims for Losses . Except for Losses incurred as a result of any Excepted Claim, the maximum aggregate liability of an Indemnifying Party for indemnification under Section 8.1(a) or 8.2(a) shall not exceed $400,000. The maximum aggregate liability of an Indemnifying Party for indemnification for Excepted Claims shall not exceed $800,000. The maximum aggregate liability of an Indemnifying Party for indemnification under this Article VIII , other than Excepted Claims or under Section 8.1(a) or 8.2(a) , shall not exceed the Purchase Price.

Section 8.7. Treatment of Indemnity Payments . Any indemnity payments made pursuant to this Article VIII shall, to the extent permitted by applicable Law, be treated as an adjustment to the Purchase Price for Tax purposes.

Section 8.8. Insurance Recovery; Tax Benefits; Mitigation . The amount of any Losses incurred by a Party shall be reduced by (i) the net amount such Party or any Affiliate thereof actually received or reasonably expected to be received from any insurer or other party liable for such Losses, and such Party shall use commercially reasonable efforts to effect any such recovery, and (ii) any Tax savings or benefits realized by any Party seeking indemnification hereunder that are attributable to any deduction, loss, credit or refund or other reduction in Tax resulting from or arising out of such Losses. An Indemnified Party that has received from or on behalf of an Indemnifying Party payment of an indemnification claim for Losses under this Article VIII shall remit to the Indemnifying Party the amount of insurance or other third party proceeds that correspond to the amounts, savings or benefits contemplated by the immediately preceding sentence that are paid to the Indemnified Party with respect to such Losses. Each Party shall take, and shall causes its Affiliates to take, all reasonable steps to mitigate its Losses upon and after becoming aware of any event which could reasonably be expected to, or does, give rise to any Losses, including incurring costs only to the minimum extent necessary to remedy the breach that gives rise to such Losses.

Section 8.9. Exclusive Remedy . Except as set forth in Section 8.10 , the indemnification rights set forth in this Article VIII shall be the sole and exclusive remedies of the Parties for any Losses based upon, arising out of or otherwise in respect of the matters set forth in this Agreement, and the Parties shall not be entitled to any further indemnification rights or claims of any nature whatsoever in respect thereof. Notwithstanding the foregoing, nothing in this Agreement shall in any way limit the liability of any Person for such Person’s acts of intentional misrepresentation or fraud.

Section 8.10. Injunctive Relief . Any Party may sustain irreparable harm by reason of a breach of Sections 6.2(d) and 6.4 , and the Purchaser may sustain irreparable harm by reason of a breach of Section 6.6 , for which money damages would not be an adequate remedy. Each Party therefore agrees that, in the event of a threatened or continuing breach of such Sections, the non-breaching party shall be entitled, without prejudice to all other available remedies hereunder, to seek immediate injunctive or other equitable relief

ARTICLE IX
MISCELLANEOUS PROVISIONS

Section 9.1. Notices . All notices, communications and deliveries required or made hereunder must be made in writing signed by or on behalf of the Party making the same, shall specify the Section hereunder pursuant to which it is given or being made, and shall be delivered personally or by telecopy transmission or by a national overnight courier service or by registered or certified mail (return receipt requested) (with postage and other fees prepaid) as follows:

To the Purchaser:	Protec Instrument Corporation 6815 Biscayne Boulevard Suite 103-359 Miami, FL 33138 Fax: 305.639.1928

with a copy to:	Laboratoires Protec S.A. 10 rue de la Prairie 91140 Villebon sur Yvette FRANCE Attention: Mr. Pavel Streber

with a copy to:	Sullivan & Worcester LLP One Post Office Square Boston, MA 021096 Attention: Edwin Miller and Lewis Segall Fax: 617.338.2880

To the Sellers:	Dynasil Corporation of America 130 Galen Street Watertown, MA 02472 Attention: Peter Sulick Fax: 617.668.6890

with a copy to:	Edwards Wildman Palmer LLP 111 Huntington Avenue Boston, MA 02199 Attention: Matthew Gardella Fax: 866.955.8776

or to such other representative or at such other address of a Party as such Party may furnish to the other Parties in writing. Any such notice, communication or delivery shall be deemed given or made (a) on the date of delivery, if delivered in person, (b) upon transmission by facsimile if receipt is confirmed by telephone, (c) on the first (1st) Business Day following delivery to a national overnight courier service or (d) on the fifth (5th) Business Day following it being mailed by registered or certified mail.

