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DLYT > SEC Filings for DLYT > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for DAIS ANALYTIC CORP

Form 10-Q for DAIS ANALYTIC CORP


14-Aug-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 31, 2014.

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 adding additional distribution channels for the ConSERV product, creating newer sales opportunities for key ConsERV components in allowed distribution channels in non-ConsERV products, and the development of the NanoClear product by moving to pilot stage activities focusing on initial 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 ("SoEx"), 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 SoEX 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 SoEX 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 SoEX negotiated the organization of a joint venture subsidiary, which has not yet been formed, owned by the Company and SoEX. The SPA also requires the Company to appoint a director nominated by the Investor which shall be completed upon final review of the applicant nominated by SoEX. SoEX also signed a voting agreement which obligates SoEX 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 SoEX, 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. Since this initial installation the Company has a total of four other high profile installations of the ConsERV product in China which should increase through our relationship with SoEX. 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. Pursuant to the Distribution Agreement, in exchange for $500,000, royalty payments and a commitment from SoEX to purchase nano-material membrane and other products from Dais, SoEX 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 SoEX 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 SoEX first memorialized in the Securities Purchase Agreement, dated January 21, 2014 between SoEX and Dais, SoEX 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, SoEX's failure to make payments to Dais for products ordered that do not exceed $15,000,000 in 2016 or any calendar year thereafter.

Membrane Sales to SoEX and ConsERV Core sales to Distributors

During the second quarter of 2014, the Company began making shipments of its membrane to SoEX. The Company generated revenues of approximately $130,000 from membrane sales to SoEX. SoEX will use the membrane to build ConsERV™ cores and systems for which the Company shall earn a royalty. Additionally the Company produced and shipped ConsERV cores to existing China based distributors during this period partially offsetting the drop in sales to Licensee in the North and South American markets. The Company expects sales to grow in China, and other geographic areas in Asia leveraging the manufacturing of ConsERV product in China.

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

THREE MONTHS ENDED JUNE 30, 2014 COMPARED TO JUNE 30, 2013

The following table indicates certain data derived from our Statements of
Operations for the three months ended June 30, 2014:

                                                                  2014            2013
REVENUE:
Sales                                                          $  488,354     $    477,950
License fees and royalties                                         34,248           50,419
                                                                  522,602          528,369

COST OF GOODS SOLD                                                307,400          351,184
GROSS MARGIN                                                      215,202          177,185
OPERATING EXPENSES
Research and development expenses, net of government grant        109,312          206,784
   proceeds of $99,087 and $0
Selling, general and administrative expenses                      365,931        1,058,907
TOTAL OPERATING EXPENSES                                          475,243        1,265,691
LOSS FROM OPERATIONS                                             (260,041 )     (1,088,506 )

REVENUES

Revenues for the quarter ended June 30, 2014 decreased slightly from $528,369 to 522,602. The decrease in revenues in the 2014 period is primarily attributable to a decrease in licensing fees and royalties from approximately $50,000 to approximately $34,000 as certain licensing agreements expired. Product sales increased to approximately $488,000 from $478,000 primarily as a result of an increase in the sale of membrane to approximately $130,000 from $13,000. Sales of ConsERV™ cores decreased to approximately $353,000 in 2014 from $433,000 in 2013 as a result of a decrease in sales the Licensee in the North and South American markets sales as the result of a large hospital project in 2013 partially offset by increased ConsERV core sales to China-based distributors.

In October 2012, we entered into a License and Supply Agreement with MG Energy LLC ("MGE") transitioning ConsERV™ system sales in North and South America to MGE. 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 and are selling membrane to SoEX in China. We believe sales in China are our best route to increased sales and profitability.

COST OF SALES

Our cost of sales for membrane consists of material and services costs paid to several manufacturers that we use for separate stages in the processing of our Aqualyte™ membrane. The costs for our ConsERV™ cores consists primarily of materials (including freight), direct labor, and outsourced manufacturing expenses incurred to produce our ConsERV™ products.


Cost of goods sold was $307,400 and $351,184 for the quarters ended June 30, 2014 and 2013, respectively. The decrease of $43,784 was a decrease of 12.5%, in line with the decrease in product sales of cores partially offset by higher sales of membrane.

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.

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 $365,931 for the quarter ended June 30, 2014, compared to $1,058,907 for the quarter ended June 30, 2013, a decrease of approximately $693,000 primarily attributable to a decrease of $665,000 in stock-based compensation as a result of stock options granted to our Chief Executive Officer, directors and other employees in 2013. We also have increased costs in the second quarter of 2014 as a result of travel to China made in connection with increasing our sales and presence in China.

