Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 1. Background Information
Dais Analytic Corporation (the "Company"), a New York corporation, has developed and is commercializing applications using its nano-structure polymer technology. The first commercial product is an energy recovery ventilator ("ERV") (cores and systems) for use in commercial Heating, Ventilating, and Air Conditioning (HVAC) applications. The second commercial product is NanoClear
TM
, a water clean-up process useful in the creation of potable water from most forms of contaminated water including industrial process waste water (petrochemical, steel, etc.) sea, brackish, or waste water. In addition to direct sales, the Company licenses its nano-structured polymer technology to strategic partners in the aforementioned application and is in various stages of development with regard to other applications employing its base technologies. The Company was incorporated in April 1993 and its corporate headquarters is located in Odessa, Florida.
The Company is dependent on third parties to manufacture the key components needed for its nano-structured based materials and some portion of the 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 the Company's quality, quantity and cost requirements or technical specifications, or the inability to obtain alternative sources of these components on a timely basis or on acceptable terms, would create delays in production of the Company's products and/or increase its unit costs of production. Certain of the components or the processes of the Company's suppliers are proprietary. If the Company was ever required to replace any of its suppliers, it should be able to obtain comparable components from alternative suppliers at comparable costs but this would create a delay in production.
Note 2. Going Concern and Management’s Plans
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. For the year ended December 31, 2016, the Company generated a net loss of $276,007 and has incurred significant losses since inception. As of December 31, 2016, the Company has an accumulated deficit of $43,664,486, total stockholders' deficit of $2,167,684, negative working capital of $872,183 and cash and cash equivalents of $21,066. The Company used $952,457 and $2,041,192 of cash from operations during the years ended December 31, 2016 and 2015, respectively, which was funded primarily by proceeds from loans from related parties and equity financings. There is no assurance that any such financing will be available in the future. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company is currently pursuing the following sources of short and long-term working capital:
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1.
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The Company is holding preliminary discussions with parties who are interested in licensing, purchasing the rights to or establishing a joint venture to commercialize applications of the Company’s technology.
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2.
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The Company is seeking growth capital from certain strategic and/or government (grant) related sources. 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 products.
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3.
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The Company is holding discussions with investors and investment banks to obtain debt and/or equity financing.
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Any failure by the Company 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. There are no assurances we will be able to obtain the financing and planned product development and commercialization. Accordingly, the Company may not have the ability to continue as a going concern. 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.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 3. Significant Accounting Policies
The significant accounting policies followed are:
Use of estimates
-
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates underlying the Company’s reported financial position and results of operations include the allowance for doubtful accounts, fair value of unit based compensation, fair value impairment analysis, valuation allowance on deferred taxes and the warranty reserve.
Cash and cash equivalents
-
For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances.
Accounts receivable
-
Accounts receivable consist primarily of receivables from the sale of the Company’s ERV products and royalties due under license and supply agreements. The Company regularly reviews accounts receivable for any bad debts based on an analysis of the Company's collection experience, customer credit worthiness and current economic trends. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on management's review of accounts receivable, an allowance for doubtful accounts of $3,647 and $3,261 has been recorded at December 31, 2016 and 2015, respectively.
Other receivables
-
Other receivables consist primarily of receivables from the U.S. Department of Defense and the U.S. Department of Energy (See Note 3 - Research and development expenses and funding proceeds). The Company prepares invoices as it meets funding program milestones. Based on management's review of other receivables, management has determined that no allowance for other receivables is necessary at December 31, 2016 and 2015.
Inventory
-
Inventory consists of raw materials, work-in-process and finished goods and is stated at the lower of cost, determined by first-in, first-out method, or market. Market is determined based on the net realizable value, with appropriate consideration given to obsolescence, excessive levels, deterioration and other factors. At December 31, 2016 and 2015, the Company had $72,059 and $0 of raw materials, $4,158 and $2,560 of in-process inventory and $1,381 and $92,351 of finished goods inventory, respectively. A reserve is recorded for any inventory deemed excessive or obsolete. No reserve is recorded at December 31, 2016 and 2015, respectively.
Property and equipment
-
Property and equipment is recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from 3 to 7 years. Leasehold improvements are amortized over the shorter of their estimated useful lives of 5 years or the related lease term. Depreciation and amortization expense was $54,053 and $38,042 for the years ended December 31, 2016 and 2015, respectively. Gains and losses upon disposition are reflected in the Statement of Operations in the period of disposition. Maintenance and repair expenditures are charged to expense as incurred.
During the third quarter of 2015, the Company reviewed its property and equipment and wrote-off $120,331 of assets no longer in service. These assets were fully depreciated resulting in a reduction of cost and accumulated depreciation with no resulting loss. There were no dispositions of property and equipment in 2016.
Intangible assets
- Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company's existing intangible assets consist solely of patents. Patents are amortized over their estimated useful or economic lives of 17 years. Patent amortization expense was $22,055 and $23,803 for the years ended December 31, 2016 and 2015, respectively. Based on current capitalized costs, total patent amortization expense is estimated to be approximately $12,000 per year for the next five years and thereafter.
Long-lived assets
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Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. When impairment indicators exist, the Company estimates the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether or not the asset values are recoverable. The Company did not recognize impairment on its long-lived assets during the years ended December 31, 2016 or 2015.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 3. Significant Accounting Policies (Continued)
Government Funding
–
Government funding represents grants from the U.S. Department of Defense and U.S. Department of Energy and are recognized when there is reasonable assurance that the funding will be received and conditions associated with the funding are met. When fundings are received related to property and equipment, the Company reduces the basis of the assets on the balance sheet, resulting in lower depreciation expense over the life of the associated asset. When fundings are received which relate to expense reimbursement they are recorded as a reduction of the associated expense in the period in which the expense is incurred.
