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DLYT > SEC Filings for DLYT > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for DAIS ANALYTIC CORP


14-Nov-2012

Quarterly Report


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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q and in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2012.

THIS FILING, INCLUDING BUT NOT LIMITED TO "MANAGEMENT'S DISCUSSION AND ANALYSIS", CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS "ANTICIPATED,"
"BELIEVE," "EXPECT," "PLAN," "INTEND," "SEEK," "ESTIMATE," "PROJECT," "WILL,"
"COULD," "MAY," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD- LOOKING STATEMENTS AS A RESULT OF SEVERAL FACTORS, INCLUDING THE RISKS FACED BY US AS DESCRIBED BELOW AND ELSEWHERE IN THIS FORM 10-Q AS WELL AS IN OUR FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 2012. IN LIGHT OF THESE RISKS AND UNCERTAINTIES THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-Q WILL OCCUR. WE HAVE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE, EXCEPT AS REQUIRED BY FEDERAL SECURITIES LAWS AND WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. WE MAY NOT UPDATE THESE FORWARD-LOOKING STATEMENTS, EVEN THOUGH OUR SITUATION MAY CHANGE IN THE FUTURE.

OVERVIEW

We have developed and patented a nano-structure polymer technology, which is being commercialized in products based on the functionality of these materials. We believe the applications of our technology have promise in a number of diverse market segments and products.

The initial product focus of the Company is ConsERV, an energy recovery ventilator. Our primary focus is to expand our marketing and sales of our ConsERV products. We also have new product applications in various stages of development. We believe that three of these product applications, including an advanced air conditioning system which is projected to be more energy efficient and have lower emissions compared to current HVAC equipment, a sea-water desalination product and an electrical energy storage device, may be brought to market in the foreseeable future if we receive adequate capital funding.

We expect ConsERV™ to continue to be our focused commercial product through 2012 with a growing emphasis on moving the development of the NanoClear and NanoAir technologies towards commercialization.

REVENUES

We generate our revenues primarily from the sale of our ConsERV™ Systems, cores and moisture transfer membrane in largely commercial HVAC markets with a small amount of revenue coming from residential sales to consumers and HVAC distributors. Sales channels for our ConsERV™ products include OEMs, distributors, retailers, and consumers. We also occasionally license our technology to strategic partners and sell various prototypes of other product applications that use our polymer technology.


Our revenue growth is expected to arise from (i) fulfilling the ventilation needs from the requirements generated by the growing marketplace for "energy consultants" who work to lower their client's energy costs and emissions, (ii) sales from the Company's own 'customer direct' sales activities, all of which focus on the sale of product primarily into the commercial user marketplace with a growing emphasis on low rise structures (small commercial buildings, multi-purpose structures, and residences) and (iii) royalties and sale of products to our ConsERV licensee. In addition, the Company will work to secure orders for ConsERV™ "core only" sales from HVAC equipment manufacturers and from distribution firms servicing the equipment needs of the HVAC installer community. We are focused on creating additional license/supply relationships with HVAC or ERV OEMs preferably having a dominant presence in existing direct related sales channels.

COST OF SALES

Our cost of sales consists primarily of materials (including freight), direct labor, and outsourced manufacturing expenses incurred to produce our ConsERV™ products.

We are dependent on third parties to manufacture the key components needed for our nano-structured based materials and value added products made with these materials. Accordingly, a supplier's failure to supply components in a timely manner, or to supply components that meet our quality, quantity and cost requirements or our technical specifications, or the inability to obtain alternative sources of these components on a timely basis or on terms acceptable to us, would create delays in production of our products or increase our unit costs of production. Certain of the components contain proprietary products of our suppliers, or the processes used by our suppliers to manufacture these components are proprietary. If we are required to replace any of our suppliers, while we should be able to obtain comparable components from alternative suppliers at comparable costs, it would create a delay in production.

