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DLYT > SEC Filings for DLYT > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for DAIS ANALYTIC CORP


29-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control.

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 world- wide. 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 2013 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™ products in largely commercial HVAC markets with a small amount of revenue coming from residential sales to HVAC distributors. Sales channels for our ConsERV™ products include OEMs, our North and South America licensee, distributors and retailers. We also occasionally license our technology to other strategic partners and sell various prototypes of other product applications that use our polymer technology.

Our near term revenue growth is dependent on continued sales from (i) more seasoned independent sales representatives world-wide, (ii) a greater number of independent sales representatives in certain areas, (iii) the growth of our licensees sales in North and South America (iv) fulfilling the ventilation needs of the growing "energy consultant" marketplace which work to lower their client's energy costs and emissions, and (v) from the Company's own 'customer direct' sales activities, all of which focus on the sale of product primarily into the commercial user marketplace. As a result of the License and Supply Agreement with MGE, however, we expect both revenue and cost of goods sold to decrease in the first quarter of 2013. In addition, the Company, its licensee and its independent sales representative sales force 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 also working to create license/supply relationships with HVAC or ERV OEMs preferably having a dominant presence in existing direct related sales channels world-wide.


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) to reduce our 'per unit' cost structure; 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

The following table sets forth, for the periods indicated, certain data derived from our Statements of Operations:

                                                                Year Ended
                                                               December 31,
                                                           2012             2011
Revenues                                               $  3,656,080     $  3,504,054
Percentage of revenues                                        100.0 %          100.0 %

Cost of goods sold                                     $  2,434,610     $  2,563,250
Percentage of revenues                                        66.6. %           73.2 %

Research and development expenses, net grant revenue   $    453,927     $     52,275
Percentage of revenues                                         12.4 %            1.5 %

Selling, general and administrative expenses           $  1,938,553     $  2,992,156
Percentage of revenues                                         53.0 %           85.4 %

Impairment of equipment                                $     62,288     $         --
Percentage of revenues                                          1.7 %            0.0 %

Amortization of discount on convertible note payable   $    358,555     $  1,141,445
Percentage of revenues                                          9.8 %           32.6 %

Interest expense                                       $    278,091     $    297,010
Percentage of revenues                                          7.6 %            8.5 %

Change in fair value of warrant liability              $ (1,888,218 )   $ (1,204,483 )
Percentage of revenues                                         51.6 %           34.4 %

Net income (loss)                                      $     21,339     $ (2,335,204 )
Percentage of revenues                                          0.6 %          (66.6 )%


DECEMBER 31, 2012 COMPARED TO DECEMBER 31, 2011

REVENUES: Total revenues for the year ended December 31, 2012 and 2011 were $3,656,080 and $3,504,054, respectively, an increase of $152,026, or 4.3%. The increase in revenues for 2012 is primarily attributable to the overall increase in the number of sales of engineered ConsERV products in 2012 and a recognition of $150,000 of deferred revenue related to the Genertec Agreement. During each of the years ended December 31, 2012 and 2011, four customers accounted for approximately 60% and 57% of revenues, respectively.

COST OF GOODS SOLD: Cost of goods sold was $2,434,610 and $2,563,250 or 67% and 73% of revenues for the years ended December 31, 2012 and 2011, respectively. The decrease in 2012 of $128,640 is due to the reduction in the number of management personnel involved in production. Gross profit margin increased to 30% in 2012, excluding $150,000 deferred revenue recognized in 2012 related to the Genertec Agreement, from 27% in 2011. The increase in the gross profit margin was due to the reduction in personnel costs allocated to production.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses were $1,938,553 for the year ended December 31, 2012, compared to $2,992,156 for the year ended December 31, 2011, a decrease of $1,053,603 or 35%. This decrease is primarily due to a decrease in stock based compensation of approximately $621,000, a decrease in professional fees of approximately $158,000, a decrease in travel expenses of $56,500 and a $122,000 decrease in payroll costs.

IMPAIRMENT OF EQUIPMENT: Loss on impairment of equipment was $62,288 for the year ended December 31, 2012, as compared to $0 for the year ended December 31, 2011. The increase in impairment is due to the disassembly of a prototype unit that was not functional.

AMORTIZATION OF DISCOUNT ON NOTE PAYABLE: Amortization of discount on note payable was $358,555 for the year ended December 31, 2012 compared to $1,141,445 for the same period of 2011, a decrease of $782,890 or 69%. During the year ended December 31, 2011, the Company had recorded a discount and embedded beneficial conversion feature on a convertible note which was amortized over the life of the related note, these amounts were fully amortized in 2012.

