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 June 30, 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 July 31, 2001, the issuer had 29,650,285 shares of common stock, $.01
par value per share, outstanding.
DCH TECHNOLOGY, INC.
CONTENTS
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountant's Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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 (Diversified
Commercial Hydrogen) Technology, Inc. and subsidiary as of June 30, 2001 and the
related consolidated statements of operations and cash flows for the six 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 auditing standards generally
accepted in the United States of America, 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
July 19, 2001
DCH Technology, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
2001 2000
------------- --------------
CURRENT ASSETS (UNAUDITED)
Cash and cash equivalents $ 152,653 $ 75,300
Accounts receivable, net of allowances 172,382 175,047
Inventories 562,075 528,816
Prepaid expenses 267,809 84,261
Other receivable 33,543 17,076
------------- --------------
TOTAL CURRENT ASSETS 1,188,462 880,500
PROPERTY AND EQUIPMENT, net 2,350,792 2,362,357
OTHER ASSETS
Intangible assets, net of accumulated amortization 132,673 134,536
Restricted cash deposit 700,000 700,000
Investments with no readily determinable fair value 25,000 25,000
Investment in joint venture 38,187 41,623
Marketing, leased asset, net of depreciation 165,641 -
Other 9,071 10,190
------------- --------------
TOTAL OTHER ASSETS 1,070,572 911,349
------------- --------------
$ 4,609,826 $ 4,154,206
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 359,151 $ 659,053
Accrued liabilities 129,865 427,563
Accrued compensation 570,809 728,805
Current portion of note payable 59,367 55,867
Current portion of capital lease obligations 16,635 14,623
Unearned revenue 109,194 -
------------- --------------
TOTAL CURRENT LIABILITIES 1,245,021 1,885,911
LONG TERM LIABILITIES, net of current portion
Note payable 679,906 710,658
Capital lease obligations 4,562 14,662
------------- --------------
TOTAL LIABILTIES 1,929,489 2,611,231
F-1
MINORITY INTEREST IN LLC 57 -
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,
29,208,785 and 25,560,616 shares
issued and outstanding 292,088 255,606
Additional paid-in-capital 24,175,744 17,631,900
Investment in limited liability companies (64,554) (68,714)
Other comprehensive loss (6,756) (3,320)
Accumulated deficit (21,716,242) (16,272,497)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY 2,680,280 1,542,975
------------- --------------
$ 4,609,826 $ 4,154,206
============= ==============
F-2
DCH Technology, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
June 30, June 30,
------------------------- --------------------------
2001 2000 2001 2000
----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Sales $ 231,525 $ 265,756 $ 420,276 $ 576,431
Cost of goods sold 121,224 323,428 224,420 481,111
----------- ------------ ------------ ------------
Gross profit 110,301 (57,672) 195,856 95,320
Operating expenses:
Selling, general and 1,770,951 1,242,507 4,069,050 2,502,714
administrative expenses
Depreciation and amortization 105,890 42,003 203,088 69,769
Research and development 581,884 418,535 1,376,593 684,710
----------- ------------ ------------ ------------
Total operating expenses 2,458,725 1,703,045 5,648,731 3,257,193
----------- ------------ ------------ ------------
Loss from operations (2,348,424) (1,760,717) (5,452,875) (3,161,873)
Other income (expense), net (12,730) 52,602 3,150 71,541
----------- ------------ ------------ ------------
Net loss before Minority interest (2,361,154) (1,708,115) (5,449,725) (3,090,332)
Minority interest 5,980 - 5,980 -
----------- ------------ ------------ ------------
Net loss (2,355,174) (1,708,115) (5,443,745) (3,090,332)
Other comprehensive loss
Foreign currency translation 471 - 3,436 -
----------- ------------ ------------ ------------
Comprehensive loss (2,354,703) $(1,708,115) $(5,447,181) $(3,090,332)
=========== ============ ============ ============
Net loss per share
Basic $ (0.08) $ (0.07) $ (0.19) $ (0.13)
