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DLYT > SEC Filings for DLYT > Form 10-Q on 14-Nov-2013All Recent SEC Filings

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Form 10-Q for DAIS ANALYTIC CORP


14-Nov-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 AND CURRENT DEVELOPMENTS

We have developed and patented a nano-structure polymer technology, Aqualyte™, which is being commercialized in products based on the functionality of these materials. The Company is commercializing its innovative Aqualyte™ family of nano-structured materials and processes focusing on evolutionary or disruptive air, energy and water applications. The uses include:

· ConsERV™, a commercially available engineered energy recovery ventilator (an HVAC product) useful for efficient management of ventilation air's temperature and moisture content using the energy found in the outgoing 'stale' air stream to pre-condition the incoming fresh air often saving energy, CO2 and allowing for equipment downsizing;

· NanoAir™, an alpha -stage water-based, no fluorocarbon producing refrigerant cooling cycle useful to replace the existing gas based compression cooling cycle in most all forms of air conditioning and refrigeration saving a projected 50% in energy and CO2;

· NanoClear™, an early beta --stage method for treating contaminated water (sea, waste, industrial) to provide nearly 1,000 times cleaner potable water; and

· NanoCap™, which holds promise to use the Aqualyte™ family to form a disruptive non-chemical energy storage device (an ultra capacitor) when completed for use in transportation, renewable energy and 'smart grid' configurations.

The initial product commercialized using the firm's Aqualyte™ materials is ConsERV™, an energy recovery ventilator. Our primary focus at this time is to expand the marketing and sales of our Aqualyte™ materials and products world-wide. We also have new product applications centered around the Aqualyte™ materials and processes 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 with channel partners and made faster if we receive adequate capital funding.

The Company received an initial order for its ConsERV™ cores and systems useful in most forms of HVAC equipment built around Aqualyte™ nano-materials from a specialty engineering service company in Beijing, China. The deployment of the ConsERV™ technology is at the first building of a 45-building complex, which includes technology designed to address China's air quality issues (PM2.5). Installation in the first building has been completed and the customer reports approximately 20% savings in energy usage.

We expect Aqualyte™ materials and products to continue to be our focused commercial products through 2014 with a growing emphasis on moving the development of international sales channel for ConsERV™ and selling materials for NanoClear™ water projects. NanoAir™ and NanoCap™ technologies needing more early development (which may be partially funded by government grants) will be the 'second wave' of uses being sold by Dais and its distribution channels.

During the second quarter of 2013 we completed the design, build and production of a pilot wastewater treatment device (based on the Company's NanoClear™ process), located near a Pasco County, Florida municipal wastewater treatment facility. The NanoClear™ unit began to produce clean water from contaminated wastewater and has (and will) continue to undergo rigorous testing and monitoring. The project was undertaken to showcase the functionality of Dais's Aqualyte™ nano-materials and novel process in harsh wastewater uses over existing products for the cleaning of contaminated water. The project shows, via third party testing, contamination in water is reduced to nearly the 'parts per billion' level while current water standards allow for impurities measured in 'parts per million'.1

1 Based on independent water sample testing commissioned by Dais to the Pasco County Utilities Environmental Laboratory, and TestAmerica, Tampa Florida USA. October 2013


REVENUES

Currently, we generate our revenues primarily from the sale of our Aqualyte™ materials fashioned into an heat exchanger for ConsERV™ applications largely in commercial HVAC equipment with a small amount of revenue coming from newer distributors, and selling materials, or prototype products made from our materials to include original equipment manufacturers ("OEM"), our North and South America ConsERV™ Licensee, distributors and retailers. Aqualyte™ products used as an heat exchanger often reduces energy usage in HVAC equipment.

Our near term revenue growth is dependent on sales from (i) the growth of our licensee's ConsERV™ sales in North and South America, (ii) more seasoned independent sales representatives and distributors world-wide, and (iii) 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 fourth 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 outside of North and South America.

The Company received an initial order for its ConsERV™ cores and systems useful in most forms of HVAC equipment built around Aqualyte™ nano-materials from a specialty engineering service company in Beijing, China. The deployment of the ConsERV™ technology is at the first building of a 45-building complex, which includes technology designed to address China's air quality issues (PM2.5). Installation in the first building has been completed and the customer reports approximately 20% savings in energy usage. 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 receives the grant amount in phases upon the meeting of certain milestones. The grant will advance our Nano Air technologies toward commercialization.

