TMCnet News
DAIS ANALYTIC CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION(Edgar Glimpses Via Acquire Media NewsEdge) 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, Aqualyte™, 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. We are commercializing our 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™, a beta-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™, a beta-stage method for treating contaminated water (sea, waste, industrial) to provide up to 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 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. 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 contaminate wastewater and will undergo rigorous testing and monitoring. The project was undertaken to showcase the functionality of Dais' Aqualyte™ nano-materials and novel process in harsh wastewater uses over existing products for the cleaning of contaminated water. 18 -------------------------------------------------------------------------------- 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 third 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. 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. 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. 19 -------------------------------------------------------------------------------- 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 Stock compensation expense was approximately $727,700 and $752,500 for the three and six months ended June 30, 2013, respectively. For the six months ended June 30, 2013, the Company issued 5,168,000 common stock options to six employees and directors and one consultant at strike prices ranging from $0.15-$0.18 per share with a term of 2-10 years. During the six months ended June 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 June 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 June 30, 2013 2012 Revenues $ 528,369 $ 649,015 Percentage of revenues 100.0 % 100.0 % Cost of goods sold $ 351,184 $ 508,962 Percentage of revenues 66.5 % 78.4 % Research and development expenses, net grant revenue $ 206,784 $ 143,396 Percentage of revenues 39.1 % 22.1 % Selling, general and administrative expenses $ 1,058,907 527,573 Percentage of revenues 200.4 % 81.3 % Interest expense $ 0 $ 81,529 Percentage of revenues 0.0 % 12.6 % Change in fair value of warrant liability (gain) $ 0 $ (911,922 ) Percentage of revenues 0.0 % 140.5 % Net (loss) income $ (1,083,506 ) $ 299,497 Percentage of revenues 205.1 % 46.1 % 20-------------------------------------------------------------------------------- REVENUES: Total revenues for the three months ended June 30, 2013 and 2012 were $528,369 and $649,015, respectively, a decrease of $120,646 or 18.6%. 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. COST OF GOODS SOLD: Cost of goods sold decreased $157,778 to $351,184 and represented 66.5% of revenues, for the three months ended June 30, 2013 compared to $508,962 or 78.4% of revenues for the three months ended June 30, 2012. Gross profit margin increased from 21.5% in 2012 to 33.5% in 2013. The increase in the gross profit margin is primarily the result of an increase in our sale of materials and ConsERV cores. RESEARCH AND DEVELOPMEN EXPENSES, NET OF GRANT REVENUE: Research and development expenses of $206,784 for the three months ended June 30, 2013 increased from $143,396 for the same period ended June 30, 2012. The increase was primarily attributable to resources expended to advance Nanoclear™ towards commercialization. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $1,058,907 for the three months ended June 30, 2013 increased $531,334 from $527,573 in the same period of 2012 or 100.7%. The increase was primarily due to an increase in stock based compensation of $669,000. INTEREST EXPENSE: Interest expense was $0 for the three months ended June 30, 2013 compared to $81,529 for the same period of 2012. The decrease was primarily 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 to $0 for the three months ended June 30, 2013 from a gain of $911,922 in the prior period ended June 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 June 30, 2013. NET LOSS: Net loss for the three months ended June 30, 2013 increased by $1,383,003 to $1,083,506 from net income of $299,497 for the three months ended June 30, 2012. The increase in net loss is primarily due to the increase in selling, general and administrative expense, the decrease in the change in the fair value of the warrant liability and the decrease in revenues as discussed above. Summary of Six Months Ended June 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: Six Months Ended June 30, 2013 2012 Revenues $ 1,148,411 $ 1,688,498 Percentage of revenues 100.0 % 100.0 % Cost of goods sold $ 832,147 $ 1,192,099 Percentage of revenues 72.5 % 70.6 %Research and development expenses, net grant revenue $ 326,742 $ 234,994 Percentage of revenues 28.5 % 13.9 % Selling, general and administrative expenses $ 1,384,238 962,338 Percentage of revenues 120.5 % 57.0 % Interest expense $ 0 $ 159,315 Percentage of revenues 0.0 % 9.4 % Change in fair value of warrant liability (gain) $ 0 $ (1,499,852 ) Percentage of revenues 0.0 % 88.8 % Amortization of discount on convertible note payable $ 0 $ 358,555 Percentage of revenues 0.0 % 21.2 % Net (loss) income $ (1,389,654 ) $ 281,114 Percentage of revenues 121.0 % 16.6 % 21-------------------------------------------------------------------------------- REVENUES: Total revenues for the six months ended June 30, 2013 and 2012 were $1,148,411 and $1,688,498, respectively, a decrease of $540,087 or 32%. 