Form 10-K for DAIS ANALYTIC CORP
31-Mar-2014
Annual Report
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control.
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 focus of 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. We also expect sales outside the United States to account for a greater percentage of our sales.
RESULTS OF OPERATIONS
DECEMBER 31, 2013 COMPARED TO DECEMBER 31, 2012
The following table sets forth, for the periods indicated, certain data derived
from our Statements of Operations:
Year Ended December 31,
2013 2012
Revenues $ 1,742,595 $ 3,656,080
Cost of goods sold $ (1,257,418 ) $ (2,434,610 )
Gross Margin 485,177 1,221,470
Selling, general and administrative expenses $ (2,108,629 ) $ (1,938,553 )
Research and development expenses, net grant revenue $ (495,175 ) $ (453,927 )
Impairment of equipment $ (2,672 ) $ (62,288 )
Loss from Operations (2,121,299 ) (1,233,298 )
Amortization of discount on convertible note payable $ - $ (358,555 )
Interest expense, net $ (179 ) $ (278,026 )
Other income - 3,000
Change in fair value of warrant liability $ - $ 1,888,218
Net income (loss) $ (2,121,478 ) $ 21,339
REVENUES
Total revenues for the year ended December 31, 2013 and 2012 were $1,742,595 and $3,656,080, respectively, a decrease of $1,913,485, or 52.3%. We now generate our revenues primarily from the sale of our ConsERV? cores. Sales of ConsERV? cores increased but were more than offset by the decrease in MERV systems. We also occasionally license our technology to other strategic partners and sell various prototypes of other product applications that use our polymer technology. While sales of our products decreased, license and royalty fees increased from $103,640 to $215,606.
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. As a result of the License and Supply Agreement with MG Energy LLC, Multistack, LLC accounted for approximately 83% of the Company's revenue, for the year ended December 31, 2013. We expected both revenue and cost of goods sold to decrease beginning in 2013 as a result of of the License and Supply Agreement.
We are also 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.
COST OF GOODS SOLD
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 $1,257,418 and $2,434,610 for the years ended December 31, 2013 and 2012, respectively. The decrease of $1,177,192 was a decrease of 48.4%, in line with the decrease in sales. The decrease was slightly lower due to the loss of efficiency due to the lower sales volume and loss on the write-off of approximately $60,000 in inventory.
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 $736,293 as a result of our decrease in sales and a slight decrease in gross margin percentage. Our gross margin percentage decreased from 33.4% for the year ended December 31, 2012 to 27.8% for the year ended December 31, 2013 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 $2,108,629 for the year ended December 31, 2013, compared to $1,938,553 for the year ended December 31, 2012, an increase of $170,076 or 8.7%. This increase is primarily due to an increase in stock based compensation of approximately $540,000, a decrease in front office payroll expenses of approximately $250,000 and a decrease in professional fees of $150,000.
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
IMPAIRMENT IN ASSETS
Loss on impairment of equipment was $2,672 for the year ended December 31, 2013 compared to $62,288 for the year ended December 31, 2012. The impairment in 2012 was due to the disassembly of an early prototype unit that was no longer required.
OTHER EXPENSES
AMORTIZATION OF DISCOUNT ON NOTE PAYABLE: Amortization of discount on note payable was zero for the year ended December 31, 2013 compared to $358,555 for the year ended December 31, 2012. During the year ended December 31, 2011, the Company had recorded a discount and embedded beneficial conversion feature on a convertible note which was amortized over the life of the related note. These amounts were fully amortized in 2012.
INTEREST EXPENSE: Interest expense was $179 for the year ended December 31, 2013 compared with $278,091 for the year ended December 31, 2012 as we paid notes payable in 2012. On July 13, 2012, we paid in full all principal and interest due pursuant to the $1.5 million Secured Note. On October 29, 2012, we paid in full all principal and interest due the $1,000,000 2011 Convertible Note.