Our cost of sales may fluctuate due to a number of factors, including, but not limited to:

• A change in key suppliers or the prices that they charge for the fundamental components of our ConsERV™ products;

• An increase in the labor resources needed to expand the production of our ConsERV™ products;

• Commercialization of new product applications of our polymer technology;

• Continued technological improvements in key materials or configuration(s); and

• Additional outsourcing of our manufacturing and assembly processes with strategic partners to reduce our 'per unit' cost structure.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Our selling, general and administrative expenses consist primarily of payroll and related benefits, share-based compensation, professional fees, marketing and channel support costs, and other infrastructure costs such as insurance, information technology and occupancy expenses.

Our selling, general and administrative expenses may fluctuate due to a variety of factors, including, but not limited to:

• Additional expenses as a result of being a reporting company including, but not limited to, director and officer insurance, director fees, SEC reporting and compliance expenses, transfer agent fees, additional staffing, professional fees and similar expenses;

• Additional infrastructure needed to support the expanded commercialization of our ConsERV™ products and/or new product applications of our polymer technology for, among other things, administrative personnel, physical space, marketing and channel support and information technology; and

• The fair value of new share-based awards, which is based on various assumptions including, among other things, the volatility of our stock price


Results of Operations

Summary of Three Months Ended September 30, 2012 Results of Operations

The following table sets forth, for the periods indicated, certain data derived
from our Statements of Operations and certain of such data expressed as a
percentage of revenues:

                                                                  Three Months Ended September 30,
                                                                     2012                   2011

Revenues                                                       $        849,469       $        625,949
Percentage of revenues                                                    100.0 %                100.0 %
Cost of goods sold                                             $        518,166       $        466,271
Percentage of revenues                                                     61.0 %                 74.5 %
Research and development expenses, net grant revenue           $        192,749       $         (3,838 )
Percentage of revenues                                                     22.7 %                  0.6 %
Selling, general and administrative expenses                   $        418,696       $        487,961
Percentage of revenues                                                     49.3 %                 78.0 %
Impairment of fixed assets                                     $         62,288       $              0
Percentage of revenues                                                      7.3 %                  0.0 %
Interest expense                                               $         94,893       $        105,367
Percentage of revenues                                                     11.2 %                 16.8 %
Change in fair value of warrant liability (gain)               $       (108,633 )     $        126,008
Percentage of revenues                                                     12.8 %                 20.1 %
Amortization of discount on convertible note payable           $              0       $        341,138
Percentage of revenues                                                      0.0 %                 54.5 %
Net income                                                     $       (328,690 )     $       (895,384 )
Percentage of revenues                                                     38.7 %                143.0 %

REVENUES: Total revenues for the three months ended September 30, 2012 and 2011 were $849,469 and $625,949, respectively, an increase of $223,520 or 35.7%. The increase in revenues in the 2012 period is primarily attributable to the overall increase in the number of units sold and the amount of "core only" sales over the same period in 2011.

COST OF GOODS SOLD: Cost of goods sold increased $51,895 to $518,166 and represented 61% of revenues, for the three months ended September 30, 2012 compared to $466,271 or 74.50% of revenues for the three months ended September 30, 2011. Gross profit margin increased from 25.5% in 2011 to 39% in 2012. The increase in the gross profit margin was due to the increase in sales of higher gross margin products and the reduction of Dais personnel assigned to the production team.

RESEARCH AND DEVELOPMEN EXPENSES, NET OF GRANT REVENUE: Research and development expenses, net of grant revenue of $192,749 for the three months ended September 30, 2012 increased from ($3,838) for the same period ended September 30, 2011. The increase was primarily due to no grant revenues being earned during the three months ended September 30, 2012.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $418,696 for the three months ended September 30, 2012 decreased $69,265 from $487,961 in the same period of 2011 or 14%. The decrease was primarily due to a decrease in stock based compensation.

IMPAIRMENT OF FIXED ASSETS: Impairment of fixed assets increased to $62,288 for the three months ended September 30, 2012 compared to $0 for the same period ended September 30, 2011. This increase was due to the Company impairing one of its demonstration units as it was no longer functioning.

