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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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)
24832 Avenue Rockefeller
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 April 15, 2002, the issuer had 36,057,413 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 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
2
PART I. FINANCIAL INFORMATION
DCH Technology, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, ECEMBER 31,
2002 2001
------------- -------------
CURRENT ASSETS UNAUDITED)
Cash $ 220,507 $ 356,281
Accounts receivable, net of allowances 195,725 230,192
Inventory 653,199 528,442
Prepaid expenses 368,888 444,643
Other receivable 1,998 6,392
------------- -------------
TOTAL CURRENT ASSETS 1,440,317 1,565,950
PLANT, PROPERTY AND EQUIPMENT, net 583,382 633,040
OTHER ASSETS
Intangible assets, net of amortization 127,359 135,608
Investment in joint venture 32,299 32,696
Investments with no readily determinable fair value 15,000 15,000
Other 188,679 119,156
------------- -------------
TOTAL OTHER ASSETS 363,337 302,460
------------- -------------
$ 2,387,036 $ 2,501,450
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 576,795 $ 469,292
Accrued compensation 172,258 212,919
Accrued liabilities 87,388 167,116
Current portion of capital lease obligations 9,186 13,462
Unearned revenue 75,000 75,000
------------- -------------
TOTAL CURRENT LIABILITIES 920,627 937,789
------------- -------------
MINORITY INTEREST - 3,544
3
STOCKHOLDERS' EQUITY
Preferred stock, $0.10 par value
5,000,000 shares authorized,
no shares issued - -
Common stock, $0.01 par value,
100,000,000 shares authorized,
35,914,530 and 32,148,730 shares
issued and outstanding 359,145 321,487
Additional paid-in-capital 29,397,397 27,514,120
Investment in limited liability companies (64,553) (64,554)
Note receivable (525,000) -
Other comprehensive loss (8,736) (8,340)
Accumulated deficit (27,691,844) (26,202,596)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,466,409 1,560,117
------------- -------------
$ 2,387,036 $ 2,501,450
============= =============
The Accompanying Notes are an Integral Part of these Financial Statements
4
DCH Technology, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
March 31,
-------------------------------
2002 2001
--------------- --------------
(UNAUDITED) (UNAUDITED)
Sales $ 212,010 $ 188,751
Cost of products sold 195,077 103,196
--------------- --------------
Gross profit 16,933 85,555
Operating expenses:
Selling, general and administrative
expenses 1,167,010 2,298,098
Depreciation and amortization 55,525 97,198
Research and development 284,566 794,709
--------------- --------------
Total operating expenses 1,507,101 3,190,005
--------------- --------------
Loss from operations (1,490,168) (3,104,450)
Other income (expenses), net 12,412 15,880
--------------- --------------
Net loss (1,477,756) (3,088,570)
Other comprehensive loss
Foreign currency translation
Adjustments 397 (3,908)
--------------- --------------
Comprehensive loss $ (1,477,359) $ (3,092,478)
=============== ==============
Net loss per share
Basic $ (0.04) $ (0.11)
=============== ==============
Diluted $ (0.04) $ (0.11)
=============== ==============
Weighted average common shares
Outstanding 33,643,220 27,579,427
=============== ==============
The Accompanying Notes are an Integral Part of these Financial Statements
5
DCH TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------------
2002 2001
------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES (UNAUDITED) (UNAUDITED)
Net loss $ (1,477,756) $ (3,088,571)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 55,525 97,198
Issuance of stock, warrants and options for services 221,805 1,558,913
Loss (gain) from investment in partnership and joint venture (15,037) 4,160
Loss (gain) on disposal of equipment 3,534 (2,019)
Change in assets and liabilities:
Accounts receivable, net 39,715 (12,078)
Inventory (124,758) (124,660)
Prepaid expenses 1,992 50,038
Other receivable - 10,134
Accounts payable 107,505 (256,447)
Accrued expenses (79,727) 189,727
Other current liabilities - 3,455
Other asset 27,244 -
Accrued payroll and vacation (40,661) (475,414)
Unearned revenue - 100,000
------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (1,280,619) (1,945,564)
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits 996 1,119
Purchase of licenses and intellectual property (668) (9,619)
Purchase of property and equipment (1,338) 88,561)
------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (1,010) (97,061)
CASH FLOWS FROM FINANCING ACTIVITIES
Private placement of common stock and warrants 1,097,261 1,702,500
Principal payments on capital lease (4,276) (3,036)
Principal payments on long-term debt - (13,652)
Proceeds from exercise of options and warrants 52,870 414,567
------------- -----------------
NET CASH RECEIVED FROM FINANCING ACTIVITIES 1,145,855 2,100,379
------------- -----------------
NET INCREASE (DECREASE) IN CASH (135,774) 57,754
CASH, BEGINNING OF PERIOD 356,281 75,300
------------- -----------------
CASH, END OF PERIOD $ 220,507 $ 133,054
============= =================
6
Supplemental disclosure of cash flow information:
Cash paid for
Interest $ 1,365 $ 14,452
Income taxes 2,204 350
Non-cash transactions
During the period ended March 31, 2002, the Company issued 1,381,772 shares
of Common Stock with a fair market value of $525,000, in exchange for a note
receivable.