=========== ============ ============ ============
Diluted $ (0.08) $ (0.07) $ (0.19) $ (0.13)
=========== ============ ============ ============
Weighted average shares
outstanding 28,889,286 24,501,567 28,238,191 22,918,479
=========== ============ ============ ============
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 SIX MONTHS ENDED
JUNE 30,
---------------------------
2001 2000
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
Net loss $(5,443,745) $(3,090,332)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 203,088 69,769
Loss on disposal of equipment 524 -
Issuance of stock, warrants and options for services 2,852,999 752,154
Loss from investment in partnerships and joint venture 4,160 10,443
Minority interest (5,980) -
Change in assets and liabilities:
Accounts receivable, net allowance 2,665 (412,881)
Inventory (270,784) (91,166)
Prepaid expenses 66,452 (186,805)
Other receivables 14,131 49,658
Accounts payable (299,902) (27,151)
Unearned revenue 109,194 -
Accrued liabilities (182,698) 67,398
Accrued compensation (157,996) 94,223
------------ -------------
NET CASH USED IN OPERATING ACTIVITIES (3,107,892) (2,764,690)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in certificate of deposit - (700,000)
Minority interest investment in LLC 6,037 -
Deposits made for equipment 1,119 (127,267)
Purchase of licenses and intellectual property (16,826) -
Purchase of property and equipment (101,473) (789,073)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES (111,143) (1,616,340)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock and warrants 2,783,117 5,210,000
Principal payments on capital leases (8,088) (7,857)
Principal payments on long-term debt (27,252) (7,518)
Proceeds from exercise of options and warrants 548,611 1,159,400
Proceeds from common stock subscriptions receivable - 131,000
------------ -------------
NET CASH RECEIVED FROM FINANCING ACTIVITIES 3,296,388 6,485,025
------------ -------------
NET INCREASE IN CASH 77,353 2,103,995
CASH, BEGINNING OF PERIOD 75,300 1,193,084
------------ -------------
CASH, END OF PERIOD $ 152,653 $ 3,297,079
============ =============
Supplemental disclosure of cash flow information:
Cash paid for
Interest $ 31,164 $ 5,069
Income taxes 1,950 1,950
Non-cash transactions
During the period ended June 30, 2001, accrued expenses of $115,000
was settled with the issuance of options
During the period ended June 30, 2001, prepaid services under a consulting agreement of
$250,000 were paid with the issuance of stock
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 June 30, 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 six months ended June 30, 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) INVENTORIES
June 30, December 31,
2001 2000
--------- ------------
Raw Materials $ 271,717 $ 393,158
Work in Process 289,558 124,797
Finished Goods 800 10,861
--------- -----------
Total $ 562,075 $ 528,816
========= ===========
(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 June 30, 2001, cumulative net
operating losses, which have not been deducted for income tax reporting purposes
amount to approximately $19,000,000. 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
$7,800,000. 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) BUSINESS SEGMENT INFORMATION
The Company's reportable segments include the hydrogen fuel cell division
Located in Wisconsin and the hydrogen sensor division located in California. The
Following table represents segment information for the three and six months
ended June 30, 2001 and 2000:
Fuel Cells Sensors Total
For the three months ended June 30, 2001: ---------- ---------- ----------
Sales $ 5,828 $ 225,697 $ 231,525
Gross profit (loss) $ (5,572) $ 115,873 $ 110,301
For the three months ended June 30, 2000:
Sales $ 22,600 $ 243,156 $ 165,756
Gross profit (loss) $(136,996) $ 79,324 $ (57,672)
For the six months ended June 30, 2001:
Sales $ 7,528 $ 412,748 $ 420,276
Gross profit (loss) $ (11,126) $ 206,982 $ 195,856
For the six months ended June 30, 2000:
Sales $ 304,940 $ 271,491 $ 576,431
Gross profit (loss) $ 24,722 $ 70,598 $ 95,320
(6) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation. These changes have no effect on net earnings.