INTEREST EXPENSE: Interest expense was $94,893 for the three months ended September 30, 2012 compared to $105,367 for the same period of 2011, a decrease of $10,474. The decrease was primarily due to the repayment of the secured loan in 2012.


AMORTIZATION OF DISCOUNT ON NOTE PAYABLE: Amortization of discount on note payable decreased to $0 for the three months ended September 30, 2012 compared to $341,138 for the same period ended September 30, 2011. The decrease was due to the related note payable reaching maturity in the first quarter 2012.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability decreased by $234,641 for the three months ended September 30, 2012 to ($108,633) from $126,008 in the prior period ended September 30, 2011 due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model. See Note 8 in the accompanying Financial Statements.

NET INCOME: Net loss for the three months ended September 30, 2012 decreased by $566,694 to $328,690 from $895,384 for the three months ended September 30, 2011. The decrease in net income is primarily due to the decrease in the change in the fair value of the warrant liability and increase in revenues as discussed above.

Summary of Nine Months Ended September 30, 2012 Results of Operations

The following table sets forth, for the periods indicated, certain data derived
from our Statements of Operations and certain of such data expressed as a
percentage of revenues:

                                                                 Nine Months Ended September 30,
                                                                     2012                 2011

Revenues                                                       $      2,537,967       $   2,608,722
Percentage of revenues                                                    100.0 %             100.0 %
Cost of goods sold                                             $      1,707,554       $   1,973,835
Percentage of revenues                                                     67.3 %              75.7 %
Research and development expenses, net grant revenue           $        427,743       $       9,317
Percentage of revenues                                                     16.9 %               0.4 %
Selling, general and administrative expenses                   $      1,383,106       $   2,202,771
Percentage of revenues                                                     57.0 %              84.4 %
Impairment of fixed assets                                     $         62,288       $           0
Percentage of revenues                                                      2.5 %               0.0 %
Amortization of discount on convertible note payable           $        358,555       $     791,706
Percentage of revenues                                                     14.1 %              30.3 %
Interest expense                                               $        254,208       $     235,239
Percentage of revenues                                                     10.0 %               9.0 %
Change in fair value of warrant liability (gain)               $     (1,608,486 )     $     783,944
Percentage of revenues                                                     63.4 %              30.1 %
Net income (loss)                                              $        (46,936 )     $  (3,385,852 )
Percentage of revenues                                                      1.8 %             129.8 %

REVENUES: Total revenues for the nine months ended September 30, 2012 and 2011 were $2,537,967 and $2,608,722, respectively, a decrease of $70,755 or 2.7%. The decrease in revenues in the 2012 period is primarily attributable to customer concerns related to our ability to repay the convertible secured promissory note in the principal amount of $1.5 million. The note was repaid on July 13, 2012. In addition, during the nine month period 2012, we experienced a small decrease in sales due to relocating the production of our enthalpy cores to our Odessa location. The time required to establish the production line and complete quality assurance procedures resulted in fewer cores being produced than anticipated and hence fewer systems were shipped. During the nine months ended September 30, 2012 and 2011, four customers accounted for approximately 63% and 55% of revenues, respectively.


COST OF GOODS SOLD: Cost of goods sold decreased $266,281 to $1,707,554 and represented 67.3% of revenues, for the nine months ended September 30, 2012 compared to $1,973,835 or 75.7% of revenues for the nine months ended September 30, 2011. Gross profit margin increased from 24% in 2011 to 33% in 2012. The increase in the gross profit margin was due to the recognition of the $150,000 nonrefundable deposit related to the termination of the Genertec and the CAST agreements net of the increase in costs related to the relocation of the production of our enthalpy cores to our Odessa location, which required an increase in labor costs and additional training for quality assurance procedures.