The Accompanying Notes are an Integral Part of these Financial Statements
7
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. 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, 2001. In the opinion of management, all adjustments considered
necessary for a fair presentation (consisting of normal recurring adjustments
and accruals) have been included in the interim period. Operating results for
the three months ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
(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, 2001 March 31, 2002
------------------ ---------------
Raw Materials $ 296,560 $ 304,686
Work in Process 221,630 340,788
Finished Goods 10,252 7,725
------------------ ---------------
Total $ 528,442 $ 653,199
================== ===============
(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, 2002 cumulative net
operating losses, which have not been deducted for income tax reporting
purposes, amount to approximately $27 million. 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 $9.4 million. 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.
8
(5) NOTE RECEIVABLE
A $525,000 note receivable received for the issuance of 1,381,772 shares of
common stock has been classified as an offset to equity. The Company has
received approximately $125,000 of the note since March 31, 2002.
9
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) Technology, Inc. (DCH) is engaged in
the acquisition, development, and commercialization of hydrogen-based
technologies.
DCH develops and/or licenses patented technologies and converts the
technologies into viable products that we then produce and sell. We focus on
technologies related to the use of hydrogen, primarily hydrogen-specific gas
sensors and hydrogen-based proton exchange membrane (PEM) fuel cells. We also
provide hydrogen safety services.
We introduced our first hydrogen gas detector product line, the Robust
Hydrogen Sensor product line, in November 1998. DCH currently offers eight
hydrogen sensor products, including our new family of H2SCAN sensing systems.
DCH began development of 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 this development and develop channels to market. DCH currently offers and
has placed into the market alpha and beta fuel cell products ranging in power
from less than one watt to 5 kW.
We currently obtain our funding from equity financings and product sales.
As production activity increases 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, DCH common stock began trading on the American Stock
Exchange under the symbol "DCH."
Recent Developments
- --------------------
Subsequent to March 31, 2002, our financial condition has remained
challenging. As of the date of filing of this Quarterly Report, we were
experiencing a very severe cash shortfall. We have been seeking a strategic
investor or partner, but to date have not reached any agreement or understanding
with any such party. We obtained the majority of our capital during the first
quarter of 2002 from the sale of equity securities, but do not currently have
free-trading shares available for public sales under a registration statement.
We may from time to time raise funds from private placements of equity or debt
securities; however, we currently have not entered into any agreement or other
understanding regarding any private placements. If we raise additional funds
from private placements of equity or convertible debt securities, the percentage
ownership of our shareholders will be diluted. Obtaining capital will be
challenging in a difficult environment, due to the economic downturn in the
United States economy. In the event that we cannot secure sufficient working
capital in the next few weeks, we will be required to pursue certain strategic
options including but not limited to curtailing our operations or selling all or
a portion of one or more of our divisions.
10
Hydrogen Sensors
- -----------------
The first quarter of 2002 provided certain promising developments for DCH
Sensors.
