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DLYT > SEC Filings for DLYT > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for DAIS ANALYTIC CORP

Form 10-Q for DAIS ANALYTIC CORP


15-May-2014

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 2014 with a growing emphasis on moving the development of the NanoClear and NanoAir technologies towards commercialization.

RECENT DEVELOPMENTS

Securities Purchase Agreement with SoEX (Hong Kong) Industry & Investment Co., Ltd.

The Company entered into a Securities Purchase Agreement (the "SPA") with an investor, SoEX (Hong Kong) Industry & Investment Co., Ltd., a Hong Kong corporation (the "Investor"), pursuant to which the Company agreed to sell 37.5 million shares of the Company's common stock, for $1.5 million, at $0.04 per share pursuant to Regulation S. The Company received the $1.5 million from the Investor on March 3, 2014, ahead of the March 7, 2014 deadline specified in the SPA and has issued the 37.5 million shares of common stock to the Investor and 3,750,000 shares of common stock to a non-U.S. placement agent. The Company shall use the proceeds from the sale of the common stock for working capital and business development. Pursuant to the SPA, the Company and the Investor negotiated the organization of a joint venture subsidiary, which has not yet been formed, owned by the Company and the Investor. The SPA also requires the Company to appoint a director nominated by the Investor which shall be completed during the second quarter of 2014. The Investor also signed a voting agreement which obligates the Investor to vote as recommended by the Company's board of directors for a one-year period beginning on the date the shares of common stock are issued to the Investor, which were issued on March 6, 2014.


Initial ConsERV™ Order on Installation in China

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. Installation in the first building has been completed and the customer reports approximately 20% savings in energy usage at three different sites. We believe sales in China are our best route to increased sales and profitability.

Distribution Agreement with SoEX (Hong Kong) Industry & Investment Co., Ltd.

On April 24, 2014, the Company entered into a Distribution Agreement (the "Distribution Agreement") with SoEX (Hong Kong) Industry & Investment Co., Ltd., a Hong Kong corporation (the "Distributor"). Pursuant to the Distribution Agreement, in exchange for $500,000, royalty payments and a commitment from the Distributor to purchase nano-material membrane and other products from Dais, the Distributor obtained the right to distribute and market Dais's products for incorporation in energy recovery ventilators sold and installed in commercial, industrial and residential buildings, transportation facilities and vehicles (the "Field") in mainland China, Hong Kong, Macao and Taiwan (the "Territory"). Further the Distributor received an exclusive license in the Territory to use Dais's intellectual property in the manufacture and sale of Dais's products in the Field and Territory and to purchase its requirements of nano-material membrane only from Dais, subject to terms and conditions of the Distribution Agreement.

To further the distribution of Dais's products in the Territory, and to further the intent of the Company and the Distributor first memorialized in the Securities Purchase Agreement, dated January 21, 2014 between the Distributor and Dais, the Distributor shall form SoEX (Beijing) Environmental Protection Technology Company Limited (the "Subsidiary") which will function as the manufacturer and master distributor for the products in the Field and Territory. Upon the legal formation of the Subsidiary, Dais will be issued 25% of the equity of the Subsidiary, the right to a board seat and certain preemptive rights. The initial term of the Distribution Agreement is fifteen years unless terminated for, among other causes, the Distributor's failure to make payments to Dais for products ordered that do not exceed $15,000,000 in 2016 or any calendar year thereafter.

US Army Small Business Innovation Research Grant

In the first quarter of 2013, Dais was awarded a grant titled "Non-Fouling Water Reuse Technologies". The grant allows Dais to tailor its NanoClear® process to the needs of Army units. NanoClear has repeatedly shown that its novel Aqualyte® family of materials has the ability to separate most contaminants from water, achieving nearly 'parts per billion' clean product water with little or no fouling of the important membrane component.