(7) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill will no longer
be amortized but will be subject to annual impairment tests in accordance with
the Statements. Other intangible assets will continue to be amortized over their
useful lives. Management believes these pronouncements will not have a material
effect on the Company's financial statements or disclosures.
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. THESE STATEMENTS INCLUDE,
WITHOUT LIMITATION, STATEMENTS ABOUT OUR 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 US ON THE DATE
HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER
"FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS FORM 10-QSB ARE AMONG THOSE
FACTORS THAT IN SOME CASES HAVE AFFECTED OUR 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.
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 Proton Exchange Membrane (PEM) fuel cells. We also provide services to
promote hydrogen safety.
We commenced initial production of our first hydrogen gas detector product
line, the Robust Hydrogen Sensor (TM) product line, in November 1998, and
currently offer eight hydrogen sensor products. We began to commercialize a low
power (up to 10 kWs) fuel cell 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 equity financings and product sales. As
production activity increases, production facilities are more fully utilized and
we implement our complete marketing strategy, 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."
On July 1, 2001, we entered into consulting agreements with David Haberman
and David Walker. Messrs. Haberman and Walker founded DCH in 1994. Both of these
gentlemen have recently resigned as DCH Company Operating Officers. Mr. Walker
served as an officer (Vice President and President) from 1994 to June 30, 2001.
Mr. Haberman had served as Vice President from 1994 until June 30, 2001. The
Stockholders reelected both as Members of the Board of Directors at the June
2001 meeting. Mr Haberman was again elected by the Board to serve as its
Chairman.
The founders felt this move was necessary to ensure DCH's continued growth
and success as the Company evolves from an entrepreneurial enterprise to a major
corporation. The rest of the Board of Directors concurred with their decision.
Hydrogen Sensors
- -----------------
Beginning in April 2001, we began shipping our new hand-held hydrogen
monitoring system, the H2scan(TM). The H2scan unit is a completely re-designed
and integrated unit, based on over two and a half years of input from our
customers, and is a significant step forward in both technology and capability.
The H2Scan in standard configuration comes with a carrying case, extra battery,
charger, and an extension wand for reaching areas of detection out of arm's
length. By combining efficient electronics engineering and molded assembly
components, we have shortened assembly time for the units and increased our
gross profit margin on the units. At the same time, we have added to the unit
over nine new features and three sensor components that formerly were optional
equipment. In April 2001, we delivered the first H2scan unit to an automotive
customer for use at a hydrogen refilling station in Sacramento, California.
Our line of hydrogen specific sensors is also making increased inroads into
semiconductor manufacturing. We are currently sole source suppliers for several
companies. Several automotive companies are either testing or using our sensors
in prototype fuel cell cars or using our handheld H2scan unit for leak detection
during fueling at hydrogen refueling stations. We are continuing to ship sensor
products for the use in real time measurement for reformer applications. We have
redesigned a sensor head for measuring the amount of hydrogen in the out gas of
the reformer. Several fuel cell and automotive companies are currently testing
our Robust Hydrogen Sensor for this application. Our sensor research and
development efforts are focused on working with automotive companies to develop
an effective, cost-efficient sensor for hydrogen-fueled cars and trucks.
In May 2001, we granted distribution rights to market and sell our sensor
products to SunLine Services Group of Thousand Palms, California a separate
agency of SunLine Transit Authority, which is a world leader in alternative
energy vehicles. SunLine Services Group is a world hub for demonstrating the
latest in alternative energy vehicles, including the latest technologies from
Stuart Energy, Teledyne, Siemens, Quest Air, Hydrogen Burner, and many others.
These technologies are showcased in a "Clean Air Mall" at SunLine's
headquarters.
We have targeted for future sensor product distribution arrangements with
several companies that operate businesses in multiple locations and have
established distribution networks selling other industrial gas products.