We developed and delivered a sensor system in an explosion proof container
for the power generation market, a significant new business sector. The sensor
system was developed under a contract with L-3 Communications, a major defense
contractor, covering 65 H2SCAN hydrogen-specific sensing systems. The systems
will be delivered this year in stages, with the first 13 units to be delivered
in April.
We also completed the H2SCAN for a fixed sensor application, pursuant to
an intensive effort with Novellus Systems, Inc., a leading producer of
semiconductor manufacturing equipment, to upgrade its present sensors. The
first fixed sensor application is an up-grade for 110 DCH hydrogen-specific
sensing systems installed over the past two years in products sold by Novellus
and operating today. The upgrade includes significant mechanical and electronic
improvements that bring the earlier DCH sensing system up to the performance
levels of DCH's new H2SCAN sensing technology.
Another significant event that took place during the first quarter of 2002
was a request for the development of a H2SCAN hand held unit for a field
hydrogen calibration kit. The kit includes all software, hardware and detailed
procedures for field hydrogen calibration. We believe that the availability of
this kit, requested by several large users, will open up additional applications
for our H2SCAN hand held sensor.
Fuel Cells
- ----------
In the first quarter of 2002 we have achieved significant milestones in the
evolution of multiple kilowatt fuel cells designed for integration with natural
gas reformers. The Enable 5 kW fuel cell delivered to Houston Advanced
Research Center (HARC) late in 2001 was installed and operational early in 2002.
This was the first natural gas fuel cell system operated at the HARC
demonstration center. On March 19th another 5kW natural gas fuel cell was
shipped to a confidential customer involved in the storage and distribution of
natural gas. At the close of the 1st quarter of 2002 another natural gas fuel
cell was in construction for delivery to ConEd, a major electrical utility,
early in the 2nd quarter.
In January 2002, we shipped the last of our new generation 15 watt remote
fuel cell power systems to the Texas Natural Resource Conservation Commission
(TNRCC), completing the contracted 10 unit order. In February two 30 watt
units were shipped to the Pennsylvania Department of Environmental Protection
(DEP). The DEP is reviewing the performance of the units and will investigate
the purchase of higher volumes to provide electrical power for air and water
quality sampling equipment.
Research and development work has continued with considerable success.
Development of molded bipolar plate technology has allowed us to reduce
significantly the production cost of fuel cell stacks. These developments,
along with contracts for volume material purchases, have resulted in a 70%
reduction in the cost of materials for the higher power fuel cell stacks over
the last nine months.
Center for Hydrogen Safety (CHS)
- --------------------------------
The CHS assesses hydrogen risks at existing facilities. During the first week
of October 2001, CHS conducted an audit for SunLine Transit Agency in Thousands
Palms, California, involving compliance with pertinent codes and standards. In
March 2002, CHS also conducted a review of SunLine's Emergency Evacuation Plan.
11
In February 2002, we obtained the remaining 30% of CHS that we had not
previously owned from Rode & Associates, LLC. We have also assumed management
responsibilities for CHS, but will retain Rode & Associates on a consultancy
basis.
Results of Operations
- -----------------------
Three Months Ended March 31, 2002, Compared With Three Months Ended March 31,
- --------------------------------------------------------------------------------
2001
- ----
In the three months ended March 31, 2002, we had sales of $212,010 compared
to sales of $188,751 for the three months ended March 31, 2001. The higher sales
for the three-month period ending March 31, 2002 primarily reflected the
increased sales of fuel cells and growth in consulting revenue.
Our sales backlog for fuel cells was $945,000 at March 31, 2002. Delivery
of these units is scheduled to take place over the next ten months. While
market acceptance of our new sensor products improved in the first quarter of
2002, overall sensor revenue was lower as compared to the first quarter of 2001.
The cost of products sold increased to $195,077 for the three months ended
March 31, 2002, from $103,196 for the three months ended March 31, 2001,
reflecting a higher number of fuel cell units delivered during the 2002 period.
On a percentage basis, costs of sales were 92 percent for the three-month period
ended March 31, 2002 and 54.6 percent for the same period in 2001. The drop in
gross profit margin is a result of increased sales of fuel cells in which costs
exceeded revenues. We currently anticipate that the cost of fuel cells
currently under construction will exceed the revenues from such fuel cells for
the foreseeable future.
