FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 000-26957
DCH TECHNOLOGY, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1349374
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
27811 Avenue Hopkins #6
Valencia, CA 91355
(Address of Principal Executive Offices)
Issuer's telephone number: (661) 775-8120
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of March 31, 2001 the issuer had 28,297,765 shares of common stock, $.01
par value per share, outstanding.
DCH TECHNOLOGY, INC.
CONTENTS
Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountant's Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
PART I. FINANCIAL INFORMATION
Independent Accountant's Report
Board of Directors and Shareholders
DCH Technology, Inc.
We have reviewed the accompanying consolidated balance sheet of DCH Technology,
Inc. and subsidiary as of March 31, 2001 and the related consolidated statements
of operations and cash flows for the three month period then ended. These
financial statements are the responsibility of DCH Technology, Inc. management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of DCH Technology, Inc. and
subsidiaries as of December 31, 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended not
presented herein; and in our report dated February 6, 2001, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 2000, is fairly presented, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
/s/ Moss Adams LLP
Los Angeles, California
April 23, 2001
F-1
DCH Technology, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2001 2000
------------- --------------
CURRENT ASSETS (UNAUDITED)
Cash and cash equivalents $ 133,054 $ 75,300
Accounts receivable, net of allowances 187,125 175,047
Inventory 453,013 528,816
Prepaid expenses 34,223 84,261
Other receivable 13,029 17,076
------------- --------------
TOTAL CURRENT ASSETS 820,445 880,500
PROPERTY AND EQUIPMENT, net 2,396,517 2,362,357
OTHER ASSETS
Intangible assets, net of accumulated amortization 134,816 134,536
Restricted cash deposit 700,000 700,000
Investments with no readily determinable fair value 25,000 25,000
Investment in joint venture 37,716 41,623
Marketing and leased asset, net 169,023 -
Other 9,071 10,190
------------- --------------
TOTAL OTHER ASSETS 1,075,626 911,349
------------- --------------
$ 4,292,588 $ 4,154,206
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 402,606 $ 659,053
Accrued expense 45,559 427,563
Accrued compensation 253,391 728,805
Current portion of note payable 56,815 55,867
Current portion of capital lease obligations 17,268 14,623
Unearned revenue 100,000 -
Other 3,455 -
------------- --------------
TOTAL CURRENT LIABILITIES 879,094 1,885,911
LONG TERM LIABILITIES, net of current portion
Note payable 696,058 710,658
Capital lease obligations 8,981 14,662
------------- --------------
TOTAL LIABILTIES 1,584,132 2,611,231
STOCKHOLDERS' EQUITY
Preferred stock, $0.10 par value
5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $0.01 par value,
50,000,000 shares authorized,
28,297,765 and 25,560,616 shares
issued and outstanding 282,978 255,606
Additional paid-in-capital 21,858,327 17,631,900
Investment in limited liability companies (64,554) (68,714)
Other comprehensive loss (7,228) (3,320)
Accumulated deficit (19,361,067) (16,272,497)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 2,708,456 1,542,975
------------- --------------
$ 4,292,588 $ 4,154,206
============= ==============
The accompanying notes are an integral part of these financial statements
F-2
DCH Technology, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
------------ ------------
(UNAUDITED) (UNAUDITED)
Sales $ 188,751 $ 310,675
Cost of goods sold 103,196 157,683
------------ ------------
Gross profit 85,555 152,992
Operating expenses:
Selling, general and administrative expenses 2,298,098 1,260,207
Depreciation and amortization 97,198 27,766
Research and development 794,709 266,175
------------ ------------
Total operating expenses 3,190,006 1,554,148
------------ ------------
Loss from operations (3,104,451) (1,401,156)
Other income, net 15,880 18,939
------------ ------------
Net loss (3,088,571) (1,382,217)
Other comprehensive loss
Foreign currency translation adjustments (3,908) -
------------ ------------
Comprehensive loss $(3,092,478) $(1,382,217)
============ ============
Net loss per share
Basic $ (0.11) $ (0.07)
============ ============
Diluted $ (0.11) $ (0.07)
============ ============
Weighted average shares outstanding 27,579,427 20,458,047
============ ============
The accompanying notes are an integral part of these financial statements
F-3
DCH Technology, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
Net loss $(3,088,571) $(1,382,217)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 97,198 27,766
Gain on disposal of equipment (2,019) -
Issuance of stock, warrants and options for services 1,558,913 535,620
Loss from investment in partnerships and joint venture 4,160 -
Change in assets and liabilities:
Accounts receivable, net allowance (12,078) (282,557)
Inventory (124,660) (24,836)
Prepaid expenses 50,038 (255,660)
Other receivables 10,134 (90,625)
Accounts payable (256,447) (138,780)
Other current liabilities 3,455 -
Unearned revenue 100,000 -