Fuel Cells
- -----------
During the second quarter ended June 30, 2001, our 3 kW PEM fuel cell
demonstration project with the Texas Natural Resource and Conservation
Commission (TNRCC) concluded with a public demonstration in Austin, Texas. The
demonstration project showed the use of our mobile 3KW fuel cell as an
environmentally friendly system for powering air quality measurement equipment.
In May 2001, we reached an agreement with IPS MeteoStar, Aurora, Colorado,
a global supplier of remote data-logging systems that communicate information
back to customers real-time via satellite, to begin distributing products with
our portable fuel cells serving as the internal electric power supply. A
MeteoStar monitoring system powered by our 12W/12V fuel cell is currently being
used by the State of Texas for monitoring water quality.
In June 2001, we signed an agreement with ZAPWORLD.COM, Sebastopol,
California, a company that designs, manufactures and sells electric bicycles,
scooters, motorcycles and other electric transportation and recreational
products, to develop the world's first commercially available hydrogen fuel
cell-powered electric bicycle. We are scheduled to introduce the first jointly
produced units by 2002.
In July 2001, we demonstrated our third-generation of higher-power portable
fuel cells at the South Coast Air Quality Management District (AQMD) Conference
in Diamond Bar, California. The unit demonstrated at the AQMD meeting stood
less than 2 feet high with less than a 2.5 square-foot base, yet delivered a
constant 1 kW of power with peak power of nearly 2 kW. Our new fuel cell unit is
distinguished by its unique simplicity in design and operation and by the power
it can deliver in a very compact package.
Results of Operations
- -----------------------
Three and Six Months Ended June 30, 2001, Compared With Three and Six Months
- --------------------------------------------------------------------------------
Ended June 30, 2000
- -------------------
In the three months ended June 30, 2001, we had sales of $231,525 compared
to sales of $265,756 for the three months ended June 30, 2000. In the six months
ended June 30, 2001, we had sales of $420,276 compared to sales of $576,431 for
the six months ended June 31, 2000. The lower sales in both the three and six
month periods ended June 30, 2001 resulted primarily from a large non-recurring
contract sale realized during the first quarter of 2000. These lower 2001 sales
were offset in part by an increase in the number of sensor units sold during the
second quarter of 2001. In the three months ended June 30, 2001 we had received
orders for two 5kW fuel cells and ten 12-watt fuel cells. The 12-watt units are
scheduled for delivery in the third quarter of 2001 and the 5kW units are
scheduled for delivery before the end of 2001. We have received deposits and
advance payments on certain of these units. These units are all under
construction at our Enable subsidiary. The sales backlog on these units is
approximately $318,000.
The cost of products sold decreased to $121,224 for the three months ended
June 30, 2001 from $323,428 for the three months ended June 30, 2000. The cost
of products sold decreased to $224,420 for the six months ended June 30, 2001
from $481,111 for the six months ended June 30, 2000. In percentage terms, cost
of goods sold represented 52% of total sales for the three months ended June 30,
2001 versus 122% for the same period in 2000, and 53% of total sales for the six
months ended June 30, 2001 versus 83% for the same period in 2000. These cost
reductions in 2001 were achieved primarily as a result of the introduction of
our new H2Scan hydrogen sensor product line. The components for these new
sensors are more easily integrated, thus resulting in lower manufacturing and
assembly costs. We do not anticipate that fuel cells currently under
construction will contribute to our gross profit margin.