Research and development expenses and funding proceeds
-
Expenditures for research, development and engineering of products are expensed as incurred. The Company incurred research and development costs of $939,409 and $978,526 for the years ended December 31, 2016 and 2015, respectively. The Company accounts for proceeds received from government fundings for research as a reduction in research and development costs. The Company recorded proceeds against research and development expenses on the Statements of Operations of $510,675 and $234,788 for the years ended December 31, 2016 and 2015, respectively.
Stock issuance costs
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Stock issuance costs are recorded as a reduction of the related proceeds through a charge to stockholders' deficit.
Common stock
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The Company records common stock issuances when all of the legal requirements for the issuance of such common stock have been satisfied.
Revenue recognition
-
Generally, the Company recognizes revenue for its products upon shipment to customers, provided no significant obligations remain and collection is probable.
In certain instances, the Company’s ConsERV system product may carry a limited warranty of up to two years for all parts contained therein with the exception of the energy recovery ventilator core produced and sold by the Company. The distributor of the ConsERV system may carry a limited warranty of up to ten years. The limited warranty includes replacement of defective parts for the ConsERV system, and includes workmanship and material failure for the ConsERV core. The Company has recorded an accrual of $91,531 for future warranty expenses at December 31, 2016 and 2015, respectively, which is included in accrued expenses, other.
For the years ended December 31, 2016 and 2015, one customer, Multistack LLC, accounted for approximately 67% and 96% of the Company’s sales revenue, respectively. At December 31, 2016 and 2015, amounts due from MultiStack were approximately 0% and 61% of total accounts receivable, respectively. No amounts were due from MultiStack at December 31, 2016 as a result of the termination of the license agreement between the Company and Multistack on December 8, 2016. See Note 9 for a discussion of Multistack LLC and the licensing agreement with MG Energy LLC.
Revenue derived from the sale of licenses is deferred and recognized as license fee revenue on a straight-line basis over the life of the license, or until the license arrangement is terminated. The Company recognized license fee revenue of $1,653,847 and $168,844 for the years ended December 31, 2016 and 2015, respectively. Royalties are recognized as earned. The Company recognized royalty revenue of $71,667 and $119,822 for the years ended December 31, 2016 and 2015, respectively.
The Company accounts for revenue arrangements with multiple elements under the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 605-25, "Revenue Recognition-Multiple-Element Arrangements". In order to account for these agreements, the Company must identify the deliverables included within the agreement and evaluate which deliverables represent separate units of accounting based on if certain criteria are met, including whether the delivered element has stand-alone value to the licensee. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units.
Stock based compensation
- The Company recognizes all share-based payments to employees, including grants of employee stock options, as compensation expense in the financial statements based on their fair values. That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period) or immediately if the share-based payments vest immediately.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 3. Significant Accounting Policies (Continued)
The value of each grant is estimated at the grant date using the Black-Scholes option model with the following assumptions for options granted during the years ended December 31, 2016 and 2015:
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Years Ended
December 31,
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2016
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2015
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Dividend rate
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0
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%
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0
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%
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Risk free interest rate
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1.80
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%
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2.24
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%
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Expected term
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10 years
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10 years
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Expected volatility
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185
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%
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178
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%
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The basis for the above assumptions are as follows: the dividend rate is based upon the Company’s history of dividends; the risk-free interest rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term was calculated based on the Company’s historical pattern of options granted and the period of time they are expected to be outstanding; and expected volatility was calculated based upon historical trends in the Company’s common stock for periods prior to the date the Company’s trading information was available.
Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Based on historical experience of forfeitures, the Company estimated forfeitures at 0% for each of the years ended December 31, 2016 and 2015, respectively.
Non-employee stock-based compensation
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The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50
Equity-Based Payments to Non-Employees
. Stock-based compensation related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services, whichever is more readily determinable. The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.
Financial instruments
- The Company accounts for financial instruments in accordance with FASB Accounting Standards Codification (ASC) 820 "
Fair Value Measurements and Disclosures
" (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:
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Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
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Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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·
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Level 3 - Inputs that are both significant to the fair value measurement and unobservable.
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Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 3. Significant Accounting Policies (Continued)
The Company does not have any financial instruments carried at fair value. The respective carrying values of certain on-balance sheet financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued compensation and accrued expenses.
Income taxes
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Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes resulting from temporary differences. Such temporary differences result from differences in the carrying value of assets and liabilities for tax and financial reporting purposes. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company identifies and evaluates uncertain tax positions, if any, and recognizes the impact of uncertain tax positions for which there is a less than more-likely-than-not probability of the position being upheld when reviewed by the relevant taxing authority. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. The Company has not recognized a liability for uncertain tax positions. If there were an unrecognized tax benefit, the Company would recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company's 2013 through 2016 tax years remain open and subject to examination by the Internal Revenue Service.
Derivative Financial Instruments
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The Company does not use derivative instruments to hedge exposure to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 “
Derivative and Hedging”
(ASC 815) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.
Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether fair value of warrants issued is required to be classified as equity or as a derivative liability.
Earnings (loss) per share
– Basic income (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted income (loss) per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. Common share equivalents of 24,427,916 and 33,761,916 were excluded from the computation of diluted earnings per share for the years ended December 31, 2016 and 2015, respectively, because their effect is anti-dilutive.
Recent Accounting Pronouncements
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There are new accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") which are not yet effective as follows:
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of the new standard on its financial statements.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 3. Significant Accounting Policies (Continued)
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). In July 2015, the FASB voted to defer the effective date of ASU 2014-09 for all entities by one year. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its financial statements and has not yet determined the method by which it will adopt the standard in 2018.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern, which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard is effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance did not have a material impact on the financial statements.
Reclassificatio
ns
–
Certain 2015 amounts have been reclassified to conform to the 2016 presentation with no impact on total stockholders’ deficit or net loss.