Section 9.2. Schedules and Exhibits . The schedules, the Disclosure Schedule and the exhibits referenced in this Agreement are hereby incorporated into this Agreement and are hereby made a part hereof as if set out in full herein.

Section 9.3. Assignment; Successors in Interest . No assignment or transfer by any Party of such Party’s rights and obligations hereunder shall be made except with the prior written consent of the other Parties; provided , however , that the Purchaser shall, without the obligation to obtain the prior written consent of any other Party, be entitled to assign this Agreement or all or any part of its rights or obligations hereunder to one or more of its direct or indirect wholly owned subsidiaries. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and permitted assigns, and any reference to a Party shall also be a reference to the successors and permitted assigns thereof.

Section 9.4. Captions . The titles, captions and table of contents contained herein are inserted herein only as a matter of convenience and for reference and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provision hereof.

Section 9.5. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts without reference to choice of law rules. Any dispute arising under or in connection with this Agreement shall be resolved in the state or federal courts in and for the Commonwealth of Massachusetts, and the parties hereby submit to the exclusive jurisdiction of such courts in respect of any such proceeding. Any Party may make service on any other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 9.1 . Nothing in this Section 9.5 , however, shall affect the right of any Party to serve legal process in any other manner permitted by law or at equity. Each Party agrees that a final, non-appealable judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law or at equity. The failure or refusal of any Party to (i) appear in or defend any claim made hereunder shall not affect the validity or enforceability of any judgment, award or order rendered against such Party or any other Party, and (ii) satisfy its allocable portion of any judgment, award or order will not affect the obligation of the other Parties to satisfy their respective allocable portion of such judgment, award or order.

Section 9.6. WAIVER OF JURY TRIAL . EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE DOCUMENTS EXECUTED PURSUANT HERETO OR ANY DEALINGS WITH ANY OTHER PARTY RELATING TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR THE OTHER DOCUMENTS EXECUTED PURSUANT HERETO. THIS WAIVER IS IRREVOCABLE AND MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 9.6 AND EXECUTED BY EACH OF THE PARTIES HERETO). THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE DOCUMENTS EXECUTED PURSUANT HERETO. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of the transactions contemplated by this Agreement or the documents executed pursuant hereto, including without limitation contract claims, tort claims, breach of duty claims and all other common law and statutory claims. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court or arbitral tribunal.

Section 9.7. Severability . Any provision hereof that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by Law, each Party hereby waives any provision of Law that renders any such provision prohibited or unenforceable in any respect.

Section 9.8. Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement or the terms hereof to produce or account for more than one of such counterparts.

Section 9.9. Enforcement of Certain Rights . Nothing expressed or implied herein is intended, or shall be construed, to confer upon or give any Person other than the Parties, and their successors or permitted assigns, any right, remedy, obligation or liability under or by reason of this Agreement, or result in such Person being deemed a third-party beneficiary hereof.

Section 9.10. Waiver; Amendment . Any agreement on the part of a Party to any extension or waiver of any provision hereof shall be valid only if set forth in an instrument in writing signed on behalf of such Party. A waiver by a Party of the performance of any covenant, agreement, obligation, condition, representation or warranty shall not be construed as a waiver of any other covenant, agreement, obligation, condition, representation or warranty. A waiver by any Party of the performance of any act shall not constitute a waiver of the performance of any other act or an identical act required to be performed at a later time. This Agreement may not be amended, modified or supplemented except by written agreement of the Parties.

Section 9.11. Integration . This Agreement, the Transition Services Agreement and the other documents executed pursuant hereto supersede all prior and contemporaneous negotiations, agreements, understandings, representations and warranties among the Parties with respect to the subject matter hereof, including without limitation the Letter of Intent, dated March 27, 2013, by and between Dynasil and Laboratoires PROTEC S.A., and constitute the entire agreement among the Parties with respect to the subject matter hereof.

Section 9.12. Compliance with Bulk Sales Laws . Each Party hereby waives compliance by the Parties with the “bulk sales,” “bulk transfers” or similar Laws and all other similar Laws in all applicable jurisdictions in respect of the transactions contemplated by this Agreement.