We incurred $1,167,010 in selling, general and administrative expenses for
the three months ended March 31 2002, compared to $2,298,098 for the three
months ended March 31, 2001. Included in selling, general and administrative
expenses for the three months ended March 31, 2002 was $200,735 of expense
related to the issuance of fully vested options to purchase approximately
885,760 shares of stock to employees and consultants in lieu of cash
compensation. We issued the stock and fully vested options in order to conserve
cash for our operations.
Depreciation and amortization decreased to $55,525 for the three months
ended March 31, 2002, compared to $97,198 for the three months ended March 31,
2001, reflecting the sale in September 2001 of our manufacturing facility
located at 24832 Avenue Rockefeller, Valencia, California.
We expended a total of $284,566 on research and development during the
three months ended March 31, 2002, compared to expenditures of $794,709 for the
three months ended March 31, 2001. This decrease in 2002 in research and
development expenses reflects a greater focus on the commercialization and
production of products, especially for our fuel cell operation.
Due primarily to these factors, we incurred a loss from operations of
$1,477,756 for the three months ended March 31, 2002, compared to an operating
loss of $3,088,571 for the three months ended March 31, 2001. DCH had 33,643,220
weighted average common shares outstanding for the three months ended March 31,
2002 as compared to 27,579,427 weighted average common shares outstanding for
the comparable period in 2001. The net loss per share decreased to $0.04 per
share for the three months ended March 31, 2002, as compared to a loss of $0.11
per share for the comparable period in 2001.
12
Liquidity and Capital Resources
- ----------------------------------
DCH generated a total of $1,145,855 in net cash from financing activities
for the three months ended March 31, 2002, as compared to $2,100,379 during the
comparable three months in 2001. Substantially all of the financing activities
for the three months ended March 31, 2002 consisted of equity financings,
supplemented by proceeds from the exercise of options and warrants.
We utilized $1,280,621 of net cash for operating activities in the three
months ended March 31 2002, compared to $1,945,564 for the comparable period in
2001. The decrease in net cash used for operating activities was primarily
related to the growth of our product sales and operations during the period,
requiring additional investment in working capital. We utilized $1,011 of net
cash in investing activities in the three months ended March 31, 2002 compared
to the expenditure of $97,061 of net cash for investing activities in the three
months ended March 31, 2001. The majority of the funds received during the first
quarter 2002 represent proceeds from sale of common stock.
At March 31, 2002, we had $220,507 in unrestricted cash, compared to
$356,281 in cash at December 31, 2001. We also had accounts receivable (net of
allowance) of $195,725 at March 31, 2002, compared to accounts receivable of
$230,192 at December 31, 2001. Investment in inventory totaled $653,199 at
March 31, 2002 compared to $528,442 at December 31, 2001. The increase in
inventory is a combination of additional inventory requirements in our sensor
operations, and work in process on the backlog of orders at our fuel cell
operation.
At March 31, 2002 DCH had accounts payable of $576,795, compared to
accounts payable of $469,292 at December 31, 2001. The increase reflects order
backlog at our Enable Fuel Cell Company and increased orders at DCH Sensor Corp.
We reduced our accrued compensation to $172,255 at March 31, 2002 from $212,919
at December 31, 2001. We had unearned revenue of $75,000 at March 31, 2002.
These funds represent deposits and advance payments received from customers for
fuel cells currently being manufactured and due to be delivered to customers
before the end of 2002.
DCH is dependent upon outside sources for equity capital to fund our
operating requirements. We anticipate that a substantial portion of our capital
requirements for the balance of the period ending December 31, 2002 will be
provided from external funding sources. We are actively pursuing and negotiating
financing arrangements with potential strategic and other 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, or by curtailing our operations or selling all or a portion of one or
more of our divisions.
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.
13
RISKS RELATED TO DCH'S OPERATIONS
WE ARE IN IMMEDIATE NEED OF ADDITIONAL CAPITAL.