CHANGE IN FAIR VALUE OF WARRANT LIABILITY: The change in the fair value of warrant liability resulted in other income of $1,888,218 for the year ended December 31, 2012. This was due to the change in the fair value of the underlying warrant liability based on the Black-Scholes option pricing model. The warrant liability was reduced to zero at December 31, 2012.
NET INCOME (LOSS):
Net loss for the year ended December 31, 2013 was $2,121,478 compared to net income of $21,339 for the year ended December 31, 2012. The loss in the year ended December 31, 2013 was a result of a $736,293 decrease in gross margin, a $170,076 increase in selling, general and administrative expenses without any offset, such as income from the change in fair value of warrant liability, from which we benefitted in the year ended December 31, 2012.
LIQUIDITY AND CAPITAL RESOURCES
We were able in 2012, 2013 and 2014 to move from debt financing to equity financing. We completed the following sales of unregistered equity securities:
? In November of 2012, the Company issued, in connection with a private offering, 17,500,000 shares of common stock to Green Valley International Investment Management Company Limited ("GVI") at $0.10 per share for cash proceeds of $1,750,000 and the Company recorded a common stock payable for $19,255 related to 192,550 unissued shares at December 31, 2012. These shares were issued in 2013. In addition, under the terms of the private placement offering, GVI also received 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 $0.30 per share.
? In March 2013, the Company received $29,973 from GVI towards the purchase of common stock at $0.10 per share. The Company issued 492,280 shares of common stock for the $29,973 payment received in March and the $19,255 common stock payable. The Company also issued GVI 1 warrants to purchase 123,070 shares of the Company's common stock at $0.30 per share. The warrants are exercisable for 60 months from the date of issuance.
? In May 2013, the Company received $149,915 from GVI towards the purchase of common stock at $0.10 per share. The Company issued 1,499,150 shares of common stock with warrants to purchase 374,788 shares of the Company's common stock at $0.50 per share. The warrants are exercisable for 60 months from the date of issuance. All warrants issued to GVI are subject to standard anti-dilution adjustments for stock splits and other subdivisions.
? In the third quarter of 2013, the Company issued, pursuant to a Stock Purchase Agreement with a limited liability company controlled by a person who subsequently was appointed a director of the Company, 2,850,000 restricted shares of the Company's common stock at a purchase price of $0.10 per share for a total of $285,000. With the issuance of the common stock, the Company issued warrants to purchase 712,500 shares of the Company's common stock at $0.50 per share. The warrants are exercisable for 60 months from the date of issuance. The warrants are subject to standard anti-dilution adjustments for stock splits and other subdivisions.
? On January 21, 2014, we entered into a Securities Purchase Agreement with an investor, SOEX, pursuant to which we agreed to sell 37.5 million shares of our common stock, $0.01 par value per share (the "Common Stock"), for $1.5 million, at $0.04 per share pursuant to Regulation S. We received the $1.5 million from SOEX on March 3, 2014 and have issued the 37.5 million shares of Common Stock to the Investor and 3,750,000 shares to a foreign broker for this transaction. We will use the proceeds from the sale of the Common Stock for working capital, business development and as registered capital in an entity, which we are expected to be the majority owner (the "China Subsidiary"), to be incorporated in China with SOEX. Upon formation of this entity, SOEX shall provide additional funds to the China Subsidiary, to be negotiated and agreed upon between the Company and SOEX and as needed to fund the China Subsidiary including, but not limited to funds to secure and pay personnel and build the required facilities and infrastructure to sell our ConsERV and Aqualyte materials products in China.