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

RESEARCH AND DEVELOPMENT EXPENSES

Expenditures for research, development and engineering of products are expensed as incurred. For the three months ended June 30, 2014 and 2013, the Company incurred research and development costs of a$109,312 (net of government grant proceeds of $99,087) and $206,784, respectively. The Company accounts for proceeds received from government grants for research as a reduction in research and development costs. There were no grant proceeds received by the Company during the three months ended June 30, 2013. Without taking into account the reduction as a result of government proceeds, research and development expenses were flat in the second quarter ended June 30, 2014 compared to the second quarter ended June 30, 2013.


NET LOSS:

Net loss for the quarter ended June 30, 2014 was $258,203 compared to net loss of $1,083,506 for the quarter ended June 30, 2013. The higher loss in the quarter ended June 30, 2013 was primarily a result of higher stock compensation expense and research and development expenses.

SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO JUNE 30, 2013

The following table indicates certain data derived from our Statements of
Operations for the six months ended June 30, 2014:

                                                                  2014            2013
REVENUE:
Sales                                                          $  708,765     $  1,047,572
License fees and royalties                                         65,418          100,839
                                                                  774,183        1,148,411

COST OF GOODS SOLD                                                514,550          832,147

GROSS MARGIN                                                      259,633          316,264

OPERATING EXPENSES
Research and development expenses, net of government grant        217,338          326,742
   proceeds of $260,004 and $0
Selling, general and administrative expenses                      706,386        1,384,238
TOTAL OPERATING EXPENSES                                          923,724        1,710,980

LOSS FROM OPERATIONS                                             (664,091 )     (1,394,716

REVENUES

Revenues for the six months ended June 30, 2014 decreased 32.6% from $1,148,411 to 774,183. The decrease in revenues in the 2014 period is primarily attributable to a decrease in product sales. Product sales decreased approximately $339,000 from approximately $1,048,000 primarily as a result of a 36% decrease in the sales of ConsERV™ cores to approximately $568,000 in 2014 from $891,000 in 2013 as a result of a sale for a large hospital project in 2013 and lower core sales in the first quarter of 2014. In addition, product sales of energy recovery ventilator systems declined approximately $115,000 from the first six months of 2013 as we no longer sell those systems in North and South America due to our agreement with MGE. The decrease in the sale of cores was partially offset by an increase in the sale of membrane by approximately $120,000 to $133,000 in the first six months of 2014.

In October 2012, we entered into a License and Supply Agreement with MG Energy LLC ("MGE") transitioning ConsERV™ system sales in North and South America to MGE. 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 and is selling membrane to SoEX in China. We believe sales in China are our best route to increased sales and profitability.


COST OF SALES

Cost of goods sold was $514,550 and $832,147 for the six months ended June 30, 2014 and 2013, respectively. The decrease of $317,597 was a decrease of 38.2%, reflecting a 32.3% decrease in product sales during the six months ending June 30, 2014 compared to the six months ended June 30, 2013.

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 $706,386 for the six months ended June 30, 2014, compared to $1,384,238 for the six months ended June 30, 2013, a decrease of approximately $678,000 primarily attributable to $665,000 in stock-based compensation as a result of stock options granted to our Chief Executive Officer, directors and other employees in 2013 partially offset by lower payroll expenses from a lower administrative headcount during the first six months of 2014. We also have had increased costs in the first six months of 2014 as a result of travel to China made in connection with securing the Distribution Agreement with SOEX, and increasing our sales and presence in China.

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

RESEARCH AND DEVELOPMENT EXPENSES

Expenditures for research, development and engineering of products are expensed as incurred. For the six months ended June 30, 2014 and 2013, the Company incurred research and development costs of approximately $217,338 (net of government grant proceeds of $260,004) and $326,742, respectively. The Company accounts for proceeds received from government grants for research as a reduction in research and development costs. There were no grant proceeds received by the Company during the six months ended June 30, 2013. Taking into account the absence of government proceeds, research and development expenses were higher in the six months ended June 30, 2014 compared to the six months ended June 30, 2013 as a result of research and development of the NanoClear and NanoAir technologies towards commercialization.

NET LOSS:

Net loss for the six months ended June 30, 2014 was $662,573 compared to net loss of $1,389,654 for the six months ended June 30, 2013. The lower loss in the six months ended June 30, 2014 was a result of higher stock compensation expense in 2013 partially offset by higher gross margin in 2013.

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 $569,777 at June 30, 2014, cash to be received from the Distribution Agreement, 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 June 30, 2014, the Company has an accumulated deficit of $40,735,878and a stockholders' deficit of $2,856,184. The Company used $894,107 and $340,564 of cash in operations during the six months ended June 30, 2014 and 2013, respectively, which was funded by proceeds from product sales and equity financings. 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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