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DLYT > SEC Filings for DLYT > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for DAIS ANALYTIC CORP


15-May-2013

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 29, 2013.

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 29, 2013. 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 commercialized by 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.

RECENT DEVELOPMENTS

In April 2013, the U.S. Department of Defense, Navy and the U.S. Department of Energy Advanced Research Projects Agency-Energy (ARPA-E) approved a grant of up to $800,000 to Company for the funding of a project to produce and trial a chilling system, that is operated by directly manipulating water vapor using Company's selectively permeable membrane made of a nano-structure solid polymer. The grant requires the Company to contribute $200,000 of the proposed total project cost of $1,000,000. The Company will receive the grant amount in phases upon the meeting of certain milestones. The grant will advance our Nano Air technologies toward commercialization.

Joyce Conner-Boyd, was appointed Chief Operating Officer in March of 2013. Prior to accepting this position, she served as Senior Vice President of Vertical Domains for SoftServ Inc. From 1995 to 2010, Ms. Conner-Boyd was employed by HealthPort Technologies, (formerly Smart Document Solutions), in various executive roles specializing in performance improvement and strategic operations.

REVENUES

We generate our revenues primarily from the sale of our ConsERV™ products in largely commercial HVAC equipment with a small amount of revenue coming from sales to distributors for residential HVAC equipment. Sales channels for our ConsERV™ products include original equipment manufacturers ("OEM"), 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 sales from (i) the growth of our licensee's sales in North and South America, (ii) more seasoned independent sales representatives world-wide, (iii) a greater number of independent sales representatives in certain areas, (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 MG Energy LLC, however, we anticipate both revenue and cost of goods sold for the second quarter of 2013 may decrease when compared to the same period in 2012. The Company, MG Energy LLC and its independent sales representatives will work to secure orders for ConsERV™ products, including but not limited to "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.

During the three months ended March 31, 2013 and 2012, four customers accounted for approximately 94% (77% of revenue is from an affiliate) and 67% of revenues, respectively

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 produce or 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

Summary of Three Months Ended March 31, 2013 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 March 31,
                                                                    2013                2012

Revenues                                                       $      620,042       $  1,039,483
Percentage of revenues                                                  100.0 %            100.0 %
Cost of goods sold                                             $      486,593       $    683,137
Percentage of revenues                                                   78.5 %             65.7 %
Research and development expenses, net grant revenue           $      114,329       $     91,598
Percentage of revenues                                                   18.4 %              8.8 %
Selling, general and administrative expenses                   $      325,371       $    434,765
Percentage of revenues                                                   52.5 %             41.8 %
Interest expense                                               $            0       $     77,786
Percentage of revenues                                                    0.0 %              7.5 %
Change in fair value of warrant liability (gain)               $            0       $   (587,930 )
Percentage of revenues                                                    0.0 %             56.6 %
Amortization of discount on convertible note payable           $            0       $    358,555
Percentage of revenues                                                    0.0 %             34.5 %
Net loss                                                       $     (306,149 )     $    (18,383 )
Percentage of revenues                                                   49.4 %              1.8 %

REVENUES: Total revenues for the three months ended March 31, 2013 and 2012 were $620,042 and $1,039,486, respectively, a decrease of $419,444 or 40.4%. The decrease in revenues in the 2013 period is primarily attributable to transitioning ConsERV™ system sales in North and South America to MG Energy LLC, our licensee. The decrease in revenues during 2013 is also attributed to the recognition of the $150,000 nonrefundable deposit related to the termination of the Genertec and the CAST agreements during the three months ended March 31, 2012.

COST OF GOODS SOLD: Cost of goods sold decreased $196,544 to $486,593 and represented 79% of revenues, for the three months ended March 31, 2013 compared to $683,137 or 66% of revenues for the three months ended March 31, 2012. Gross profit margin decreased from 34.3% in 2012 to 21.5% in 2013. The decrease in the cost of goods sold and the gross profit margin were due to transitioning ConsERV™ system sales to our licensee in North and South America.


RESEARCH AND DEVELOPMEN EXPENSES, NET OF GRANT REVENUE: Research and development expenses, net of grant revenue, of $114,329 for the three months ended March 31, 2013 increased from $91,598 for the same period ended March 31, 2012. The increase was primarily additional monies spent to advance Nanoclear™ towards commercialization without offsetting grant revenues earned during the three months ended March 31, 2013.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $325,371 for the three months ended March 31, 2013 decreased $109,394 from $434,765 in the same period of 2012 or 25.2%. The decrease was primarily due to a decrease in stock based compensation.