Note 4. Property and Equipment
Property and equipment consist of the following:
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December 31,
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2016
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2015
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Furniture and fixtures
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$
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20,966
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$
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20,966
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Computer equipment
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21,761
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21,761
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Demonstration equipment
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92,733
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92,733
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Office and lab equipment
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316,412
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282,840
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Leasehold improvements
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9,708
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9,708
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Property and equipment, gross
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461,580
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428,008
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Less accumulated depreciation
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330,577
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276,523
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Property and equipment, net
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$
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131,003
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$
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151,485
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Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 5. Accrued Expenses, Other
Accrued expenses, other consists of the following:
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December 31,
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2016
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2015
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Accrued expenses, other
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$
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141,271
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$
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48,587
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Accrued warranty costs
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91,531
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91,531
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$
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232,802
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$
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140,118
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Note 6. Related Party Transactions
The Company rents a building that is owned by two stockholders of the Company, one of which is the Chief Executive Officer. Rent expense for this building is $4,066 per month, including sales tax. The Company recognized rent expense related to this lease of $48,792 in the years ended December 31, 2016 and 2015, respectively. The lease term will terminate upon 30 days' written notice from landlord or 90 days written termination from us.
On June 24, 2016, the Company entered into a Loan and Security Agreement (“Security Agreement”) with Patricia Tangredi (the “Holder”) pursuant to which the Company issued a Senior Secured Promissory Note for $150,000 (the “Note”). The interest rate is 12% per annum compounded daily with a minimum interest payment of $2,000. The Note grants the Holder a secured interest in the assets of the Company. Ms. Tangredi is the wife of Timothy Tangredi, the Company’s CEO and stockholder, and therefore is a related party of the Company. Pursuant to the Note, the Company is to pay the Holder the principal amount of $150,000 plus all interest due thereon in accordance with terms and conditions of the Security Agreement on the earlier of: (i) the date upon which the Company secures funds, regardless of source, equal to or exceeding, in the aggregate, $1,000,000 or (ii) October 31, 2016.
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On September 7, 2016, the parties amended the Loan and Security Agreement (“First Amendment”) whereby the principal amount was increased by $100,000. In addition, the Company issued on October 19, 2016, 200,000 shares of $.01 par value common stock in accordance with the terms of the First Amendment.
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On October 30, 2016, the parties amended the Loan and Security Agreement (“Second Amendment”) whereby the maturity date of the Note was amended to December 31, 2016.
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·
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On November 28, 2016, the parties amended the Loan and Security Agreement (“Third Amendment”) whereby the principal amount was increased by $60,000, the minimum interest payment was increased to $9,000, and the Maturity Date of the Note was extended to January 20, 2017. In addition, the Company is obligated to issue 200,000 shares of $.01 par value common stock in accordance with the terms of the Third Amendment. As consideration for the modification to the Maturity Date of the Note, the Company is obligated to issue 20,000 shares of $.01 par value common stock. Both obligations to issue shares of common stock are recorded as interest expense and in current liabilities at December 31, 2016. The 220,000 shares of common stock were issued during the first quarter of 2017.
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On December 27, 2016, the parties amended the Loan and Security Agreement (“Fourth Amendment”) whereby the principal amount was increased by $30,000, the minimum interest payment was increased to $11,000, and the Maturity Date of the Note was extended to February 15, 2017. See subsequent event note 12 for update on maturity date. In addition, the Company is obligated to issue 200,000 shares of $.01 par value common stock in accordance with the terms of the Fourth Amendment. As consideration for the modification to the Maturity Date of the Note, the Company is obligated to issue 20,000 shares of $.01 par value common stock. Both obligations to issue shares of common stock are recorded as interest expense and in current liabilities at December 31, 2016. The 220,000 shares of common stock were issued during the first quarter of 2017.
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The Company is using the proceeds of the Note and the First, Third and Fourth Amendments for working capital purposes.
The Company has accrued compensation due to the Chief Executive Officer as of December 31, 2016 and 2015 of $1,485,609 and $1,321,958, respectively, included in accrued compensation and related benefits in the accompanying balance sheets.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Timothy N. Tangredi, our Chief Executive Officer and Chairman, is a founder and a member of the board of directors of Aegis BioSciences, LLC ("Aegis"). Mr. Tangredi currently owns 52% of Aegis' outstanding equity and spends approximately one to two days per month on Aegis business for which he is compensated by Aegis. Aegis has two exclusive, world-wide licenses from us under which it has the right to use and sell products containing our polymer technologies in biomedical and health care applications. Pursuant to the second license, Aegis is required to make royalty payments of 1.5% of the net sales price it receives with respect to any personal hygiene product, surgical drape or clothing products (the latter when employed in medical and animal related fields) and license revenue it receives should Aegis grant a sublicense to a third party. Aegis sold no such products nor has it received any licensing fees requiring a royalty payment be made to us. All obligations for such payments ended on June 2, 2015.
On February 27, 2015, the Company and Timothy N. Tangredi, the Company's Chief Executive Officer entered into an amendment to Mr. Tangredi's Amended and Restated Employment Agreement. Currently, the Company has non-interest bearing accrued compensation due to the Chief Executive Officer for deferred salaries earned and unpaid as described above. The amendment provides that, if at any time during a calendar year, the unpaid compensation is greater than $500,000, Mr. Tangredi must convert $100,000 of unpaid compensation into the Company's common stock during such calendar year. The conversion rate shall be equal to 75% of the average closing price for the Company's common stock for the 30 trading days prior to the date of conversion. The Company shall also pay to Mr. Tangredi a cash payment equal to 20% of the compensation income incurred as a result of the conversion. Further, at any time any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5 under such Act) of greater of 40% of the then-outstanding voting power of the voting equity interests or a person or group initiate a tender offer for the Company's common stock, Mr. Tangredi may convert unpaid compensation to Class A Convertible Preferred Stock of the Company at $1.50 per share. The Board of Directors waived the requirement to convert $100,000 of unpaid compensation into common stock during 2016. No amounts have been converted under the terms of the Agreement to date. See Note 10 Commitments and Contingencies for further disclosure of the terms of Mr. Tangredi’s employment agreement.