INTEREST EXPENSE: Interest expense was $278,091 for the year ended December 31, 2012 compared to $297,010 for the same period of 2011, a decrease of $18,919 or 6%. During the year ended December 31, 2011, there was an additional $1.5 million of debt outstanding which was all repaid during 2012 resulting in a lower interest expense in 2012.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability increased by $683,735 for the year ended December 31, 2012 to income of $1,888,218 from $1,204,483 in the prior year due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model. See Note 11 in the Financial Statements for further explanation.

NET INCOME (LOSS): Net income for the year ended December 31, 2012 increased by $2,356,543 to $21,339 from ($2,335,204) for the year ended December 31, 2011. The increase in net income is primarily due to the increase in sales and decreases in cost of sales, general and administrative expenses and interest expense as well as the increase in the change in fair value of the warrant liability.


LIQUIDITY AND CAPITAL RESOURCES

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

Our historical revenues have not been sufficient to sustain our operations. We have achieved profitability in only one 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 successful commercialization of our ConsERV™ products and any future products we develop. No assurances can be given when this will occur.

On October 17, 2012, Dais Analytic Corporation (the "Company") entered into a Securities Purchase Agreement (the "SPA") with an investor, Green Valley International Investment Management Company Limited (the "Investor") pursuant to which the Company will offer up to $7.0 million of the Company's common stock, $0.01 par value per share (the "Common Stock"), and warrants (the "Warrants") to purchase up to 17,500,000 shares of Common Stock (such offer being the "Offering").Pursuant to the terms and conditions of the SPA, Company will issue the Common Stock and Warrants in three tranches. Upon the receipt of the funds for the first tranche on or about October 26, 2012, the Company will issue $2.0 million of newly issued Common Stock for $0.10 per share and receive warrants for 5,000,000 Warrants. Upon the receipt of the funds for the second tranche on or about November 20, 2012, the Company will issue $2.0 million of newly issued Common Stock for $0.10 per share and receive warrants for 5,000,000 Warrants. Upon the receipt of the funds for the third tranche on or about December 28, 2012, the Company will issue $3.0 million of newly issued Common Stock for $0.10 per share and receive warrants for 7,500,000 Warrants. The Warrants are exercisable for 60 months beginning on the date of their issuance. The warrants have an exercise price of $0.30, and are subject to standard anti-dilution adjustments for stock splits and other subdivisions. Pursuant to terms of the Offering, officers of the Company and the Investor have signed lock-up agreements restricting the sale of Common Stock. The Investor does not have any registration rights with respect to the Common Stock or Warrants. No underwriter or placement agent was used in the sale of the Common Stock or Warrants. On December 28, 2012, Dais Analytic Corporation (the "Company") amended its Securities Purchase Agreement, dated October 17, 2012 (the "Securities Purchase Agreement"), with Green Valley International Investment Management Company Limited (the "Investor") pursuant to which the Investor will purchase up to $7.0 million of the Company's common stock, $0.01 par value per share (the "Common Stock"), and warrants (the "Warrants") to purchase up to 17,500,000 shares of Common Stock. Pursuant to the terms of the Securities Purchase Agreement, the Investor has purchased $1,750,000 of Common Stock and Warrants and the Company as recorded a common stock payable for an additional amount of $19,255. The amendment requires the Purchaser to purchase the remaining Common Stock and Warrants on or before January 31, 2013. This extension will allow the Company and the Investor to create and capitalize a wholly owned subsidiary to be organized and located in China (the "Dais China Subsidiary"). Pursuant to the amendment, the Company shall use $4.0 million of the aggregate proceeds from the sale of Common Stock and Warrants for capital expenditures, working capital, and general business purposes. The Company shall use the remaining proceeds from the sale of the Common Stock and Warrants to create and capitalize the Dais China Subsidiary. In 2012, the Company sold and issued, in connection with the SPA, 17,500,000 shares of its common stock to GVI for $1,750,000. In addition, as part of the purchase it issued GVI a warrant to purchase 4,375,000 shares of the Company's common stock with an exercise period of five years from the date of issue at an exercise price of $.30 per share. In 2013, pursuant to the terms and conditions of the above offering, Company sold and issued 492,280 shares of common stock to GVI for $49,228 in cash together with a warrant to purchase 123,070 shares of the Company's common stock. The warrant has an exercise period of five years from the date of issue at an exercise price of $0.30 per share. The SPA expired, per its terms and conditions, on January 31, 2013. The parties are in discussions to permit GVI to purchase securities on similar terms and conditions.