COST OF SALES

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

We have created an efficient supply chain made up of independent 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 Aqualyte™ materials and products;

• An increase in the labor resources needed to produce or expand the production of our Aqualyte™ 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 Aqualyte™ materials and related 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

During the nine months ended September 30, 2013, the Company implemented a new streamlined organization with new employees in key roles, including a new Chief Operating Officer. The structure was designed to better capitalize on our core competency in the nano-materials area, allow wider distribution of ConsERV™ products to other parts of the world and place heavy emphasis on moving new applications to commercialization.

Results of Operations

Summary of Three Months Ended September 30, 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
                                                             September 30,
                                                          2013           2012

Revenues                                               $  357,795     $  849,469
Percentage of revenues                                      100.0 %        100.0 %
Cost of goods sold                                     $  229,595     $  518,166
Percentage of revenues                                       64.2 %         61.0 %
Research and development expenses, net grant revenue   $   94,638     $  192,749
Percentage of revenues                                       26.5 %         22.7 %
Selling, general and administrative expenses           $  373,737     $  418,696
Percentage of revenues                                      104.5 %         49.3 %
Impairment of fixed assets                             $        0     $   62,288
Percentage of revenues                                        0.0 %          7.3 %
Other income                                           $   13,200     $        0
Percentage of revenues                                        3.7 %          0.0 %
Interest expense                                       $       31     $   94,893
Percentage of revenues                                        0.0 %         11.2 %
Change in fair value of warrant liability (gain)       $        0     $ (108,633 )
Percentage of revenues                                        0.0 %         12.8 %
Net loss                                               $ (327,006 )   $ (328,690 )
Percentage of revenues                                       91.4 %         38.7 %


REVENUES: Total revenues for the three months ended September 30, 2013 and 2012 were $357,795 and $869,469, respectively, a decrease of $511,674 or 58.8%. 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. Despite the drop in sales, as described below, the change in net income is flat for the three months ended September 30, 2013.

COST OF GOODS SOLD: Cost of goods sold decreased $288,207 to $229,595 and represented 64.2% of revenues, for the three months ended September 30, 2013 compared to $518,166 or 61.0% of revenues for the three months ended September 30, 2012. Gross profit margin decreased from 39% in 2012 to 36% in 2013. The increase in the gross profit margin is primarily the result of the efficiency in the production of the ConsERV™ cores.

RESEARCH AND DEVELOPMEN EXPENSES, NET OF GRANT REVENUE: Research and development expenses of $94,638 for the three months ended September 30, 2013 decreased from $192,749 for the same period ended September 30, 2012. The decrease was primarily attributable to the receipt of $91,310 in grant proceeds during 2013, which partially offset our research and development expenditures.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $373,737 for the three months ended September 30, 2013 decreased $44,959 from $418,696 in the same period of 2012 or 10.7%. The decrease was primarily due to a decrease in legal expenses of approximately $49,600.

INTEREST EXPENSE: Interest expense was $31 for the three months ended September 30, 2013 compared to $94,893 for the same period of 2012. The decrease was primarily due to the repayment of debt during 2012 leaving minimal interest-bearing debt on our balance sheet.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability decreased to $0 for the three months ended September 30, 2013 from a gain of $108,633 in the prior period ended September 30, 2012. In the first quarter of 2013, all warrants or provisions providing for price resets have expired so as to no longer be classified in accordance with FASB ASC 815-10-15. Therefore, no warrant liability was recorded for the three months ended September 30, 2013.

NET LOSS: Net loss for the three months ended September 30, 2013 decreased by $1,684 to $327,006 from a net loss of $328,690 for the three months ended September 30, 2012.

Summary of Nine Months Ended September 30, 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:

                                                             Nine Months Ended
                                                               September 30,
                                                           2013             2012

Revenues                                               $  1,506,205     $  2,537,967
Percentage of revenues                                       100.00 %          100.0 %
Cost of goods sold                                     $  1,061,763     $  1,707,554
Percentage of revenues                                        70.50 %           67.3 %
Research and development expenses, net grant revenue   $    421,360     $    427,743
Percentage of revenues                                        16.60 %          16.90 %
Selling, general and administrative expenses           $  1,757,974     $  1,383,106
Percentage of revenues                                       116.70 %          57.00 %
Impairment of fixed assets                             $          0     $     62,288
Percentage of revenues                                         0.00 %           2.50 %
Interest expense                                       $          0     $    254,208
Percentage of revenues                                         0.00 %          10.00 %
Change in fair value of warrant liability (gain)       $          0     $ (1,608,486 )
Percentage of revenues                                         0.00 %          63.40 %
Amortization of discount on convertible note payable   $          0     $    358,555
Percentage of revenues                                         0.00 %          14.10 %
Net loss                                               $ (1,716,661 )   $    (46,936 )
Percentage of revenues                                       114.00 %           1.80 %