Accrued expenses 189,727 (58,081)
Accrued compensation (475,414) 2,469
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (1,945,564) (1,666,901)
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits made for equipment 1,119 -
Purchase of licenses and intellectual property (9,619) -
Purchase of property and equipment (88,561) (103,193)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (97,061) (103,193)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock and warrants 1,702,500 3,860,000
Principal payments on capital leases (3,036) (3,297)
Principal payments on long-term debt (13,652) -
Proceeds from exercise of options and warrants 414,567 1,093,160
Proceeds from common stock subscriptions receivable - 131,000
------------ -------------
NET CASH RECEIVED FROM FINANCING ACTIVITIES 2,100,379 5,080,863
------------ -------------
NET INCREASE (DECREASE) IN CASH 57,754 3,310,769
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 75,300 1,193,084
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 133,054 $ 4,503,853
============ =============
Supplemental disclosure of cash flow information:
Cash paid for
Interest $ 14,452 $ 1,330
Income taxes 350 1,950
Non-cash transactions
During the period ended March 31, 2001, accrued expenses of $571,731
was settled with the issuance of options
The accompanying notes are an integral part of these financial statements
F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB. The consolidated
balance sheet, statement of operations and cash flows at and for the periods
ended March 31, 2001 have been reviewed by the Company's independent auditors in
accordance with the professional standards and procedures as set forth in
Statement of Auditing Standards No. 71 (SAS 71). SAS 71 procedures for
conducting a review of interim financial information generally are limited to
inquiries and analytical procedures concerning significant accounting matters
relating to the financial information to be reported. They do not include all
information and footnotes necessary for a fair presentation of financial
position and results of operations and cash flows in conformity with generally
accepted accounting principles. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
notes contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2000. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included in the interim period.
Operating results for the three months ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001.
(2) LOSS PER SHARE
Loss per share of common stock is computed using the weighted average
number of common shares outstanding during the period shown. Common stock
equivalents were not included in the determination of the weighted average
number of shares outstanding, as they would be antidilutive.
(3) INVENTORY
December 31, 2000 March 31, 2001
----------------- --------------
Raw Materials $ 393,158 $ 288,167
Work in Process 124,797 162,132
Finished Goods 10,861 2,714
------------ -----------
Total $ 528,816 $ 453,013
============ ===========
5
(4) INCOME TAXES
The Company records income taxes using an asset and liability method. Under
this method, deferred Federal and State income tax assets and liabilities are
provided for temporary differences between the financial reporting basis and the
tax-reporting basis of assets and liabilities. At March 31, 2001 cumulative net
operating losses, which have not been utilized for income tax reporting purposes
amount to approximately $18,000,000 for both Federal and State. These losses may
be carried-forward and used to offset future taxable income. Unused loss carry
forward amounts will expire for Federal and State purposes starting 2013 and
2002, respectively. The deferred tax assets resulting from this loss carry
forward is approximately $7,300,000. The entire amount of this deferred tax
asset has been reserved and reduced to $-0- because of the uncertainty regarding
the future utilization of the loss carry forward amounts.
(5) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation. These changes have no effect on net earnings.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT
LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS
OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES",
"INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON
THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED
BELOW UNDER "FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS QUARTERLY REPORT
ON FORM 10-QSB ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED THE
COMPANY'S RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
General
- -------
DCH (Diversified Commercial Hydrogen) Technologies, Inc. ("DCH"), is
engaged in the acquisition, development and commercial exploitation of
hydrogen-based technologies. Specifically, we concentrate on Proton Exchange
Membrane ("PEM") fuel cells, hydrogen sensors and hydrogen safety.
We seek out patented technologies in our focus areas, secure those patented
technologies through licensing agreements with the patent holders and convert
the technologies into viable products which we then produce and sell. We focus
on technologies related to the use of hydrogen, primarily hydrogen gas sensors
and fuel cells.