Unsecured Note
In December 2009, the Company entered into a $1,000,000 unsecured note payable with an investor which carried interest at 10% per annum. On March 22, 2011, the Company entered into a securities amendment and exchange agreement and an amended and restated convertible promissory note (collectively "Exchange Agreements") with the 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 (as amended and restated, the "2011 Convertible Note"). The initial conversion price is $0.26 per share, which is subject to adjustment for standard anti-dilution provisions. 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, which was subsequently extended to May 7, 2012. The Company did not repay the 2011 Convertible Note by May 7, 2012 and on June 15, 2012, the Company entered into a forbearance agreement with the investor as discussed below. On October 29, 2012, we paid in full all principal and interest due on this note.

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 (the "Secured Note") and a 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. The initial conversion price is $0.26 per share, which is subject to adjustment for standard anti-dilution provisions. 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. The Company did not repay the Secured Note by May 7, 2012 and on June 15, 2012, the Company entered into a forbearance agreement with the investor as discussed below. On July 13, 2012, we paid in full all principal and interest due pursuant to this 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 years ended December 31, 2012 and 2011, the Company recognized $358,555 and $1,141,445, respectively, in additional expense representing amortization of this debt discount, respectively.

The fair value of warrants issued in 2011 related to the above debt transactions 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 by any creditor against us, other than the investor (v) the date on which a court enters an order for relief or take any similar action in respect of us in an involuntary case under any applicable bankruptcy law, or (vi) the date on which a petition for relief under any applicable bankruptcy, is filed by or against us, each as further described in the Forbearance Agreement.

In connection with the Forbearance Agreement, interest on the 2011 Convertible Note and the Secured Note was increased to 20% per annum effective June 14, 2012.

On July 13, 2012 we paid in full all principal and interest due pursuant to the Secured Note and the patent security agreement was terminated. On October 29, 2012 we paid in full all principal and interest due pursuant to the 2011 Convertible Note. Upon payment of the 2011 Convertible Note the Forbearance Agreement was terminated.

2012 Secured Convertible Promissory Note On July 13, 2012, the Company issued a secured convertible promissory note and patent security agreement (collectively, the "Agreements") to an investor who is a shareholder of the Company. Pursuant to the terms and subject to the conditions set forth in the Agreements, the investor provided a loan in the amount of $2,000,000 to the Company, which is secured by all current and future 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 the secured convertible promissory note (the "2012 Note"), interest in the amount of 6% per annum, calculated on a 365 day year, and the principal amount of $2,000,000 and accrued interest will be paid on or before October 15, 2012, subsequently extended to October 26, 2012. The investor has the right to convert principal and accrued interest into the Company's common stock at $0.26 per share. The initial conversion price may be adjusted pursuant to standard anti-dilution provisions. The proceeds of this 2012 Note were used in part to pay, in full, all outstanding principal and interest due pursuant to the Secured Note issued March 22, 2011.

The Company performed an analysis pursuant to ASC 815 in order to determine whether the embedded conversion option included in the 2012 Note is required to be accounted for separately from the host contract and recorded on the balance sheet at fair value. The Company concluded that the embedded conversion option did not meet the requirements for such classification.


Pursuant to the patent security agreement, the Company shall not, without the Investor's prior consent, sell, dispose or otherwise transfer all or any portion of the Collateral, except for license grants in the ordinary course of business. In addition, the Company will take all actions reasonably necessary to prosecute to allowance applications for patents and maintain all patents, and to seek to recover damages for infringement, misappropriation or dilution of the Collateral with limited exceptions.

On October 30, 2012, the Company and MG Energy LLC, a Delaware limited liability company ("MG Energy"), entered into the License and Supply Agreement (the "Agreement"), effective October 26, 2012 as discussed in Note 12,

As consideration for the Agreement, MG Energy agreed to retire the 2012 Note including all interest accrued thereon, issued by the Company to the investor, who assigned the 2012 Note to MG Energy, a company in which a shareholder of the Company holds a position. This retirement is nonrefundable and noncreditable. Coincident with the retirement of the 2012 Note, the related patent security agreement was terminated. In accordance with ASC Subtopic 470-50, Debt . . .

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