REVENUES: Total revenues for the nine months ended September 30, 2013 and 2012 were $1,506,205 and $2,537,967, respectively, a decrease of $1,031,762 or 41%. 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 and recognition of the $150,000 nonrefundable deposit related to the termination of the Genertec and the CAST agreements during the nine months ended September 30, 2012.

COST OF GOODS SOLD: Cost of goods sold decreased $645,791 to $1,061,763 and represented 70.5% of revenues for the nine months ended September 30, 2013 compared to $1,707,554 or 67.3% of revenues for the nine months ended September 301, 2012. Gross profit margin decreased from 33% in 2012 to 30% 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 revenues, of $421,360 for the nine months ended September 30, 2013 decreased slightly from $427,743 for the same period ended September 30, 2012. The decrease was primarily attributable to $91,310 of grant revenues received in 2013 compared to $67,240 received in 2012.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $1,757,974 for the nine months ended September 30, 2013 increased $374,868 from $1,383,106 in the same period of 2012 or 27.1%. The increase was primarily due to the increases in stock based compensation of $654,141 and bad debt expense of approximately $70,280, which were partially offset by the decreases in payroll expenses of approximately $184,500 and professional fees of approximately $126,500.

INTEREST EXPENSE: Interest expense was $0 for the nine months ended September 30, 2013 compared to $254,208 for the same period of 2012. The decrease was due to the repayment of debt during 2012.

CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability decreased for the nine months ended September 30, 2013 to $0 from a gain of $1,608,486 in the prior period ended September 30, 2012. In the first quarter of 2013, all warrants or provisions providing for price resets have expired so as to no longer be classified in accordance with FASB ASC 815-10-15. Therefore, no warrant liability was recorded for the nine months ended September 30, 2013.

AMORTIZATION OF DISCOUNT ON NOTE PAYABLE: Amortization of discount on note payable decreased to $0 for the nine months ended September 30, 2013 compared to $358,555 for the same period ended September 30, 2012. The decrease was due to the related note payable reaching maturity in the first quarter 2012.

NET LOSS: Net loss for the nine months ended September 30, 2013 increased by $1,669,725 to $1,716,661 from a net loss of $46,936 for the nine months ended September 30, 2012. The increase in net loss is primarily due to the increase in selling, general and administrative expense including, but not limited to, $654,141 increase in non cash stock based compensation, a decrease in the change in the fair value of the warrant liability from a gain of $1,608,486 for the period ended September 30, 2012 to $0 for the period ended September 30, 2013 and a decrease in revenues as discussed above.

Liquidity and Capital Resources

The Company finances its operations primarily through sales of its Aqualyte™ materials and products made from Aqualyte™ materials, focusing on selling foreign distribution agreements for ConsERV™, entering into a royalty bearing License and Supply arrangement, small sales of 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. Furthermore, should we achieve our goal of selling Aqualyte™ materials and products made from Aqualyte™ materials into water applications we may be net cash flow positive. Our profitability will require the successful sales growth and more rapid commercialization of our Aqualyte™ materials and products made from Aqualyte™ materials. No assurances can be given when this will occur.


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 becoming distribution partners for current or future products, by licensing or purchasing the rights to distribute the Company's products, or providing equity or debt financing to further the Company's business model outside of the Company's current core market in North and South America.

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 anticipated faster channel penetration for the Company's products.

Any future financing may result in 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 and distribution 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 $41,250 at September 30, 2013, product sales, government grants, licensing, distribution arrangements and any additional debt and equity issuances to finance our operations through the next 12 months, including other contractual obligations of approximately $46,100 as of September 30, 2013. We plan to raise additional capital during the next eighteen months in order to finance additional growth of the Company, which includes 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 and/or distribution 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 September 30, 2013, the Company has an accumulated deficit of $39,668,488, negative working capital of $209,835 and a stockholders' deficit of $3,396,312. The Company used $668,298 and $636,008 of cash in operations during the nine months ended September 30, 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'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 . . .

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