We commenced initial production of our first hydrogen gas detector product
line, the Robust Hydrogen Sensor product line, in November 1998, and currently
offer eight hydrogen sensor products. We began to commercialize low power (up to
10 KW) fuel cells in 1998. In March 2000 we created a wholly-owned subsidiary,
the Enable Fuel Cell Corporation, to focus on this market. We currently obtain
our funding from private placements of equity securities and product sales. As
production activity increases, and we fully implement our marketing strategies,
we expect revenues from sales of products to increase as a proportion of our
funding.
On August 10, 2000, our common stock began trading on the American Stock
Exchange under the symbol "DCH."
7
Hydrogen Sensors
- -----------------
In the quarter ended April 30, 2001 we introduced our new hand-held
hydrogen monitoring system, the H2scan(TM), and began shipments to various
customers. This latest addition to our sensor product line is a significant step
forward in both technology and capabilities. DCH's line of hydrogen specific
sensors are making inroads into the semiconductor manufacturing and automotive
markets where we are meeting our customers' needs with the greater capabilities
that DCH can provide.
During the first quarter we sold 12 hydrogen sensor systems to the
automotive industry for evaluation as part of the safety systems for hydrogen
powered cars. Our R&D efforts are continuing to work with the automotive
industry to develop an effective and cost efficient sensor for that industry.
We also finished the installation of the clean room at our facility located
at 24832 Avenue Rockefeller, Valencia, CA. The purpose of the clean room is to
support our advanced sensor development and full scale manufacturing operations.
The clean room represents a significant step in ensuring significant growth in
the sensor division and will help us meet the growing demand for hydrogen
sensors. This is exemplified by the fact that we exceeded our sensor revenue
goal of $171,000 by approximately $12,000 for the quarter.
Fuel Cells
- -----------
On March 5, 2001, we signed an agreement with Skeljungur Ltd. (The Shell
Oil Distributors in Iceland) under which Skeljungur Ltd will distribute our PEM
fuel cells in Iceland as part of a six-month market opportunity assessment for
ten 12-Watt portable fuel cells. Skeljungur Ltd. may then act as the distributor
of Enable(TM) fuel cells to markets identified.
We further signed an agreement with Icelandic New Energy (INE), a
commercial consortum that includes several global and Iceland businesses, to
provide hydrogen fuel to users of our fuel cells from a hydrogen depot the INE
has constructed in Reykjavik. The depot will provide hydrogen at consumer
pricing significantly less than that typically available from today's industrial
and commercial vendors. INE's depot is a key part of their strategy to launch a
hydrogen-based economy in Iceland.
We shipped our second 3KW proton exchange membrane (PEM) fuel cell system
to the Texas Natural Research and Conservation Committee (TNRCC) in Austin,
Texas in January 2001. The unit was operated for a period of approximately two
months as part of a demonstration of the use of the mobile 3KW fuel cell as an
environmentally friendly system for powering air quality measuring equipment. We
are now in the process of preparing the unit for a three months demonstration
project with Unocal Corporation.
Also, during the first quarter of 2001, we provided an additional 12-Watt
fuel cell to the US Army Communications Electronics Command (CECOM) for
continued testing and evaluation.
8
Results of Operations
- -----------------------
Three Months Ended March 31, 2001, Compared With Three Months Ended March 31,
- --------------------------------------------------------------------------------
2000
- ----
For the three months ended March 31, 2001, DCH had sales of $188,751
compared to sales of $310,675 for the three months ended March 31, 2000. The
lower sales in the first quarter of 2001 in comparison to sales reported for the
same period of the prior year, are as a result of a large non-recurring contract
sale realized during the first quarter of 2000. The cost of products sold
decreased to $103,196 for the three months ended March 31, 2001, compared to
$157,683 for the three months ended March 31, 2000. In percentage terms, cost of
goods sold represented 54% of total sales for the three months ended March 31,
2001, versus 50% for the same period in 2000.
We incurred a loss from operations of $3,190,006 for the three months ended
March 31, 2001, compared to a loss from operations of $1,554,148 for the three
months ended March 31 2000. Selling, general and administrative expenses were
$2,298,098 for the three months ended March 31 2001, compared to $1,260,207 for
the comparable period in 2000.