We were able to use the equity financings and the sale of the license to MG Energy, LLC to pay off the following notes:
Unsecured Note
In December 2009, the Company entered into a $1,000,000 unsecured note payable with an investor which carried interest at 10% per annum. On March 22, 2011, the Company entered into a securities amendment and exchange agreement and an amended and restated convertible promissory note (collectively "Exchange Agreements") with the investor. Pursuant to the terms and subject to the conditions set forth in the Exchange Agreements, the Company and the investor amended and restated the $1,000,000 unsecured promissory note to, among other things, add a conversion option and extend the maturity date (as amended and restated, the "2011 Convertible Note"). The initial conversion price is $0.26 per share, which is subject to adjustment for standard anti-dilution provisions. Interest in the amount of 10% per annum, commencing on December 17, 2009 and calculated on a 365 day year, and the principal amount of $1,000,000 was due in full on March 22, 2012, which was subsequently extended to May 7, 2012. The Company did not repay the 2011 Convertible Note by May 7, 2012 and on June 15, 2012, the Company entered into a forbearance agreement with the investor. On October 29, 2012, we paid in full all principal and interest due on this note.
Secured Note
Also, on March 22, 2011, the Company entered into a 10% note and warrant purchase agreement, secured convertible promissory note (the "Secured Note") and a patent security agreement ("Financing Agreements") with the investor. Pursuant to the terms and subject to the conditions set forth in the Financing Agreements, the investor provided a loan in the principal amount of $1,500,000 to the Company, which was secured by all patents, patent applications and similar protections of the Company and all rents, royalties, license fees and "accounts" with respect to such intellectual property assets. The initial conversion price is $0.26 per share, which is subject to adjustment for standard anti-dilution provisions. Interest in the amount of 10% per annum, calculated on a 365 day year, and the principal amount of $1,500,000 was due and payable on March 22, 2012, subsequently extended to May 7, 2012. The Company did not repay the Secured Note by May 7, 2012 and on June 15, 2012, the Company entered into a forbearance agreement with the investor. On July 13, 2012, we paid in full all principal and interest due pursuant to this note.
2012 Secured Convertible Promissory Note On July 13, 2012, the Company issued a secured convertible promissory note and patent security agreement (collectively, the "Agreements") to an investor who is a shareholder of the Company. Pursuant to the terms and subject to the conditions set forth in the Agreements, the investor provided a loan in the amount of $2,000,000 to the Company, which is secured by all current and future patents, patent applications and similar protections of the Company and all rents, royalties, license fees and "accounts" with respect to such intellectual property assets .Pursuant to the secured convertible promissory note (the "2012 Note"), interest in the amount of 6% per annum, calculated on a 365 day year, and the principal amount of $2,000,000 and accrued interest will be paid on or before October 15, 2012, subsequently extended to October 26, 2012. The investor has the right to convert principal and accrued interest into the Company's common stock at $0.26 per share. The initial conversion price may be adjusted pursuant to standard anti-dilution provisions. The proceeds of this 2012 Note were used in part to pay, in full, all outstanding principal and interest due pursuant to the Secured Note issued March 22, 2011.
On October 30, 2012, the Company and MG Energy LLC, a Delaware limited liability company ("MG Energy"), entered into the License and Supply Agreement (the "Agreement"), effective October 26, 2012. As consideration for the Agreement, MG Energy agreed to retire the 2012 Note including all interest accrued thereon, issued by the Company to the investor, who assigned the 2012 Note to MG Energy, a company in which a shareholder of the Company holds a position. This retirement is nonrefundable and noncreditable. Coincident with the retirement of the 2012 Note, the related patent security agreement was terminated. In accordance with ASC Subtopic 470-50, Debt Modifications and Extinguishments, the Company determined the reacquisition price of the debt to be equal to the fair value of the debt as it was more clearly evident than the fair value of the License and Supply Agreement. The fair value of the debt approximated its carrying value and, accordingly, there was no gain or loss on the extinguishment of the debt.
While after the equity sale to SOEX, we should have enough cash to continue in business in 2014, we will need to raise additional funds until we complete our commercialization efforts.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the year ended December 31, 2013, the Company generated a net loss of $2,121,478 and the Company has incurred significant losses since inception. As of December 31, 2013, the Company has an accumulated deficit of $40,073,305, negative working capital of $515,494 and a stockholders' deficit of $3,749,512. The Company used $650,184 and $1,167,650 of cash in operations during 2013 and 2012, respectively, which was funded by proceeds from debt and equity financings. There is no assurance 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 did, however, sell 37,500,000 shares of its common stock in March 2014 for $1,500,000. 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.