Section 9.13. Interpretation . Where the context requires, the use of a pronoun of one gender or the neuter is to be deemed to include a pronoun of the appropriate gender. References herein to any Law shall be deemed to refer to such Law, as amended from time to time, and all rules and regulations promulgated thereunder. Any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. As used in this Agreement, the words “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words “without limitation.” Except as otherwise indicated, all references in this Agreement to “Sections” and “Exhibits” are intended to refer to Sections of this Agreement and Exhibits to this Agreement.

Section 9.14. Cooperation Following the Closing . Following the Closing, each Party shall deliver to the other Parties such further information and documents and shall execute and deliver to the other Parties such further instruments and agreements as any other Party shall reasonably request to consummate or confirm the transactions provided for herein, to accomplish the purpose hereof or to assure to any other Party the benefits hereof.

Section 9.15. Transaction Costs . Except as provided above or as otherwise expressly provided herein, each Party shall pay its own fees, costs and expenses incurred in connection herewith and the transactions contemplated hereby, including the fees, costs and expenses of its financial advisors, accountants and counsel.

* * *

IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed, as of the date first above written.

PROTEC INSTRUMENT CORPORATION

By:	/s/ Verena Streber
	Name:	Verena Streber
	Title:	Chief Executive Officer

DYNASIL CORPORATION OF AMERICA

By:	/s/ Peter Sulick
	Name:	Peter Sulick
	Title:	Interim President and Interim CEO

RMD INSTRUMENTS CORP.

By:	/s/ Mike O’Neill
	Name:	Mike O’Neill
	Title:	President

21.1

Subsidiaries of the Company

Subsidiaries of Dynasil Corporation of America

	Jurisdiction of Incorporation
Dynasil International, Inc (Inactive)	New Jersey
Hibshman Corporation (Inactive)	California
Optometrics Corporation	Delaware
Evaporated Metal Films Corporation	New York
Radiation Monitoring Devices, Inc.	Delaware
RMD Instruments Corporation	Delaware
Hilger Crystals, Ltd.	United Kingdom
Dynasil Biomedical Corporation	Delaware
Xcede Technologies, Inc.	Delaware

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in Registration Statements on Form S-8 (No. 333-169623, 333-165651, 333-46068) of Dynasil Corporation of America and Subsidiaries (the Company) of our report dated December 20, 2013, relating to our audits of the consolidated financial statements as of and for the years ended September 30, 2013 and 2012, which appears in this Annual Report on Form 10-K of Dynasil Corporation of America for the year ended September 30, 2013.

McGladrey LLP

Boston, Massachusetts

December 20, 2013

EXHIBIT 31.1 (a)

CERTIFICATION PURSUANT TO RULE 13a–14(a)/15d-14(a) and

SECTION 302 OF THE SARBANES-OXLEY ACT

I, Peter Sulick, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: December 20, 2013		/s/ Peter Sulick
		Peter Sulick
		Interim President and Interim Chief Executive Officer

EXHIBIT 31.1 (b)

CERTIFICATION PURSUANT TO RULE 13a–14(a)/15d-14(a) and

SECTION 302 OF THE SARBANES-OXLEY ACT

I, Thomas C. Leonard, certify that:

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

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

Date: December 20, 2013		/s/ Thomas C. Leonard
		Thomas C. Leonard
		Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002

In connection with this Annual Report of DYNASIL CORPORATION OF AMERICA (the "Company") on Form 10-K for the period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Peter Sulick, Interim President and Chief Executive Officer of the Company and Thomas C. Leonard, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

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

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

		/s/ Peter Sulick
		Peter Sulick
		Interim President and Interim Chief Executive Officer

		/s/ Thomas C. Leonard
		Thomas C. Leonard
		Chief Financial Officer

December 20, 2013

Ex 99.1

v363155_ex 99.htm

EXHIBIT 99.1

Contacts:

Patty Kehe

Corporate Secretary

Dynasil Corporation of America

Phone: 617.668.6855

pkehe@dynasil.com

Dynasil Corporation of America Reports
Fiscal Year 2013 Financial Results

Filing of Annual Report on Form 10-K

Watertown, MA, December 19, 2013 – Dynasil Corporation of America (NASDAQ: DYSL), a developer of sensing, detection and analysis technology for homeland security, medical and industrial applications, today announced financial results for fiscal year ended September 30, 2013 and the filing of its Annual Report on Form 10-K.