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 agreement during the six months ended June 30, 2012. COST OF GOODS SOLD: Cost of goods sold decreased $359,952 to $832,147 and represented 72.5% of revenues for the six months ended June 30, 2013 compared to $1,192,099 or 70.6% of revenues for the six months ended June 301, 2012. Gross profit margin decreased from 29.3% in 2012 to 27.5% 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 revenues, of $326,742 for the six months ended June 30, 2013 increased from $234,994 for the same period ended June 30, 2012. The increase was primarily attributable to resources expended to advance Nanoclear™ towards commercialization. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses of $1,384,238 for the six months ended June 30, 2013 increased $421,900 from $962,338 in the same period of 2012 or 43.8%. The increase was primarily due to the increase in stock based compensation of $650,178 partially offset by the decreases in payroll expenses of approximately $137,000 and professional fees of approximately $73,000. INTEREST EXPENSE: Interest expense was $0 for the six months ended June 30, 2013 compared to $159,315 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 six months ended June 30, 2013 to $0 from a gain of $1,499,852 in the prior period ended June 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 six months ended June 30, 2013. AMORTIZATION OF DISCOUNT ON NOTE PAYABLE: Amortization of discount on note payable decreased to $0 for the six months ended June 30, 2013 compared to $358,555 for the same period ended June 30, 2012. The decrease was due to the related note payable reaching maturity in the first quarter 2012. NET LOSS: Net loss for the six months ended June 30, 2013 increased by $1,670,768 to $1,389,654 from net income of $281,114 for the six months ended June 30, 2012. The increase in net loss is primarily due to the increase in selling, general and administrative expense, the decrease in the change in the fair value of the warrant liability and the 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. 22 -------------------------------------------------------------------------------- We will be dependent upon our existing cash of $94,170 at June 30, 2013, product sales, government grants and any additional debt and equity issuances to finance our operations through the next 12 months, including other contractual obligations of approximately $55,916 as of June 30, 2013. We plan to raise additional capital 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 June 30, 2013, the Company has an accumulated deficit of $39,341,481, negative working capital of $209,359 and a stockholders' deficit of $3,386,250. The Company used $340,564 and $211,745 of cash in operations during the six months ended June 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 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. 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. 23 -------------------------------------------------------------------------------- During 2013, the Company received $149,915 from an investor under another SPA entered into on May 31, 2013, towards the purchase of common stock at $0.10 per share. Subsequent to June 30, 2013, the Company issued 1,499,150 in settlement of the common stock payable. With the issuance of the common stock, the Company issued warrants to purchase 374,788 shares of the Company's common stock at $0.50 per share. The warrants are exercisable for 60 months. The warrants are subject to standard anti-dilution adjustments for stock splits and other subdivisions. The proceeds from the sale of the securities shall be used for working capital purposes and to investigate and establish a China PRC company. On July 15, 2013, the Company issued, pursuant to a Stock Purchase Agreement with one private investor (the "Investor"), 2,350,000 restricted shares of the Company's common stock at a purchase price of $0.10 per share for a total of $235,000. With the issuance of the common stock, the Company issued warrants to purchase 587,500 shares of the Company's common stock at $0.50 per share. The warrants are exercisable for 60 months. The warrants are subject to standard anti-dilution adjustments for stock splits and other subdivisions. The proceeds from the sale of the securities shall be used for working capital purposes. |