Included in selling, general and administrative expense was $1,558,913 of
expense related to the issuance of approximately 50,000 shares of stock and
approximately 900,000 stock options to employee and consultants in lieu of cash
compensation. We issued these options in order to conserve cash for our
operations, in accordance with an ongoing plan we implemented in the first
quarter of 2001. We estimate that our use of stock options saved approximately
$400,000 during the first quarter of 2000. As an incentive for employees
accepting options in lieu of cash during first quarter of 2001, option strike
prices were reduced which resulted in approximately $1,100,000 of additional
compensation expense. Employees receiving these options have agreed to receive,
in lieu of cash, a portion of their salaries in return for the options. In the
quarter ended March 31, 2000, similar non-cash compensation equaled $535,620.
In addition to options issued in lieu of cash compensation, we issued
approximately 950,000 stock options for settlement of accrued liabilities and
4,000,000 of incentive stock options. The 4,000,000 incentive stock options
issued vest based on predetermined stock prices and other conditions. None of
these options were vested as March 31, 2001.
Depreciation and amortization increased to $97,198 for the three months
ended March 31, 2001, compared to $27,766 for the three months ended March 31,
2000, due to the purchase of the building located at 24832 Avenue Rockefeller,
Valencia, CA and additional equipment to support our operations.
We expensed a total of $794,709 on research and development during the
three months ended March 31, 2001, compared to expenditures of $266,175 for the
three months ended March 31, 2000. The majority of the increase of $528,534 in
research and development expenses in 2001 was due to a greater focus on the
commercialization and development of products, especially in our fuel cell
operation.
As a result of these factors, we incurred a net loss of $3,088,571 for the
three months ended March 31, 2001 compared to a net loss of $1,382,217 for the
three months ended March 31, 2000. We also had a foreign currency translation
adjustment of $3,908 in the first quarter of 2001, resulting in a comprehensive
loss of $3,092,478 for that period. Despite an increase in the number of shares
outstanding during the period (we had 27,579,427 weighted average common shares
outstanding for the three months ended March 31, 2001, as compared to 20,458,047
weighted average common shares outstanding for the comparable period in 2000),
the net loss per share increased to $0.11 per share for the three months ended
March 31, 2001, as compared to a loss of $0.07 per share for the comparable
period in 2000.
9
Liquidity and Capital Resources
- ----------------------------------
We generated a total of $2,100,379 in net cash from financing activities
for the three months ending March 31, 2001, as compared to net cash from
financing activities of $5,080,863 generated during the comparable period in
2000. Substantially all of the financing activities for the quarter ended March
31, 2001 consisted of a private placement of common stock, supplemented by
proceeds from the exercise of options.
We utilized $1,945,564 of net cash for operating activities in the three
months ended March 31, 2001, compared to the utilization of $1,666,901 of net
cash for operating activities for the comparable period in 2000. The increase
in net cash used for operating activities was primarily related to the growth of
our product sales and operations during the period, including an increase in
inventory and accounts receivable. We used $97,061 of net cash for investing
activities in the three months ended March 31, 2001, compared to $103,193 of net
cash for investing activities in the three months ended March 31, 2000. These
funds were primarily used in both years to purchase production equipment and the
acquisition of licenses for our sensor and fuel cell production.
At March 31, 2001, we had $133,054 in unrestricted cash, compared to
$75,300 in cash at December 31, 2000. We also had accounts receivable of
$187,125 at March 31, 2001, compared to accounts receivable of $175,047 at
December 31, 2000. Investment in inventory totaled $453,013 at March 31, 2001
versus $526,816 at December 31, 2000. The decrease in inventory is a result of
inventory held at December 31, 2000 transferred to a leased asset and marketing
demos recorded as other assets at March 31, 2001.
DCH is dependent upon outside sources for equity capital to fund our
operating requirements. We anticipate that a portion of our capital requirements
for the balance of the period ending December 31, 2001 will be provided from
external funding sources.
We are actively pursuing financing options with potential strategic investors.
However, there is no assurance that we will be able to generate capital
sufficient to meet these long-term needs. If we cannot meet these capital
requirements, we may be able to extend the period for which available resources
would prove adequate by not proceeding with planned major operation expansions
and deferring planned staff increases.
10
Forward-Looking Statements
- ---------------------------
The forward-looking statements contained in this Quarterly Report on Form
10-QSB are subject to various risks, uncertainties and other factors that could
cause actual results to differ materially from the results anticipated in such
forward-looking statements. Included among the important risks, uncertainties
and other factors are those discussed below.
RISKS RELATED TO DCH'S OPERATIONS
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, WHICH MAY PREVENT US
FROM IMPLEMENTING OUR BUSINESS PLAN.