At December 31, 2014, the Company had accrued compensation due to its former general counsel, Mr. Tangredi's wife, for deferred salaries earned and unpaid equal to $400,772. Ms. Tangredi retired as of October 10, 2014. The Company agreed to pay her on a payment schedule over three years with (a) payments of $50,000 on October 17, 2014 and February 15, 2015, (b) 36 monthly payments ranging from $7,000 to $7,500 over three years and (c) a $50,772 lump-sum payment on October 17, 2017, if a balance remained. Under certain circumstances, such as completion of a financing, the Company agreed to make accelerated payments under the agreement. All amounts due to Ms. Tangredi were paid in the first half of 2015.
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 ("Soex"). The Distribution Agreement was a covenant included in a Securities Purchase Agreement, dated January 21, 2014, between the Company and Soex, pursuant to which Soex purchased 37,500,000 shares of the Company’s common stock, equal to approximately 31% of the issued and outstanding shares of common stock as of December 31, 2015. Pursuant to the Distribution Agreement, in exchange for $500,000 to be paid by October 20, 2014, royalty payments and a commitment from Soex to purchase nano-material membrane and other products from the Company, Soex obtained the right to distribute and market the Company’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 the Company’s intellectual property in the manufacture and sale of its products in the Field and Territory and to purchase its requirements of nano-material membrane only from the Company, subject to terms and conditions of the Distribution Agreement. During 2014, $50,000 of the $500,000 license fee was received. Pursuant to the Distribution Agreement, Soex was required to pay the Company $500,000, issue the Company 25% of the equity of a newly-created company, Soex (Beijing) Environmental Protection Technology Company Limited and pay the Company royalties. Soex only paid the Company $50,000 of the required $500,000, did not issue the required equity and did not pay any required royalties. Effective June 12, 2015, the Company’s Board of Directors ratified the termination of the Distribution Agreement, dated April 24, 2014, with Soex as a result of a breach of the Distribution Agreement by Soex. There are no early termination penalties for the termination of the Distribution Agreement. The remaining amount of deferred revenue was recognized as income upon the termination of the Distribution Agreement in June 2015. The Company recognized license fee revenue of $49,167 for the year ended December 31, 2015. The Company is pursuing legal action against Soex for breach of the Distribution Agreement as well as the Securities Purchase Agreement entered into in January 2014 (see Note 10, Commitments and Contingencies).
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
In December 2015, the Company reported that it entered into a Share Exchange Agreement (the "Exchange Agreement"), dated as of December 24, 2015 but effective as of December 1, 2015, with Open Systems Control, a California corporation (the "Shareholder"), and Synpower Corporation. Ltd., a Hong Kong corporation ("Synpower") through the issuance of 1,000,000 of common stock at $.19 per share which was recorded as Investment in China Operating Company on the balance sheet at December 31,2015. Pursuant to the Exchange Agreement, the Company purchased from the Shareholder all of the equity ownership in Synpower. At the time of the Exchange Agreement, Synpower was the owner of 62% of Jixiun-Cast Ltd., an engineering company organized in the People's Republic of China ("Cast"). The Company's plan was to use Cast for its manufacturing and distribution operations in China. On March 7, 2016, the Company and Synpower rescinded the Exchange Agreement, as of December 1, 2015, as a result of the discovery of an undisclosed event, not discoverable in the due diligence, related to Cast's ability to function in China as an operating entity for the Company. As a result of the event, the Shareholder breached the representations, warranties and covenants made by the Shareholder in the Exchange Agreement. As a result of the rescission, which was agreed to by the Shareholder, the transaction was unwound as of December 1, 2015, the Company will return the equity interest in Synpower to an entity identified by the Shareholder, and the shares issued to the Shareholder were returned to the Company and will be cancelled pending final notification of cancellation from the Shareholder. As a result of the rescission and return of shares, the Company reduced the Investment in China Operating Company and recorded Treasury Stock of $190,000 during the year ended December 31, 2016. The financial statements of Synpower and its subsidiary, Cast, were not consolidated with the Company’s 2015 financial statements for the period from December 1, 2015 through March 7, 2016 because the Company and Shareholder mutually rescinded the Exchange Agreement as of December 1, 2015 and the Company never had control of Synpower or Cast.
The above terms and amounts are not necessarily indicative of the terms and amounts that would have been incurred had comparable transactions been entered into with independent parties.
Note 7. Equity Transactions
Preferred Stock
On March 5, 2015, the Company amended its Certificate of Incorporation to increase the number of authorized shares to 250,000,000, consisting of 240,000,000 shares of common stock and 10,000,000 shares of preferred stock, and to cancel the designated but unissued Series A-D Preferred Stock and create a new series of preferred stock designated as the "Class A Preferred Stock". There are no shares of Class A Preferred Stock currently issued by the Company. Any holder of the Class A Preferred Stock shall not be entitled to any dividends. Each share of Class A Preferred Stock shall entitle the holder thereof to 150 votes on all matters submitted to a vote of the stockholders of the Company. The Class A Preferred Stock is convertible into common stock at a conversion price equal to 75% of the average closing price of the Company's common stock for the 30 trading days prior to the holder's election to convert. At December 31, 2016 and 2015, the Company’s Board of Directors has authorized 10,000,000 shares of preferred stock with a par value of $0.01 to be issued in series with terms and conditions to be determined by the Board of Directors.