INTEREST EXPENSE: Interest expense was $0 for the three months ended March 31, 2013 compared to $77,786 for the same period of 2012. The decrease was primarily due to the repayment of debt during 2012.

AMORTIZATION OF DISCOUNT ON NOTE PAYABLE: Amortization of discount on note payable decreased to $0 for the three months ended March 31, 2013 compared to $358,555 for the same period ended March 31, 2012. 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 for the three months ended March 31, 2013 to $0 from a gain of $587,930 in the prior period ended March 31, 2012 due to the expiration of the underlying warrants, which expired during the first quarter of 2013.

NET LOSS: Net loss for the three months ended March 31, 2013 increased by $287,766 to $306,149 from $18,383 for the three months ended March 31, 2012. The increase in net loss is primarily due to the decrease in the change in the fair value of the warrant liability and decrease in revenues as discussed above.

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.

Any future financing may result in substantial dilution to existing shareholders, and future debt financing, if available, may include restrictive covenants or may require us to grant a lender a security interest in any of our assets not already subject to an existing security interest. To the extent that we attempt to raise additional funds through third party collaborations and/or licensing arrangements, we may be required to relinquish some rights to our technologies or products currently in various stages of development, or grant licenses or other rights on terms that are not favorable to us. Any failure by us to timely procure additional financing or investment adequate to fund our ongoing operations, including planned product development initiatives and commercialization efforts, will have material adverse consequences on our financial condition, results of operations and cash flows.

We will be dependent upon our existing cash of $18,174 at March 31, 2013, product sales and any additional debt and equity issuances to finance our operations through the next 12 months, including other contractual obligations of approximately $75,093 as of March 31, 2013. We plan to raise additional capital in the amount of approximately $8.9 million, net of expenses, during the next eighteen months in order to secure new patents for innovative applications of our core technology, purchase equipment, and fund our working capital requirements in accordance with our existing plans through September 2014. This additional capital could be provided by a successful completion of an offering of equity securities or by entering into licensing agreements. If we are unable to raise these funds, we may be required to delay our development plans, and curtail our expenditures.


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred significant losses since inception. As of March 31, 2013, the Company has an accumulated deficit of $38,257,976, negative working capital of $63,326 and a stockholders' deficit of $3,180,352. The Company used $283,854 and provided $6,964 of cash in operations during the three months ended March 31, 2013 and 2012, respectively, which was funded by proceeds from licensing and equity financings. There are no assurances that such financing will be available in the future. In view of these matters, there is substantial doubt that the Company will continue as a going concern. The Company is currently pursuing the following sources of short and long-term working capital:

1. We are currently holding preliminary discussions with parties who are interested in licensing, purchasing the rights to, or establishing a joint venture to commercialize certain applications of our technology.
2. We are seeking growth capital from certain strategic and/or government (grant) related sources. In addition to said capital, these sources may, pursuant to any agreements that may be developed in conjunction with such funding, assist in the product definition and design, roll-out, and channel penetration of our products.

The Company's ability to continue as a going concern is highly dependent on our ability to obtain additional sources of cash flow sufficient to fund our working capital requirements. However, there can be no assurance that the Company will be successful in its efforts to secure such cash flow. Any failure by us to timely procure additional financing or investment adequate to fund our ongoing operations, including planned product development initiatives and commercialization efforts, will have material adverse consequences on our financial condition, results of operations and cash flows.

The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

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 agreed to issue the Common Stock and Warrants in three tranches. 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 the SPA, dated October 17, 2012, 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 SPA, 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.

In 2012, the Company sold and issued, in connection with the SPA, 17,500,000 shares of its common stock to the Investor for $1,750,000. In addition, as part of the purchase it issued the Investor 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.

During 2013, in connection with the SPA, the Company sold and issued 492,280 shares to the Investor for $49,228 in cash, of which $19,255 was received in 2012. In addition, under the terms of this agreement, the Investor also received a warrant to purchase 123,070 shares of the Company's common stock with 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 the Investor to purchase securities on similar terms and conditions.


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