Based on our current operating plan, we anticipate that our available funds
will be sufficient to satisfy our anticipated needs for working capital,
including our increased marketing expenses, capital expenditures and business
expansion, for only the next three months. After that time, we will need
additional capital. We may also need to raise additional funds in order to fund
more rapid expansion, to increase brand development and market awareness, to
develop new or enhanced technology, to respond to competitive pressures or to
establish strategic relationships. If we raise additional funds by issuing
equity or convertible debt securities, the percentage ownership of our
shareholders will be diluted. Any new securities could have rights, preferences
and privileges senior to those of our common stock. We cannot be certain that
additional financing will be available when and to the extent required or that,
if available, it will be on acceptable terms. Recently, certain companies with a
history of generating losses apparently have been unable to raise additional
financing to fund such continued losses. If adequate funds are not available on
acceptable terms, we may not be able to fund our expansion, increase brand
development and market awareness, develop or enhance our service offerings,
respond to competitive pressures or establish strategic relationships.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES FOR THE FORESEEABLE FUTURE.
Since our inception in November 1994, we have incurred substantial losses.
Our comprehensive net loss equaled $3,092,478 for the three months ended March
31, 2001. For the year ended December 31, 2000 we had a net loss of $7,657,413.
We had an accumulated deficit of $19,361,067 at March 31, 2001.
We anticipate that our expenses relating to developing, marketing and
supporting our current and future products will increase substantially in the
future. Accordingly, for the foreseeable future we expect to experience
additional losses as these increased expenses exceed our total revenues. These
additional losses will increase our accumulated deficit.
OUR REVENUES LARGELY DEPEND ON ONE PRODUCT LINE, THE ROBUST HYDROGEN SENSOR
LINE. WE ANTICIPATE THAT THE MAJORITY OF OUR REVENUES WILL BE DERIVED FROM SALES
OF OUR HYDROGEN SENSOR PRODUCTS.
11
Presently, our revenues are derived from sales of hydrogen sensors fuel
cells, and fees for hydrogen safety services. We expect that the majority of our
2001 revenue will come from sales of our hydrogen sensor products, with lesser
revenues from sales of our fuel cells and hydrogen safety services,
respectively. In the event that 2001 sales of our hydrogen sensor products fail
to meet our expectations, our business and financial condition could be
impaired.
Currently, five other products are under development, including three
sensors and two hydrogen fuel cells. Our future financial performance is
dependent, in significant part, upon the successful development, introduction
and customer acceptance of new and enhanced versions of the Robust Hydrogen
Sensor, other hydrogen sensors, our hydrogen fuel cell technologies and related
new products that we may develop. We cannot assure you that we will be
successful in upgrading the Robust Hydrogen Sensor or that we will successfully
develop new products, or that any new product will achieve market acceptance.
ECONOMIC, POLITICAL OR MARKET CONDITIONS COULD IMPACT OUR BUSINESS AND CAUSE OUR
REVENUE TO BE LOWER THAN ANTICIPATED.
Our business may be sensitive to general economic conditions. A reduced
level of economic and manufacturing activity in the United States may
significantly and adversely affect the demand for hydrogen sensors and
alternative energy sources such as fuel cells. A recession could cause our
customers to reduce or postpone their purchases, which could cause our revenue
to be lower than anticipated and negatively affect our business.
FUEL CELL TECHNOLOGIES ARE NEW AND EVOLVING TECHNOLOGIES, COMPETE WITH OTHER
METHODS OF ENERGY GENERATION, AND MAY NOT RECEIVE WIDESPREAD ACCEPTANCE.
Fuel cell technologies are in their very early stages of commercialization.
Like many new technologies they are characterized by rapidly evolving
technological developments, quickly changing marketing and sales strategies,
multiple and aggressive market participants, fluctuating demand, and uncertain
market acceptance for products and services.
Businesses and consumers remain uneducated about the benefits of
alternative fuel sources. This lack of knowledge may delay the acceptance and
penetration of our fuel cell products into markets that have historically been
served by traditional fuel sources. Businesses and consumers also have the
option of using other methods of alternative fuel generation, including
carbonate, phosphoric acid, polymer electrolyte, or solid oxide fuel cells
systems, as well as traditional fossil fuels such as oil and gasoline. These
methods may maintain or even increase their acceptance to the detriment of our
hydrogen fuel cell technology.
12
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE HYDROGEN SENSOR AND FUEL CELL
MARKETS.