Common Stock
At December 31, 2014, the Company’s Board of Directors had authorized 200,000,000 shares of common stock with a par value of $0.01 to be issued in series with terms and conditions to be determined by the Board of Directors. In December 2014, the Company’s board of directors approved an amendment of the Company’s Amended and Restated Articles of Incorporation that increased the authorized number of the Company’s shares of common stock to 240,000,000. The amendment was subject to stockholder approval which was obtained in February 2015.
On January 21, 2014, 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 37,500,000 shares of the Company’s common stock, for $1,500,000, 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 used the proceeds from the sale of the common stock for working capital and business development. To further the distribution of Dais’s products and strengthen the relationship between the Company and the Investor, the Investor agreed to form, and issue to the Company equity in, a subsidiary (the “Subsidiary”) which will function as the manufacturer and master distributor. The Investor has formed the Subsidiary but has not issued the equity to Dais. The SPA also required the Company to appoint a director nominated by the Investor which was completed on October 3, 2015. 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. See Note 10 Commitments and Contingencies for a discussion of litigation related to the SPA and related distribution agreement.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 7. Equity Transactions (Continued)
On December 15, 2014, the Company entered into a Securities Purchase Agreement (the "SPA") with two investors, Hong Kong SAGE Technology Investment Co., Limited and Hong Kong JHSE Technology Investment Co., Limited, both with principal offices in Hong Kong (the "Purchasers"). Pursuant to the SPA, the Company sold 18,000,000 shares of the Company's common stock, $0.01 par value per share (the "Common Stock") for $2,750,000, at approximately $0.153 per share pursuant to Regulation S. The investors were issued 18,000,000 shares after the Company received all funds in the first quarter of 2015.
The SPA also provided for the issuance of 20,333,334 shares of the Company's common stock to the Purchasers for 51% of the equity of an existing company in China (the "Operating Company") upon the completion of the following conditions: (1) the Purchasers shall have capitalized the Operating Company with $3,000,000 of registered capital or a valuation of assets at or above $3,000,000; (2) the Purchasers shall have completed the legal registration of shares of the Operating Company owned by the parties with the Company owning 51% of the Operating Company and the Purchasers jointly, and/or by and through their respective third party designees, owning a total of 49% of the Operating Company; and (3) the Operating Company, the Purchasers and the Company shall have executed an HVAC Services Agreement with $60,000,000 of revenues in greater China over a three year period with such HVAC Services Agreement having standard terms and conditions acceptable to the Company and the Purchasers.
On December 7, 2015, the Company amended the SPA to reduce the number of shares to be issued to the Purchasers. Pursuant to terms of the Amendment, the Purchasers will receive 10 million shares of the Company’s common stock over three years as they introduce orders for $60,000,000 to a subsidiary located in China, created or acquired by the Company. The Company will own greater than 51% of such subsidiary.
The Company entered into a Second Amendment of the Security Agreement, effective October 30, 2016, which amended the amount due and the due date of a promissory note issued by a related party. (See Note 6, Related Party Transaction for further discussion).
On November 30, 2016 the Company entered into a consulting agreement with an outside business consultant. Under the terms of the agreement, services commenced on December 1, 2016 and will continue for three months. The Company is to issue to the consultant $15,000 worth of restricted common stock per month based on the three day average closing price per share of the month. All shares earned under the agreement are considered earned in full and beneficially owned as of November 30, 2016. On December 30, 2016, the Company issued 300,000 shares of $.01 par value common stock to the consultants in payment of the first month’s services.
Note 8. Stock Options and Warrants
Options
In June 2000 and November 2009, the Company's Board of Directors adopted, and the shareholders approved, the 2000 Plan and 2009 Plan, respectively (together the "Plans"). The Plans provide for the granting of options to qualified employees of the Company, independent contractors, consultants, directors and other individuals. The Company's Board of Directors approved and made available 11,093,886 and 15,000,000 shares of common stock to be issued pursuant to the 2000 Plan and the 2009 Plan, respectively. On February 27, 2015, the shareholders approved the Dais Analytic Corporation 2015 Stock Incentive Plan (the "2015 Plan"). The number of shares of common stock reserved for issuance under the 2015 Plan is 10,000,000. The Plans and the 2015 Plan permit grants of options to purchase common shares authorized and approved by the Company's Board of Directors.
There were 50,000 stock options issued to consultants in 2016. The Company recognized $3,489 of compensation expense for stock options issued to consultants during the year ended December 31, 2016. There were no such stock options issued in 2015.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
The following summarizes the information relating to outstanding stock options activity during 2016:
|
|
Common
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding at December 31, 2014
|
|
|
21,362,116
|
|
|
$
|
0.27
|
|
|
|
5.57
|
|
|
$
|
1,579,657
|
|
Granted
|
|
|
250,000
|
|
|
|
0.19
|
|
|
|
8.97
|
|
|
|
|
|
Exercised
|
|
|
(882,058
|
)
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,515,000
|
)
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
19,215,058
|
|
|
|
0.28
|
|
|
|
4.89
|
|
|
$
|
9,000
|
|
Granted
|
|
|
2,340,000
|
|
|
|
0.07
|
|
|
|
9.29
|
|
|
|
|
|
Forfeited or expired
|
|
|
(2,712,500
|
)
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
18,842,558
|
|
|
$
|
0.25
|
|
|
|
5.06
|
|
|
$
|
-
|
|
Exercisable at December 31, 2016
|
|
|
18,842,558
|
|
|
$
|
0.25
|
|
|
|
5.06
|
|
|
$
|
-
|
|
Stock compensation expense was $163,294 and $56,497 for the years ended December 31, 2016 and 2015, respectively. The weighted average fair value of options granted at market during 2016 and 2015 was $0.07 and $0.19 per option, respectively. As of December 31, 2016, there was no of unrecognized employee stock-based compensation expense related to non-vested stock options.