RESEARCH AND DEVELOPMEN EXPENSES, NET OF GRANT REVENUE: Research and development expenses, net of grant revenue of $427,743 for the nine months ended September 30, 2012 increased from $9,317 for the same period ended September 30, 2011. The increase was primarily due to minimal grant revenues being earned during the nine months ended September 30, 2012.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $1,383,103 for the nine months ended September 30, 2012 represented a decrease of $819,665 from $2,202,771 in the same period of 2011. The decrease was primarily due to a decrease of $559,950 in stock based compensation expense as the Company did not approve as many equity awards in 2012. It was also due to a $100,096 decrease in professional fees as the Company entered into fewer consulting agreements. Overall, payroll expense decreased by $79,334 and postage and shipping expense decreased by $20,434. Finally, the Company reduced travel and entertainment expense by $26,918.

IMPAIRMENT OF FIXED ASSETS: Impairment of fixed assets increased to $62,288 for the nine months ended September 30, 2012 compared to $0 for the same period ended September 30, 2011. This increase was due to the Company impairing one of its demonstration units as it was no longer functioning.

INTEREST EXPENSE: Interest expense was $254,208 for the nine months ended September 30, 2012 compared to $235,239 for the same period of 2011, an increase of $18,969. The increase was primarily due to the secured and unsecured notes interest rate increasing to 20% and the issuance of the 2012 Note.

AMORTIZATION OF DISCOUNT ON NOTE PAYABLE: Amortization of discount on note payable decreased to $358,555 for the nine months ended September 30, 2012 compared to $791,706 for the same period ended September 30, 2011. The decrease was due to the related note payable reaching maturity in first quarter of 2012.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability decreased by $2,392,430 for the nine months ended September 30, 2012 to ($1,608,486) from $783,944 in the prior period ended September 30, 2011 due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model. See Note 8 in the accompanying Financial Statements.

NET LOSS: Net loss for the nine months ended September 30, 2012 decreased by $3,338,916 to $46,936 from $3,385,852 for the nine months ended September 30, 2011. The decrease in net loss is primarily due to the increase in the change in fair value of warrant liability and the decrease in interest expense as discussed above.

Liquidity and Capital Resources

The Company finances its operations primarily through sales of its ConsERV™ products, sale of its common stock, license agreements and the issuance of promissory notes.

Our historical revenues have not been sufficient to sustain our operations. We have not achieved profitability in any year since inception and we expect to continue to incur net losses and negative cash flow from operations until we can produce sufficient revenues to cover our costs, which are not expected for several years. Furthermore, even if we achieve our goal of selling a greater number of ConsERV™ products, we anticipate that we will continue to incur losses until we can cost-effectively produce and sell our products to a wider market. Our profitability will require the continued successful commercialization of our ConsERV™ products and any future products we develop. No assurances can be given when this will occur.


Unsecured Note
On March 22, 2011, the Company entered into a Securities Amendment and Exchange Agreement and an Amended and Restated Convertible Promissory Note ("Convertible Note", collectively "Exchange Agreements") with an investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the investor amended and restated the $1,000,000 unsecured promissory note to, among other things, add a conversion option and extend the maturity date to March 22, 2012 (as amended and restated, the "2011 Convertible Note"). Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 was due in full on March 22, 2012. The initial conversion price is $0.26 per share, which is subject to adjustment for standard anti-dilution provisions. All interest and principal due and owing pursuant to the 2011 Convertible Note was paid on October 29, 2012.

On March 22, 2011, in connection with the above Exchange Agreements, the Company entered into amendments to existing warrant agreements with the investor to extend the terms of the existing stock purchase warrants, dated on or about December 31, 2007 and March 12, 2009, respectively, to March 22, 2016 and to provide for cashless exercise unless such warrant shares are registered for resale under a registration statement. In addition, on March 22, 2011, the Company issued an additional stock purchase warrant to the investor. Subject to the terms of the warrant, the investor may purchase 1,000,000 shares of the Company's common stock at $0.45 per share, exercisable commencing on the earliest of the consummation of the qualified offering (as defined in the Exchange Agreements), the date of conversion of the 2011 Convertible Note in full, or the date of conversion of the Convertible Note by the investor in the greatest number of shares of the Company's common stock not to exceed 9.99% beneficial ownership of Company outstanding common stock and terminating on March 22, 2016.