We incurred $1,770,951 in selling, general and administrative expenses for
the three months ended June 30, 2001, compared to $1,242,507 for the three
months ended June 30, 2000. We incurred $4,069,050 in selling, general and
administrative expenses for the six months ended June 30, 2001, compared to
$2,502,714 for the six months ended June 30, 2000. Included in selling, general
and administrative expense for the three months ended June 30, 2001 was
$1,037,279 of expense related to the issuance of fully vested options to
purchase approximately 811,900 shares of stock to employees and consultants in
lieu of cash compensation. For the six months ended June 30, 2001, these
expenses equaled $ 2,596,192, and related to the issuance of approximately
50,000 shares of stock and fully vested options to purchase approximately
1,711,909 shares of stock. We issued the stock and fully vested options in order
to conserve cash for our operations, in accordance with an ongoing plan we
implemented in the first quarter of 2001. Employees receiving stock and options
have agreed to receive these securities, in lieu of cash, for a portion of their
salaries. We conserved approximately $1,000,000 of cash during the first six
months of 2001 under this program. In the three and six months ended June 30,
2000, similar non-cash compensation equaled $312,685 and $848,305, respectively.
Depreciation and amortization increased to $105,890 for the three months
ended June 30, 2001 compared to $42,003 for the three months ended June 30,
2000, and increased to $203,088 for the six months ended June 30, 2001 compared
to $69,769 for the six months ended June 30, 2000, reflecting the purchase in
May 2000 of the building located at 24832 Avenue Rockefeller in Valencia,
California and additional equipment to support our operations.
The Company is currently in negotiations to sell the building and related
land located at 24832 Avenue Rockefeller in Valencia, California. If the
transaction is successful, the Company will generate approximately $1,400,000 of
working cash flow through both the sales proceeds and the use of a $700,000
restricted cash deposit that is held as security on the property. In connection
with the transaction the Company will have a 10 year operating lease for the use
of the facility.
We expended a total of $581,884 on research and development during the
three months ended June 30, 2001, compared to expenditures of $418,535 for the
three months ended June 30, 2000. Research and development expenses totaled
$1,376,593 for the six months ended June 30, 2001, compared to $684,710 for the
six months ended June 30, 2000. The majority of the increases in 2001 in
research and development expenses was due to a greater focus on the
commercialization and development of products, especially in our fuel cell
operation.
Due primarily to these factors, we incurred a loss from operations of
$2,355,174 for the three months ended June 30, 2001, compared to an operating
loss of $1,708,115 for the three months ended June 30, 2000. We also had a
foreign currency translation adjustment of $471 in the second quarter of 2001,
resulting in a comprehensive loss of $2,354,703 for that period. Despite an
increase in the number of shares outstanding during the period (we had
28,889,286 weighted average common shares outstanding for the three months ended
June 30, 2001, as compared to 24,501,567 weighted average common shares
outstanding for the comparable period in 2000), the net loss per share increased
to $0.08 per share for the three months ended June 30, 2001, as compared to a
loss of $0.07 per share for the comparable period in 2000.
We incurred a net loss of $5,443,745 for the six months ended June 30, 2001
compared to a net loss of $3,090,332 for the six months ended June 30, 2000. We
also had a foreign currency translation adjustment of $3,436 in 2001, resulting
in a comprehensive loss of $5,447,181 for that period. Despite an increase in
the number of shares outstanding during the period (we had 28,238,191 weighted
average common shares outstanding for the six months ended June 30, 2001, as
compared to 22,918,479 weighted average common shares outstanding for the
comparable period in 2000), the net loss per share increased to $0.19 per
share for the six months ended June 30, 2001, as compared to a loss of
$0.13 per share for the comparable period in 2000.
Liquidity and Capital Resources
- ----------------------------------
We generated a total of $3,296,388 in net cash from financing activities
for the six months ending June 30, 2001, as compared to $6,485,025 during the
comparable six months in 2000. Substantially all of the financing activities for
the six months ended June 30, 2001 consisted of equity financings, supplemented
by proceeds from the exercise of options and warrants.
We utilized $3,107,892 of net cash for operating activities in the six
months ended June 30, 2001, compared to $2,764,690 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 $111,143 of
net cash for investing activities in the six months ended June 30, 2001,
compared to $1,616,340 of net cash for investing activities in the six months
ended June 30, 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. The higher spending in the first six months of 2000 also
reflects the acquisition of the Avenue Rockefeller property for the expansion of
our sensor production capability.