Revenues for the fiscal year ended September 30, 2013 were $42.8 million. This represents a decrease of $5.1 million or 10.6% over revenues for the fiscal year ended September 30, 2012 of $47.9 million.

Gross profit for fiscal 2013 totaled $18.1 million, or 42.3% of net revenue, compared with $19.5 million, or 40.7% of revenue for fiscal 2012. Gross profit margin improved primarily as a result of higher gross margins in the Contract Research segment partially offset by a decrease in the Instruments segment.

Selling, general and administrative expenses decreased $1.5 million to $19.4 million or 45.4% of sales in fiscal year 2013, from $20.9 million or 43.7% of sales for fiscal year 2012. SG&A expenses decreased primarily as a result of the substantial completion of the engineering costs associated with the product refreshes in our Instruments segment.

The Instruments segment had the greatest decrease in SG&A costs, decreasing $1.6 million to $3.5 million in 2013 compared to $5.1 million in 2012. This segment had two main product lines: a hand-held lead paint analyzer and a medical gamma probe used primarily in breast cancer treatment. The Company began a product refresh on both product lines in 2012 to enhance them with new features and functionality to maintain their market positions. The Company spent $1.3 million in fiscal year 2012 on research and development on the products and significant additional amounts on sales and marketing efforts in advance of the new product launches. In fiscal year 2013, these costs and other SG&A costs were substantially reduced while awaiting regulatory approval.

The Company’s updated medical probe, the Navigator 2.0, was approved for sale in May of 2013. However, as a result of the delays associated with both product line updates and an internal review of strategic alternatives for the lead paint analyzer product, the Company performed an interim impairment test of the Instrument segment and recorded an impairment of goodwill and intangibles totaling $6.8 million in the quarter ending March 31, 2013.

“As reported previously, we are making important steps in right-sizing our business, reducing outstanding indebtedness, and eliminating cost. With the spin out of our tissue sealant technology to the newly-formed subsidiary, Xcede Technologies, Inc. in October and the divestiture of our XRF product line in November, we continue to make significant improvements to our cash flows and our balance sheet,” said Peter Sulick, Chairman and CEO of Dynasil. “Going forward, we are focused on improving our liquidity and pursuing strategic initiatives that best position the company for future profitable growth.”

Including the goodwill impairment charge, net loss for the 12 months ended September 30, 2013 was $8.7 million, or $0.59 per share, compared with a loss of $4.3 million, or $0.29 per share, in fiscal 2012.

Liquidity

On December 31, 2012, the Company announced it was in default of certain financial covenants set forth in the terms of its outstanding indebtedness with respect to its fiscal year ended September 30, 2012. We continued to be in default throughout our fiscal year ended September 30, 2013 and currently remain in default. As a result, our lenders have the ability to require immediate payment of all indebtedness under our loan agreements. While the lenders have not exercised this right, their ability to require immediate payment has caused all of our outstanding indebtedness to be accelerated to current classification in our consolidated financial statements.

The Company has made all principal and interest payments due to its senior lender through the date of this filing. In addition to making the required principal payments of approximately $1.9 million during fiscal year 2013, the Company also repaid an additional $300,000 of principal in connection with the contribution of its tissue sealant intellectual property to Xcede Technologies, Inc., a joint venture with Mayo Clinic formed on or about October 1, 2013 to spin out and separately fund the development of the tissue sealant technology. Xcede has initiated financing efforts and has received funding from internal sources and outside investors.

Subsequent to fiscal year-end, the Company also repaid approximately $1.25 million of principal to its senior lender from the proceeds received from the sale of its lead paint business included in the Instruments segment. Management is continuing to pursue potential other sales transactions which, if consummated, would result in additional principal payments to the bank and also expects to continue discussions with its lenders to address the financial covenant situation. Because of the continuing default of the financial covenants and the possibility of an acceleration of the indebtedness by the lenders, the Company has classified all its outstanding indebtedness as a current liability in the accompanying consolidated balance sheets.

Given the Company’s results and the uncertainty created by the defaults under the outstanding indebtedness, the Company's independent registered public accounting firm has included a “going concern” explanatory paragraph in its audit opinion for the year ended September 30, 2013.