We are currently experiencing a very severe cash shortfall. We have been
seeking a strategic investor or partner, but to date have not reached any
agreement or understanding with any such party. We obtained the majority of our
capital during the first quarter of 2002 from the sale of equity securities, but
do not currently have free-trading shares available for public sales under a
registration statement. We may from time to time raise funds from private
placements of equity or debt securities; however, we currently have not entered
into any agreement or other understanding regarding any private placements. If
we raise additional funds from private placements of equity or convertible debt
securities, the percentage ownership of our shareholders will be diluted.
Obtaining capital will be challenging in a difficult environment, due to the
economic downturn in the United States economy. In the event that we cannot
secure sufficient working capital in the next few weeks, we will be required to
pursue certain strategic options including but not limited to curtailing our
operations or selling all or a portion of one or more of our divisions.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES FOR THE NEXT TWO FISCAL YEARS;
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
Since our inception in November 1994, we have incurred substantial losses.
Our comprehensive net loss equaled $1,477,756 for the three months ended March
31, 2002. For the year ended December 31, 2001, we had a comprehensive net loss
of $9,935,119. We had an accumulated deficit of $27,691,844 at March 31, 2002.
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 next two fiscal years, we expect to experience
additional losses as these increased expenses exceed our total revenues. These
additional losses will increase our accumulated deficit.
These conditions give rise to substantial doubt about our ability to
continue as a going concern. Our financial statements do not include
adjustments relating to the recoverability and classification of reported asset
amounts or the amount and classification of liabilities that might be necessary
should we be unable to continue as a going concern. Our continuation as a going
concern is dependent upon our ability to obtain additional financing from the
sale of our common stock, as may be required, and ultimately to attain
profitability.
WE MAY BE UNABLE TO NEGOTIATE RENEWALS OF CERTAIN COOPERATIVE RESEARCH AND
DEVELOPMENT AGREEMENTS (CRADA'S) AND TECHNOLOGY LICENSES UPON WHICH WE RELY.
We license patented technologies from other parties in order to develop and
commercialize products based on those technologies. In order to develop,
commercialize, manufacture and sell our products, we rely upon our ability to
enter into agreements such as the LANL CRADA which permits us to exploit the
technology underlying our PEM fuel cell. There is no guarantee that we will be
able to negotiate renewals of this or other CRADA's or license agreements upon
which we rely.
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 due to the
current economic slowdown, terrorist activity or the threat of such activity, or
otherwise 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.
14
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.
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
15
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, and Dr.
Johan (Hans) Friedericy, our Chief Operating Officer. We do not currently carry
"key person" insurance on Messrs. Donohue, Friedericy or Ilsley. 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
our 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
segments grow. 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.
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GOVERNMENTAL REGULATION OF 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 and our future hydrogen fuel cell manufacturing facilities will also 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.
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.
We are heavily reliant on the ability of Corlund Electronics to manufacture
the electronic circuit boards for our Robust Hydrogen Sensor . Sensor casing and
other hardware are fabricated by various small manufacturers. WR Gore Inc. is
our preferred supplier of fuel cell membranes, however we continue to evaluate
other sources. Measurement Systems manufactures silicon wafers containing our
individual sensor chips. 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.
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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.
SOME OF THE INFORMATION IN THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS
FORWARD-LOOKING STATEMENTS.
Some of the information in this Quarterly Report on Form 10-QSB contains
forward-looking statements that involve risks and uncertainties. You can
identify these statements by forward-looking words such as "may", "will",
"expect", "anticipate", "believe", "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they:
- discuss our expectations about our future performance;
- contain projections of our future operating results or of our future
financial condition; or
- state other "forward-looking" information.
We believe it is important to communicate our expectations to our
stockholders. There may be events in the future, however, that we are not
able to predict accurately or over which we have no control. The risk
factors listed in this section, as well as any cautionary language in this
Quarterly Report, provide examples of risks, uncertainties and events that
may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. You should be aware that the
occurrence of any of the events described in these risk factors and
elsewhere in this Quarterly Report could have a material and adverse effect
on our business, results of operations and financial condition.
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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.
Not applicable.
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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.
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 13, 2002 By: /s/ John Donohue
----------------------------
John Donohue,
President and CEO
By: /s/ Ronald Ilsley
----------------------------
Ronald Ilsley,
Chief Financial Officer
(Principal Accounting and
Financial Officer)
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