The following table represents the Company’s non-vested share-based payment activity for the year ended December 31, 2016 and 2015:
|
|
|
|
|
Weighted
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Options
|
|
|
Fair Value
|
|
Nonvested options - December 31, 2014
|
|
|
179,167
|
|
|
$
|
0.11
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(101,389
|
)
|
|
|
0.13
|
|
Vested
|
|
|
(77,778
|
)
|
|
|
0.12
|
|
Nonvested options - December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
2,340,000
|
|
|
|
0.07
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(2,340,000
|
)
|
|
|
0.07
|
|
Nonvested options - December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Warrants
At December 31, 2016, the Company had outstanding warrants to purchase the Company’s common stock which were issued in connection with multiple financing arrangements and consulting agreements. Information relating to these warrants is summarized as follows:
Warrants
|
|
Remaining
Number Outstanding
|
|
|
Weighted Average Remaining Life (Years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants-Stock Purchases
|
|
|
5,585,358
|
|
|
|
1.01
|
|
|
$
|
0.34
|
|
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 9. Deferred Revenue
On October 30, 2012, the Company and MG Energy LLC, a Delaware limited liability company (“MG Energy”), entered into a License and Supply Agreement (the “Agreement”), effective October 26, 2012. Pursuant to the Agreement, the Company licensed certain intellectual property and improvements to MG Energy, for use in the manufacture and sale of energy recovery ventilators (“ERV”) and certain other HVAC systems for installation in commercial, residential or industrial buildings in North America and South America in exchange for the cancellation of $2,034,521 of debt due to MG Energy. MG Energy also agreed to purchase its requirements of certain ConsERV products from the Company for MG Energy’s use, pursuant to the terms and conditions of the Agreement. MG Energy will also pay royalties, as defined, to the Company on the net sales of each product or system sold. The term of the Agreement will expire upon the last to expire of the underlying patent rights for the licensed technology.
The Company has identified all of the deliverables under the Agreement and has determined significant deliverables to be the license for the intellectual property and the supply services. In determining the units of accounting, the Company evaluated whether the license has stand-alone value to MG Energy based upon consideration of the relevant facts and circumstances of the Agreement. The Company determined that the license does not have stand-alone value to the licensee and, therefore, should be combined with the supply agreement as one unit of accounting. The initial payment for the license agreement will be treated as an advance payment and recognized over the performance period of the supply agreement.
MG Energy entered into a sublicense with Multistack, LLC. For the years ended December 31, 2016 and 2015, Multistack LLC accounted for approximately 67% and 96% of sales revenue, respectively. At December 31, 2016 and 2015, amounts due from MultiStack were approximately 0% and 61% of total accounts receivable, respectively.
On December 8, 2016, the Company and MG Energy LLC, a Delaware limited liability company (“MG Energy”), and Multistack, LLC, a Minnesota limited liability company terminated the License and Supply Agreement (the “Agreement”), with mutual release. The parties mutually agreed the License Agreement shall be terminated and all licenses, rights and obligations thereunder, and none of the parties shall be responsible for any services or payment. The amount of deferred revenue was recognized as royalty revenue upon the termination of the License Agreement in December 2016. The Company recognized license revenue of $1,653,848 and $119,678 in years ended December 31, 2016 and 2015. Deferred revenue for this agreement was $0 and $1,653,848 at December 31, 2016 and 2015, respectively. The Company recognized royalty revenue of $71,667 and $119,822 in the years ended December 31, 2016 and 2015, respectively.
On April 24, 2014, the Company entered into a Distribution Agreement with SoEX (Hong Kong) Industry & Investment Co., Ltd., as discussed in Note 6 Related Party Transactions. The amount of deferred revenue was recognized as income upon the termination of the Distribution Agreement in June 2015. The Company recognized license fee revenue of $49,167 for the year ended December 31, 2015.
Note 10. Commitments and Contingencies
The Company has employment agreements with some of its key employees and executives. These agreements provide for minimum levels of compensation during current and future years. In addition, these agreements call for grants of stock options and for payments upon termination of the agreements.
The Company entered into an amended and restated employment agreement with Mr. Timothy N. Tangredi, the Company’s President, Chief Executive Officer, and director, dated as of September 14, 2011. Mr. Tangredi’s employment agreement provides for an initial term of three years commencing on September 14, 2011 with the term extending on the second anniversary thereof for an additional two year period and on each subsequent anniversary of the commencement date for an additional year. Mr. Tangredi’s initial base salary is $200,000. Mr. Tangredi’s base salary shall be increased annually, if applicable, by a sum equal to his current base salary multiplied by one third of the percentage increase in the Company’s yearly revenue compared to the Company’s prior fiscal year revenue; provided however any annual increase in Mr. Tangredi’s base salary shall not exceed a maximum of 50% for any given year. Any further increase in Mr. Tangredi’s base salary shall be at the sole discretion of the board of directors or compensation committee (if applicable). Additionally, at the discretion of the Company’s board of directors and its compensation committee, Mr. Tangredi may be eligible for an annual bonus, if any, of up to 100% of his then-effective base salary, if he meets or exceeds certain annual performance goals established by the board of directors. In addition to this bonus, Mr. Tangredi may be eligible for a separate merit bonus if approved by the board of directors, for specific extraordinary events or achievements such as a sale of a division, major license or distribution arrangement or merger. Mr. Tangredi is entitled to medical, disability and life insurance, as well as six weeks of paid time off annually, an automobile allowance, reimbursement of all reasonable business expenses, automobile insurance and maintenance, and executive conference or educational expenses.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 10. Commitments and Contingencies (Continued)
Under his employment agreement, in addition to any other compensation which he may receive, if the Company completes a secondary public offering, Mr. Tangredi will be granted an option to purchase up to 520,000 shares of the Company’s common stock with an exercise price equal to the fair market value per share on the date of grant. This option will become vested and exercisable in thirds, with one third vested upon grant, another third at the one-year anniversary of the grant, and another third upon the second anniversary of the grant. The option shall have a term of ten years, shall be exercisable for up to three years after termination of employment (unless termination is for cause, in which event it shall expire on the date of termination), shall have a “cashless” exercise feature, and shall be subject to such additional terms and conditions as are then applicable to options granted under such plan provided they do not conflict with the terms set forth in the agreement.