We compete in both the hydrogen sensor and fuel cell markets. We may not be
able to compete successfully against current and future competitors in our
markets. The markets in which we are engaged are new, rapidly evolving, and
intensely competitive. We expect competition to intensify further in the future
both from existing competitors and new market entrants. We believe that our
ability to compete depends on many factors both within and beyond our control,
including:
- the ease of use, performance, features, price and reliability of our
solutions as compared to those of our competitors;
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed by us and our competitors;
- the quality of our customer service and support; and
- the effectiveness of our sales and marketing efforts.
Many of our current and potential competitors are likely to enjoy
substantial competitive advantages, including:
- longer operating histories;
- greater name recognition;
- more extensive customer bases; and
- cooperative relationships among themselves or with third parties to
enhance their products.
Increased competition is likely to result in price reductions, reduced
gross margins and loss of market share, any one of which could impair our
finances and business prospects. We cannot assure you that we will be able to
compete successfully against existing or potential competitors or that
competitive pressures will not materially impair our finances or business
prospects. We cannot assure you that we will be able to compete successfully
against existing or potential competitors or that competitive pressures will not
materially impair our finances or business prospects.
The markets for our products are at a very early stage of
commercialization, are rapidly changing and are characterized by an increasing
number of market entrants. As is typical for a new and rapidly evolving
industry, demand for and market acceptance of recently introduced products are
subject to a high level of uncertainty and risk. Acceptance and usage of our
fuel cells is dependent on continued growth in use of alternative energy sources
by businesses and consumers. Businesses that already have invested substantial
resources in traditional or other energy sources may be reluctant to adopt new
alternative sources. Individuals with established patterns of purchasing goods
and services may be reluctant to alter those patterns. Accordingly, it is not
assured that sufficient demand for our products will develop to sustain our
business.
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THE LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY PERSONNEL OR OUR FAILURE TO
HIRE, INTEGRATE OR RETAIN OTHER QUALIFIED PERSONNEL COULD DISRUPT OUR BUSINESS.
We depend upon the continued services and performance of our executive
officers and other key employees, particularly John Donohue, our President and
Chief Executive Officer, Ronald Ilsley, our Chief Financial Officer, Dr. Johan
(Hans) Friedericy, our Chief Operating Officer, David A. Walker founder and
Board of Directors member and David P. Haberman, our Chairman and Executive Vice
President of Strategic Planning, Technology and Business Development. While we
currently carry "key person" insurance on the lives of Messrs. Walker and
Haberman, the proceeds of such insurance might not adequately compensate us for
the loss of either of them. Competition for qualified personnel in technology,
particularly in the fuel cell industry, is intense and we may not be able to
retain or hire necessary personnel as a result of the highly specialized nature
of our products. In addition, the amount of our limited working capital may
impose compensation limitations on us that make it difficult to attract and
hire necessary employees.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. If the protection of our trademarks and proprietary
rights is inadequate, our brand and reputation could be impaired and we could
lose customers.
We have entered into confidentiality and invention assignment agreements
with our employees and contractors, and nondisclosure agreements with our
suppliers and strategic partners in order to limit access to and disclosure of
its proprietary information. There can be no assurance that these contractual
arrangements or the other steps taken by us to protect our intellectual property
will prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies.
In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Because laws protecting certain ownership
rights in hydrogen sensor and hydrogen fuel cell products are uncertain and
still evolving, we cannot give you any assurance about the future viability or
value of any of our current technology ownership rights. Such litigation,
whether successful or unsuccessful, could have a material and adverse effect on
our business, results of operations or financial condition.
While we intend to pursue registration of our trademarks and service marks
in the U.S. and internationally, effective trademark, service mark, copyright
and trade secret protection may not be available in every country in which our
services are made available online. We do not currently own any patented
technology registered with the United States Patent and Trademark Office.
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Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at all.
As a result, any such claim could have a material adverse effect upon our
business, results of operations and financial condition.
GOVERNMENTAL REGULATION OF THE HYDROGEN FUEL CELL AND HYDROGEN SENSOR TECHNOLOGY
MAY RESTRICT OUR BUSINESS.
Government regulation of the use of hydrogen for industrial applications
and fuel cell generation varies greatly from country to country. There is some
risk that the United States and other countries will increase their regulation
of these technologies in the future. As our products are utilized solely in
connection with hydrogen, any new law or regulation pertaining to the commercial
use of hydrogen, or the application or interpretation of existing laws, could
adversely impact our sales, increase our cost of doing business or otherwise
have a material and adverse effect on our business, results of operations and
financial condition.