RESULTS OF OPERATIONS

MARCH 31, 2014 COMPARED TO MARCH 31, 2013

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

                                                                 For the Three Months Ended
                                                                          March 31,
                                                                    2014               2013
REVENUE:
Sales                                                          $      220,411       $  569,622
License fees                                                           31,170           50,420
TOTAL REVENUE                                                         251,581          620,042
COST OF GOODS SOLD                                                    207,150          486,593
GROSS MARGIN                                                           44,431          133,449
OPERATING EXPENSES
Research and development expenses, net of government grant
proceeds of $160,917 and $0, respectively                             108,026          114,329
Selling, general and administrative expenses                          340,455          325,371
TOTAL OPERATING EXPENSES                                              448,481          439,700
LOSS FROM OPERATIONS                                                 (404,050 )       (306,251 )
OTHER EXPENSE (INCOME)                                                    320             (102 )
NET LOSS                                                       $     (404,370 )     $ (306,149 )


REVENUES

The decrease in revenues in the 2014 period is primarily attributable to transitioning ConsERV™ system sales in North and South America to MG Energy LLC ("MGE"). For the quarter ended March 31, 2014, Multistack, LLC, accounted for approximately 86% of the Company's revenue. We expected both revenue and cost of goods sold to decrease beginning in 2014 as a result of the License and Supply Agreement. We are working to create license/supply relationships with HVAC or ERV OEMs 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. Installation in the first building has been completed and the customer reports approximately 20% savings in energy usage. We believe sales in China are our best route to increased sales and profitability.

Product sales were $220,411 and $569,622 for the quarters ended March 31, 2014 and 2013, a decrease of $349,211 of 61.3%. We now generate our revenues primarily from the sale of our ConsERV™ cores. Revenues for ConsERV™ cores were higher in 2013 as a result of a sales for a large hospital project in 2013. Revenues were also higher in 2013 as a result of sales of Energy Recovery Systems sales which we no longer sell as a result of the License and Supply Agreement with MGE.

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. Cost of goods sold was $207,150 and $486,593 for the quarters ended March 31, 2014 and 2013, respectively. The decrease of $279,443 was a decrease of 57.4%, in line with the decrease in product sales. The decrease was slightly lower due to the loss of efficiency due to the lower sales volume in 2014.

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 and/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.

GROSS MARGIN

Our gross margin decreased to $44,431 in the quarter ended March 31, 2014 from $133,449 in the quarter ended March 31, 2013 as a result of lower sales and lower license fees. Our gross margin percentage decreased from 23.4% for the quarter ended March 31, 2013 to 20.1% for the quarter ended March 31, 2014 as a result of the factors discussed above.

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. Selling, general and administrative expenses were $340,455 for the quarter ended March 31, 2014, compared to $325,371 for the quarter ended March 31, 2013, an increase of $15,084 or 4.6%.

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


NET INCOME (LOSS):

Net loss for the quarter ended March 31, 2014 was $404,370 compared to net loss of $306,149 for the quarter ended March 31, 2013. The loss in the quarter ended March 31, 2014 was a result of lower sales and lower gross margin in the quarter ended March 31, 2014.

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 $848,440 at March 31, 2014, product sales and any additional debt and equity issuances to finance our operations through the next 12 months. The Company has incurred significant losses since inception. As of March 31, 2014, the Company has an accumulated deficit of $40,477,675 and a stockholders' deficit of $2,642,390. The Company used $625,562 and $283,854 of cash in operations during the three months ended March 31, 2014 and 2013, respectively, which was funded by proceeds from product sales and equity financings. The Company, as a result of an equity financing completed in the quarter ended March 31, 2014, has $848,440 in cash and cash equivalents. There is no assurance that such equity 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 entered into a Securities Purchase Agreement (the "SPA") with an investor, SoEX (Hong Kong) Industry & Investment Co., Ltd., a Hong Kong corporation (the "Investor"), pursuant to which the Company agreed to sell 37.5 million shares of the Company's common stock for $1.5 million, at $0.04 per share pursuant to Regulation S. The Company received the $1.5 million from the Investor on March 3, 2014, ahead of the March 7, 2014 deadline specified in the SPA and has issued the 37.5 million shares of Common Stock to the Investor. The Company shall use the proceeds from the sale of the Common Stock for working capital and business development. 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.

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