If Mr. Tangredi’s employment is terminated for any reason, the Company’s will be obligated to pay him his accrued but unpaid base salary, bonus and accrued vacation pay, and any unreimbursed expenses (“Accrued Sums”).
In addition to any Accrued Sums owed, if Mr. Tangredi’s employment is terminated by the Company in the event of his disability or without cause or by Mr. Tangredi for good reason, he shall be entitled to:
(i)
|
an amount equal to the sum of (A) the greater of 150% of the base salary then in effect or $320,000 plus (B) the cash bonus and/or merit bonus, if any, awarded for the most recent year;
|
(ii)
|
health and life insurance, a car allowance and other benefits set forth in the agreement until two years following termination of employment, and thereafter to the extent required by COBRA or similar statute; and
|
(iii)
|
all stock options, to the extent they were not exercisable at the time of termination of employment, shall become exercisable in full.
|
In addition to any Accrued Sum owed, in the event of termination upon death, Mr. Tangredi shall be entitled to (i) and (iii) above.
In addition to any Accrued Sums owed, in the event that Mr. Tangredi elects to terminate employment within one year following a change in control, he shall receive a lump sum payment equal to the sum of (a) the greater of his then current base salary or $210,000 plus (b) the cash bonus and merit bonus, if any, awarded in the most recent year. In addition, he will be entitled to (ii) and (iii) above.
The employment agreement also contains customary covenants restricting the use of the Company’s confidential information and solicitation of employees, which are similarly applicable to other executive officers. In addition the Company is obligated to indemnify Mr. Tangredi for any claims made against him in connection with his employment with the Company, to advance indemnification expenses, and maintain his coverage under the Company’s directors’ and officers’ liability insurance policy.
Under the employment agreement, the Company and Mr. Tangredi have agreed that the Company will retain an independent compensation consultant, which may modify the compensation program for Mr. Tangredi and other officers, subject to certain conditions including approval of the board of directors. Notwithstanding the recommendation and board consideration, Mr. Tangredi has the right to continue the current terms of the employment agreement.
On February 27, 2015, the Company and Timothy N. Tangredi, the Company's Chief Executive Officer entered into an amendment to Mr. Tangredi's Amended and Restated Employment Agreement. Currently, the Company has non-interest bearing accrued compensation due to the Chief Executive Officer for deferred salaries earned and unpaid as described above. The amendment provides that, if at any time during a calendar year, the unpaid compensation is greater than $500,000, Mr. Tangredi must convert $100,000 of unpaid compensation into the Company's common stock during such calendar year. The conversion rate shall be equal to 75% of the average closing price for the Company's common stock for the 30 trading days prior to the date of conversion. The Company shall also pay to Mr. Tangredi a cash payment equal to 20% of the compensation income incurred as a result of the conversion. Further, at any time any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5 under such Act) of greater of 40% of the then-outstanding voting power of the voting equity interests or a person or group initiate a tender offer for the Company's common stock, Mr. Tangredi may convert unpaid compensation to Class A Convertible Preferred Stock of the Company at $1.50 per share. The Board of Directors waived the requirement to convert $100,000 of unpaid compensation into common stock during 2015 and 2016. No amounts have been converted under this agreement to date.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Litigation
From time to time, claims are made against the Company in the ordinary course of its business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products or engaging in other activities. The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on the Company’s results of operations for that period or future periods.
In the third quarter of 2015, the Company commenced an action for the cancellation of the 37,500,000 shares issued to Soex (the “Shares”) in connection with a Securities Purchase Agreement, dated January 21, 2014 (“Soex SPA”), and 3,750,000 shares issued to Zan Investment Advisory Limited (“Zan”), which is affiliated with Soex through Aifan Liu, who was appointed as a Company board observer by SOEX and her husband, Xinghong Hua. Sharon Han, General Manager and Chairwoman of Soex, served on the Company’s board pursuant to the provisions of the Soex SPA. Ms. Han resigned from the Board of Directors effective February 1, 2016.
On April 24, 2014, the Company entered into a Distribution Agreement (the “Distribution Agreement”), with Soex to distribute certain of the Company’s products in China. The Company was entitled to receive, pursuant to the Distribution Agreement, royalties and a $500,000 payment, of which $50,000 has been received, that was due on or before October 24, 2014. Further, the Company reported it has not received any royalties from Soex. Soex is in breach of the Distribution Agreement.
As reported in the Company’s Form 10-Q for the quarter ended June 30, 2015, the Company began pursuing legal action against Soex for breach of the Soex Securities Purchase Agreement and Distribution Agreement. On July 8, 2015, the Company filed a lawsuit in state courts in Florida against Soex and Zan.