About Dynasil

Dynasil Corporation of America (NASDAQ: DYSL) develops and manufactures detection and analysis technology, precision instruments and optical components for the homeland security, medical and industrial markets. Combining world-class technology with expertise in research and materials science, Dynasil is commercializing products including dual-mode radiation detection solutions for Homeland Security and commercial applications, and sensors for non-destructive testing. The Company is building a relationship with the Mayo Clinic to develop early-stage opportunities such as advanced biomedical technologies. Dynasil has an impressive and growing portfolio of issued and pending U.S. patents. The Company is based in Watertown, Massachusetts, with additional operations in Mass., Minn., NY, NJ and the United Kingdom. More information about the Company is available at www.dynasil.com .

Forward-looking Statements
This press release may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding results of operations, our default under the financial covenants under our loan agreement with Santander Bank and Massachusetts Capital Resource Company, Xcede obtaining financing from outside investors, the commercialization of our products including our dual mode detectors, our development of new technologies including at Dynasil Biomedical, the adequacy of our current financing sources to fund our current operations, our growth initiatives, our capital expenditures and the strength of our intellectual property portfolio. These forward-looking statements may be identified by the use of words such as “plans”, “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” “continue” or similar terms, though not all forward-looking statements contain such words. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to resolve our current default under our outstanding indebtedness, 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, our ability to address our material weaknesses in our internal controls, 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, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to deleverage our balance sheet, our ability to identify and execute on acquisition opportunities and integrate such acquisitions into our business, and seasonality, as well as the uncertainties set forth in the Company’s Annual Report on Form 10 K and from time to time in the Company's other filings with the Securities and Exchange Commission. The Company disclaims any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

	September 30,		September 30,
	2013		2012
ASSETS
Current Assets
Cash and cash equivalents	$	2,436,828	$	3,414,880
Accounts receivable, net		3,657,320		5,475,142
Costs in excess of billings and unbilled receivables		1,537,318		1,735,798
Inventories, net of reserves		3,140,244		3,271,700
Prepaid expenses and other current assets		1,291,942		1,460,836
Total current assets		12,063,652		15,358,356

Property, Plant and Equipment, net		4,773,779		4,984,150
Other Assets
Intangibles, net		3,484,583		6,703,305
Goodwill		6,240,983		10,254,160
Deferred financing costs, net		114,229		165,457
Total other assets		9,839,795		17,122,922

Total Assets	$	26,677,226	$	37,465,428

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt	$	9,819,048	$	11,984,492
Capital lease obligations, current		124,383		-
Accounts payable		2,056,262		2,416,397
Deferred revenue		515,790		694,672
Accrued expenses and other liabilities		2,846,850		2,809,580
Total current liabilities		15,362,333		17,905,141

Long-term Liabilities
Capital lease obligations, net of current portion		232,173		-
Pension liability		249,966		345,443
Deferred tax liability		186,866		371,256
Total long-term liabilities		669,005		716,699

Stockholders' Equity		10,645,888		18,843,588

Total Liabilities and Stockholders' Equity	$	26,677,226	$	37,465,428

DYNASIL CORPORATION OF AMERICA

CONSOLIDATED STATEMENTS OF OPERATIONS

	2013			2012
Net revenue	$	42,752,832		$	47,887,150
Cost of revenue		24,667,087			28,381,407
Gross profit		18,085,745			19,505,743
Operating expenses:
Sales and marketing expenses		1,746,865			1,729,703
Research and development expenses		2,307,407			2,810,778
General and administrative expenses		15,371,494			16,386,454
Impairment of goodwill and long-lived assets		6,829,072			2,284,499
Total operating expenses		26,254,838			23,211,434

Loss from operations		(8,169,093	)		(3,705,691	)
Interest expense, net		861,038			639,096

Loss before income taxes		(9,030,131	)		(4,344,787	)
Income tax credit		(302,960	)		(41,021	)

Net loss	$	(8,727,171	)	$	(4,303,766	)

Net loss	$	(8,727,171	)	$	(4,303,766	)

Other comprehensive loss:

(Increase) decrease in pension liability	$	92,513		$	(345,443	)
Foreign currency translation		(1,734	)		109,783
Total comprehensive loss	$	(8,636,392	)	$	(4,539,426	)

Basic net loss per common share	$	(0.59	)	$	(0.29	)
Diluted net loss per common share	$	(0.59	)	$	(0.29	)

Weighted average shares outstanding
Basic		14,812,858			14,811,294
Diluted		14,812,858			14,811,294