At June 30, 2001, we had $152,653 in unrestricted cash, compared to $75,300
in cash at December 31, 2000. We also had accounts receivable (net of
allowance) of $172,382 at June 30, 2001, compared to accounts receivable of
$175,047 at December 31, 2000. Investment in inventory totaled $562,075 at
June 30, 2001 compared to $528,816 at December 31, 2000. The slight increase
in inventory is a combination of additional inventory requirements in our
sensor operations, and work in process at our fuel cell operation.
At June 30, 2001, we had accounts payable of $359,151, compared to accounts
payable of $659,053 at December 31, 2001. The decrease is due primarily to our
efforts to pay down existing liabilities and reduce additional costs during the
six month period. We also reduced our accrued compensation to $570,809 at June
30, 2001, from $728,805 at December 31, 2000. We had unearned revenue of
$109,194 at June 30, 2001, derived from fuel cells currently being manufactured
and due to be delivered to the customer in the third quarter of 2001.
We are 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 and negotiating financing
arrangements with potential strategic investors. However, there is no assurance
that we will be able to generate capital sufficient to meet our 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.
Forward-Looking Statements
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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 $5,447,181 for the six months ended June 30,
2001. For the year ended December 31, 2000, we had a comprehensive net loss of
$7,657,413. We had an accumulated deficit of $21,716,242 at June 30, 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.
To date, most of our 2001 revenue has come from sales of our hydrogen
sensor products, with lesser revenues from sales of our fuel cells and hydrogen
safety services, respectively. We expect that this trend will continue for the
balance of 2001. In the event that 2001 sales of our hydrogen sensor products
fail to meet our expectations, our business and financial condition could be
impaired.
We have five other technologies 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 cell
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.
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, and 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.
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, one of our
founders and a current member of our Board of Directors 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. We do not currently
carry "key person" insurance on any of our other executives. 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 restrictions 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.
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.
We will be subject to various federal, state and local laws and regulations
relating to; 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.
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 from leaks which reach this critical
four percent level. However, an accidental explosion or fire from mishandling
of our products or due to unforeseen circumstances 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, but we may 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.
Our CMOS wafer process for the hydrogen sensor line is currently
accomplished at Silicon Valley Sensors, Inc., in San Jose, California. We have
purchased equipment from Honeywell, Inc. that has enabled us to process the new
wafers in-house in the near future. 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
COMMERCIALIZATION 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
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.
On June 12, 2001, we held our Annual Shareholders Meeting. There were a
total of 23,997,246 shares of voting common stock at the Meeting present in
person and by proxy. The following individuals were elected at the Annual
Shareholders Meeting to serve as members of our Board of Directors until the
election of their respective successors:
Name Votes For
David Haberman 23,902,093
David Walker 23,904,593
Dr. Johan (Hans) Friedericy 23,905,393
Mark Lezell 23,731,251
Daniel Teran 23,730,951
Robert Walker 23,908,193
Raymond Winkel 23,908,293
In addition, the shareholders cast 6,819,219 shares in favor of approving
and adopting the DCH 2001 Stock Option Plan, which was mailed to each
shareholder prior to the Annual Shareholders Meeting. 470,217 shares were cast
against the adoption of the 2001 Stock Option Plan and 1,000 shares abstained
from voting on this matter. The shareholders also cast 23,910,561 shares in
favor of ratifying the Board's engagement of Moss Adams LLP as our independent
accountants. 38,075 shares were cast against the ratification, and 450 shares
abstained from voting on this matter.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Not applicable.
(b) Reports on Form 8-K.
Not applicable.
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 August 14, 2001 By: /s/ John Donohue
-----------------------
John Donohue,
President and CEO
By: /s/ Ronald Ilsley
-----------------------
Ronald Ilsley,
Chief Financial Officer
(Principal Accounting and
Financial Officer)