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. If we secure debt financing in the future, we may not be able to repay all or any of such debt when due without severely impacting our ability to continue operations and we may not be able to secure additional financing to repay such financing on acceptable terms, if at all. Should we be unable to repay or renegotiate any such financing, as an alternative, management could attempt to renegotiate the repayment terms and seek extension of the maturity dates. There is no guarantee that, if we should need to renegotiate any such future debt, any negotiated terms we may be able to secure would be favorable to the Company. 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 as could any unfavorable terms.
Statements of Cash Flows
Cash and cash equivalents as of December 31, 2013 was $27,125 compared to $294,150 as of December 31, 2012. Cash is primarily used to fund our working capital requirements.
As of December 31, 2013, the Company had a decrease in working capital of $760,659, resulting in a working capital deficit of $515,494 compared to $245,365 of working capital as of December 31, 2012. During the year ended 2013, we used $650,184 of cash to fund our operations, $116,730 to purchase property and equipment and patent costs. These uses of cash are partially offset by approximately $500,000 of proceeds received during 2013 in connection with the issuance of debt and common stock.
Net cash used in operating activities was $650,184 for the year ended December 31, 2013 compared to approximately $1,167,650 for the same period in 2012. Although, there was a greater net loss in the year ended December 31, 2013, less cash was used by operating activities in 2013 as a result of non-cash charges that negatively affected net loss in the year ended December 31, 2013 and non-cash income that positively affected net income in the year ended December 31, 2012.
Net cash used in investing activities was $116,730 for the year ended December 31, 2013 compared to $45,195 for the same period in 2012. During the year ended December 31, 2013, we increased our purchases of equipment by approximately $82,000 and decreased our patent costs by approximately $14,000.
Net cash provided by financing activities was $1,244,255 for the year ended December 31, 2012 compared to approximately $500,000 for the same period in 2013. During the year ended December 31, 2013, we received approximately $465,000 in proceeds from the issuance of common stock. During the year ended December 31, 2012, we received $1,759,255 of net proceeds from the issuance of common stock and made payments of $2,565,000 on related party notes, net of proceeds of $2,050,000 from the issuance of such related party notes.
ECONOMY AND INFLATION
We have not experienced any significant cancellation of orders due to the downturn in the economy and only a small number of customer requested delays in delivery or production of orders in process.
Our management believes that inflation has not had a material effect on our results of operations
CONTRACTUAL OBLIGATIONS
We do not have any liabilities related to long-term contractual obligations as of December 31, 2013.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity or capital expenditures.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the accompanying financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the accompanying financial statements and the accompanying notes. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. When making these estimates and assumptions, we consider our historical experience, our knowledge of economic and market factors and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates. Management has discussed the selection of critical accounting policies and estimates with our Board of Directors, and the Board of Directors has reviewed our disclosure relating to critical accounting policies and estimates in this annual report on Form 10-K. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of the financial statements:
The significant accounting policies followed are:
Revenue recognition
Generally, the Company recognizes revenue for its products upon shipment to customers, provided no significant obligations remain and collection is probable.
In cetrain instances, our ConsERV product may carry a warranty of up to two years for all parts contained therein with the exception of the energy recovery ventilator core which may carry a warranty of up to ten years. The warranty includes replacement of defective parts. The Company has recorded an accrual of approximately $92,100 and $92,800 for future warranty expenses at December 31, 2013 and 2012, respectively.
Revenue derived from the sale of licenses is deferred and recognized as revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated. The Company recognized revenue of $189,100 and $103,640, respectively, from license agreements for the years ended December 31, 2013 and 2012. Royalty revenues are recognized when the royalty is earned. The Company recognized revenue of $26,512 and $0, respectively, from royalties for the years ended December 31, 2013 and 2012.