DCH will be subject to various federal, state and local laws and
regulations relating to, among other things, land use, safe working conditions,
handling and disposal of hazardous and potentially hazardous substances and
emissions of pollutants into the atmosphere. We believe that we have obtained
all necessary government permits and have been in substantial compliance with
all of these applicable laws and regulations.
Since 1991, the National Environmental Protection Act (NEPA) has required
that each local Department of Energy procurement office file and have approved
by the Department of Energy in Washington, DC, appropriate documentation for
environmental, safety and health impacts with respect to procurement contracts
entered into by that local office. The costs associated with compliance with
environmental regulations may or may not be recovered under existing or future
contracts to which we are a party. In addition, contract work may be delayed
until such approval is received.
PRODUCT DEFECTS AND PRODUCT LIABILITY CLAIMS RELATED TO OUR HYDROGEN SENSORS AND
HYDROGEN FUEL CELL PRODUCTS COULD EXPOSE US TO SIGNIFICANT LIABILITY.
Although we test our products extensively prior to introduction, we cannot
assure you that our testing will detect all serious defects, errors and
performance problems prior to commercial release of our future sensor and fuel
cell products. Any future defects, errors or performance problems discovered
after commercial release could result in the diversion of scarce resources away
from customer service and product development, lost revenues or delays in
customer acceptance of our products and damage to our reputation, which, in each
case, could have a material and adverse effect on our business, results of
operations or financial condition.
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In addition to the potential for product defects, hydrogen itself is a
dangerous gas under certain circumstances. For example, hydrogen is highly
explosive when it reaches concentrations in the air of greater than four percent
provided an ignition source is present. The buoyant and highly dispersive nature
of hydrogen gas provides challenges in the appropriate location of our sensors
for effective hydrogen detection, but by its nature, makes it difficult to
accumulate levels which reach 4% from leaks. However, an accidental explosion or
fire from mishandling of our products or due to unforeseen circumstances may
cause damage to our reputation, result in lost sales and revenues, or have other
material and adverse effects on our business.
We have not experienced any product liability claims to date. We may
however, be subject to such claims in the future. A product liability claim
brought against us could have a material and adverse effect on our business,
results of operations or financial condition.
WE ARE HEAVILY RELIANT ON THIRD PARTIES FOR CERTAIN COMPONENTS AND ANY DELAYS,
DEFECTS OR OTHER PROBLEMS IN SUPPLYING THESE COMPONENTS COULD ADVERSELY AFFECT
OUR BUSINESS.
Currently, our CMOS wafer process for the hydrogen sensor line is
accomplished at Silicon Valley Sensors, Inc., in San Jose, California. We have
purchased equipment from Honeywell, Inc. that will enable us to process the new
wafers in-house commencing in the second quarter 2001. There can be no assurance
that our manufacturing efforts will be successful or cost-effective. Our
manufacturing partner ICCI fabricates electronic circuit boards for the Robust
Hydrogen Sensor. Sensor casing and other hardware are fabricated by various
small manufacturers. Although delays in the shipment and receipt of our
component parts may occur, historically we have experienced only those delays
that tend to occur in the normal course of business.
Growth in the volume of orders for our products may strain the capacity of
these component suppliers, and delays or other problems with component suppliers
could have a material and adverse effect on our business. Although we test the
component parts that we receive from our suppliers, we cannot be assured that
our components will be completely free of all defects.
THE MARKETS FOR OUR FUEL CELL PRODUCTS ARE AT A VERY EARLY STAGE OF DEVELOPMENT,
ARE RAPIDLY CHANGING AND ARE CHARACTERIZED BY AN INCREASING NUMBER OF MARKET
ENTRANTS.
Fuel cell technologies are in their very early stages of commercialization.
Like many new technologies, they are characterized by rapidly evolving
technological developments, quickly changing marketing and sales strategies,
multiple and aggressive market participants, fluctuating demand, and uncertain
market acceptance for products and services.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
(b) Reports on Form 8-K.
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DCH TECHNOLOGY, INC.
Date May 10, 2001 By: ____________________
John Donohue,
President & CEO
By: _____________________
Ronald Ilsley,
Chief Financial Officer
(Principal Accounting and
Financial Officer)
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