The 2011 Convertible Note is a hybrid financial instruments that blends characteristics of both debt and equity securities. The note embodies settlement alternatives to the holder providing for either redemption of principal and interest in cash (forward component) or conversion into the Company's common stock (embedded conversion feature). The forward component was valued using the present value of discounted cash flows arising from the contractual principal and interest payment terms and the embedded conversion feature was valued using the Monte Carlo simulation method. The fair value of the 2011 Convertible Note was estimated to be $1,964,905 on the date of the exchange, which resulted in a loss on extinguishment of debt of $964,905. Further, in accordance with ASC 470-20-25 and ASC 470-50-40, the net premium of $964,905 associated with the 2011 Convertible Note was reclassified to capital in excess of par value under the presumption that such net premium represented a capital contribution. Consequently, the 2011 Convertible Note is being carried at face value. The fair value of the additional warrant to purchase 1,000,000 shares and the value associated with the previously issued warrants that were amended was determined to be $716,890 using the Black-Scholes option model and is included in the aggregate loss on extinguishment of $1,681,795. Since the loan is held by a related party, the loss on extinguishment has been treated as a capital transaction and, as a result, this transaction had no net effect on capital in excess of par value.

Secured Note
Also, on March 22, 2011, the Company entered into a 10% note and warrant purchase agreement, secured convertible promissory note and Patent Security Agreement ("Financing Agreements") with the investor. Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, the investor provided a loan in the principal amount of $1,500,000 to the Company, which was secured by all patents, patent applications and similar protections of the Company and all rents, royalties, license fees and "accounts" with respect to such intellectual property assets. Pursuant to this secured convertible promissory note ("Secured Note"), interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 was due and payable on March 22, 2012, subsequently extended to May 7, 2012, but repayment is accelerated upon a qualified offering (as defined in the note). The initial conversion price was $0.26 per share. All interest and principal due and owing pursuant to this Secured Note was paid on July 13, 2012. On July 13, 2012, the Patent Security Agreement was terminated coincident with payment of the Secured Note.

On March 22, 2011, in connection with the Financing Agreements, the Company issued a Stock Purchase Warrant to the investor to purchase 3,000,000 shares of the Company's common stock at $0.45 per share, exercisable until March 22, 2016. The Warrant was fair valued on the date of issuance, which amounted to $1,204,787. The warrant value was recorded as a debt discount based on the relative fair value of the warrant to the total proceeds received, which amounted to $435,240. The Warrant was fair valued using the Black-Scholes-Merton valuation model. In addition, the debt contained a beneficial conversion feature, which was valued at the date of issuance at $1,762,163; however, since this amount is in excess of the net value of the debt less the warrant discount, the beneficial conversion feature will be limited to $1,064,760 and recorded as a discount on the loan. The total debt discount of $1,500,000 is being amortized using the effective interest method over the 12-month term of the Secured Note. For the three and nine months ended September 30, 2012, the Company recognized $0 and $358,555, respectively, in additional interest expense representing amortization of this debt discount. For the three and nine months ended September 30, 2011, the Company recognized $341,138 and $791,706, respectively, in additional interest expense representing amortization of this debt discount.


The fair value of warrants issued in 2011 related to the above debt transaction were calculated using the Black-Scholes model with the following assumptions:
Expected life in years: 5-10 years; Estimated volatility 115%-117%, Risk-free interest rate: 1.89%-2.07%; Dividend yield: 0%.

Forbearance Agreement
On June 15, 2012, we entered into a forbearance agreement (the "Forbearance Agreement"), with the investor. Under the Forbearance Agreement, the investor agreed to forebear from disposing of or selling any collateral secured by the Patent Security Agreement until the earliest of: (i) July 15, 2012; (ii) two business days after our receipt of a written notice after any subsequent event of default, (iii) two business days after our receipt of a written notice that any representations, warranties or information we provided to the investor in any document or instrument in connection with the Forbearance Agreement is materially false, incomplete or misleading, (iv) two business days after our receipt of a written notice that a proceeding or other action has been commenced . . .

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