Pursuant to the Distribution Agreement, Soex is in material breach of the following:
(1)
|
Section 1(a) of the Distribution Agreement for Soex’s failure to make a $225,000 payment to the Company for the appointment of Soex as the exclusive distributor of the Products in the Field and Territory (the “Distribution Payment Default”) in accordance with the terms set forth in the Distribution Agreement. Such payment was due on October 20, 2014 (the “Payment Date”).
|
|
|
(2)
|
Section 8(b) of the Distribution Agreement for Soex’s failure to make a $225,000 payment to the Company for the grant of the license and right to manufacture, sell, lease and distribute Products (excluding manufacture of MTM), and to use the Intellectual Property in connection therewith (the “License Payment Default” and, together with the Distribution Payment Default, the “Payment Default”) in accordance with the terms set forth in the Distribution Agreement. Such payment was due on the Payment Date.
|
|
|
(3)
|
Section 15(b) of the Distribution Agreement for Soex’s failure to issue to the Company 25% of the equity (the “Equity Default”) of SOEX (Beijing) Environmental Protection Technology Company Limited (the “China Subsidiary”).
|
As a result of the above, the Company terminated the Distribution Agreement. As provided in Section 14(e) of the Distribution Agreement, the Company has the right to enforce any obligation due to it by the Soex. As a result, Soex still must (a) pay the remaining $450,000 due under the Distribution Agreement and the amount of Royalties due, plus interest at 1.5% per month (18% per year) with interest accruing from the date that payment was due and (b) issue to us 25% of the equity of SOEX (Beijing) Environmental Protection Technology Company Limited. As provided in Section 14(b), neither the Company nor Soex shall be liable for compensation, reimbursement or damages due to loss of profits on sales or anticipated sales or losses due to expenditures, investments or commitments made or in connection with the establishment, development or maintenance of the business.
Further, in consideration of the issuance of the Shares to Soex and the equity to Zan under the Soex SPA was the covenant that Soex would enter into a Distribution Agreement and establish a subsidiary in China and issue shares to the Company in the China Subsidiary. With Soex’s Equity Default, Soex breached the Soex SPA and the Company is seeking return of the Shares from Soex in the lawsuit filed in July 2015.
The litigation has been moved to the U.S. District Court for the Middle District of Florida where Soex has instituted a counterclaim (Civil Docket Case#: 8:15-cv-02362-MSS-EAJ). While the Company believes it has a strong case against Soex as a result of its breaches of the agreements with, the Company cannot make any predictions about the success of its action against Soex or whether or not Soex will have the assets to satisfy any judgment.
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
Note 11. Income Taxes
There is no current or deferred income tax expense or benefit for the years ended December 31, 2016 and 2015. The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Tax (benefit) at U.S. statutory rate
|
|
$
|
(93,000
|
)
|
|
$
|
(525,000
|
)
|
Research and development credits
|
|
|
(82,000
|
)
|
|
|
-
|
|
State income tax (benefit), net of federal benefit
|
|
|
(10,000
|
)
|
|
|
(56,000
|
)
|
Prior year true-up
|
|
|
247,400
|
|
|
|
-
|
|
Other adjustments
|
|
|
(1,400
|
)
|
|
|
(16,000
|
)
|
Change in valuation allowance
|
|
|
(61,000
|
)
|
|
|
597,000
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets, current:
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
3,300
|
|
|
$
|
3,100
|
|
Stock warrant consideration and other
|
|
|
118,800
|
|
|
|
118,800
|
|
Deferred revenue
|
|
|
-
|
|
|
|
49,800
|
|
Valuation allowance
|
|
|
(122,100
|
)
|
|
|
(171,700
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets, noncurrent:
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
-
|
|
|
$
|
661,600
|
|
Depreciation
|
|
|
27,300
|
|
|
|
25,700
|
|
Accrued deferred compensation payable
|
|
|
575,900
|
|
|
|
493,800
|
|
Research and development credit
|
|
|
216,900
|
|
|
|
134,900
|
|
Stock compensation
|
|
|
105,800
|
|
|
|
105,300
|
|
Net operating loss carryforward
|
|
|
9,879,100
|
|
|
|
9,395,100
|
|
Valuation allowance
|
|
|
(10,805,000
|
)
|
|
|
(10,816,400
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Dais Analytic Corporation
Notes to Financial Statements
Years Ended December 31, 2016 and 2015
As of December 31, 2016 and 2015, the Company had federal and state net operating loss carry-forwards totaling approximately $26,300,000 and $24,700,000, respectively, which expire through 2036. The Company has established a valuation allowance to fully reserve all deferred tax assets at December 31, 2016 and 2015 because it is more likely than not that the Company will not be able to utilize these assets. The change in the valuation allowance for the years ended December 31, 2016 and 2015 was an increase of $61,000 and $597,000, respectively.
As of December 31, 2016, the Company has not performed an IRC Section 382 study to determine the amount, if any, of its net operating losses that may be limited as a result of the ownership change percentages during 2016. However, the Company will complete the study prior to the utilization of any of its recorded net operating losses.
Note 12.
Subsequent Events
No material events have occurred after December 31, 2016 that requires recognition or disclosure in the financial statements except as follows:
On February 3, 2017, the Company entered into a Fifth Amendment of the Loan and Security Agreement with a related party, whereby the principal amount was increased by $100,000, and the Maturity Date of the Note was extended to the earlier of (i) the date upon which the Company secures funds, regardless of source, equal to or exceeding, in the aggregate, $1,000,000 or (ii) March 15, 2017. As consideration for the additional proceeds and modification of the Maturity Date the Company issued to the related party a warrant to purchase one million shares of common stock with an exercise price of $0.01 with a ten year exercise period.
On February 21, 2017, the Company entered into a Sixth Amendment of the Loan and Security Agreement with a related party, whereby the principal amount was increased by $125,000, and the Maturity Date of the Note was extended to the earlier of (i) the date upon which the Company secures funds, regardless of source, equal to or exceeding, in the aggregate, $1,000,000 or (ii) March 15, 2017. As consideration for the additional proceeds and modification of the Maturity Date the Company issued to the related party a warrant to purchase an additional one million, eight hundred thousand shares of common stock with an exercise price of $0.01 with a ten year exercise period.
On April 7, 2017, the Company entered into a Seventh Amendment of the Loan and Security Agreement with a related party, the Maturity Date of the Note was extended to the earlier of (i) the date upon which the Company secures funds, regardless of source, equal to or exceeding, in the aggregate, $1,000,000 or (ii) May 31, 2017.