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, 2002
[ ] 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)
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 August 14, 2002, the issuer had 36,154,206 shares of common stock,
$.01 par value per share, outstanding.
DCH TECHNOLOGY, INC.
CONTENTS
Page No.
--------
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 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
2
PART I. FINANCIAL INFORMATION
DCH Technology, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
2002 2001
------------- --------------
CURRENT ASSETS (UNAUDITED)
Cash and cash equivalents $ 21,237 $ 356,281
Accounts receivable, net of allowances 103,663 230,192
Inventories, net of reserves 316,407 528,442
Prepaid expenses, net of reserves 95,307 444,643
Other receivable - 0 - 6,392
------------- --------------
TOTAL CURRENT ASSETS 536,614 1,565,950
PROPERTY AND EQUIPMENT, net of depreciation and reserves 303,935 633,040
OTHER ASSETS
Intangible assets, net of accumulated amortization 143,304 135,608
Investments with no readily determinable fair value -0- 15,000
Investment in joint venture, net of reserves 17,914 32,696
Other 48,901 119,156
------------- --------------
TOTAL OTHER ASSETS 210,119 302,460
------------- --------------
$ 1,050,668 $ 2,501,450
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 570,736 $ 469,292
Accrued liabilities 132,568 167,116
Accrued compensation 320,193 212,919
Current portion of capital lease obligations 4,774 13,462
Unearned revenue 75,000 75,000
------------- --------------
TOTAL CURRENT LIABILITIES 1,103,271 937,789
------------- --------------
TOTAL LIABILTIES 1,103,271 937,789
F-1
MINORITY INTEREST IN LLC - 3,544
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,
36,154,206 and 25,560,616 shares
issued and outstanding 361,542 321,487
Additional paid-in-capital 29,295,441 27,514,120
Investment in limited liability companies (64,554) (64,554)
Other comprehensive loss (5,207) (8,340)
Accumulated deficit (29,639,825) (26,202,596)
------------- --------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (52,603) 1,560,117
------------- --------------
$ 1,050,668 $ 2,501,450
============= ==============
The Accompanying Notes are an Integral Part of these Financial Statements
F-2
DCH Technology, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
June 30, June 30,
------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Sales $ 192,441 $ 231,525 $ 404,451 $ 420,276
Cost of goods sold 434,868 121,224 629,945 224,420
------------ ------------ ------------ ------------
Gross profit (242,427) 110,301 (225,494) 195,856
Operating expenses:
Selling, general and 959,441 1,770,951 2,126,451 4,069,050
administrative expenses
Depreciation and amortization 321,566 105,890 377,093 203,088
Research and development 409,078 581,884 693,642 1,376,593
------------ ------------ ------------ ------------
Total operating expenses 1,690,085 2,458,725 3,197,186 5,648,731
------------ ------------ ------------ ------------
Loss from operations (1,932,512) (2,348,424) (3,422,680) (5,452,875)
Other income (expense), net (15,469) (12,730) (3,057) 3,150
------------ ------------ ------------ ------------
Net loss before Minority interest (1,947,981) (2,361,154) (3,425,737) (5,449,725)
Minority interest - 5,980 - 5,980
------------ ------------ ------------ ------------
Net loss (1,947,981) (2,355,174) (3,425,737) (5,443,745)
Other comprehensive loss
Foreign currency translation (3,530) 471 (3,133) 3,436
------------ ------------ ------------ ------------
Comprehensive loss $(1,951,511) $(2,354,703) $(3,428,870) $(5,447,181)
============ ============ ============ ============
Net loss per share
Basic $ (0.05) $ (0.08) $ (0.10) $ (0.19)
============ ============ ============ ============
Diluted $ (0.05) $ (0.08) $ (0.10) $ (0.19)
============ ============ ============ ============
Weighted average shares
outstanding 36,126,683 28,889,286 34,891,812 28,238,191
The Accompanying Notes are an Integral Part of these Financial Statements
5
DCH TECHNOLOGY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASHFLOW
CASH FLOWS FROM OPERATING ACTIVIES FOR THE SIX MONTHS ENDED JUNE 30,
2002 (UNAUDITED) 2001 (UNAUDITED)
----------------- -----------------
Net loss $ (3,425,737) $ (5,443,745)
Adjustments to reconcile net loss to net cash
Used in operating activities
Depreciation and Amortization 377,092 203,088
Issuance of stock, warrants and options
for services 263,484 2,852,999
Loss from investment in partnerships and
joint venture 15,037 4,160
Loss on disposal of property and equipment 83,363 524
Gain on sale of stock (85,000)
Minority interest (5,980)
Change in assets and liabilities
Accounts receivable 133,723 2,665
Inventory 212,034 (270,784)
Prepaid expenses 251,574 66,452
Other receivables 14,131
Accounts payable 101,444 (299,902)
Accrued expenses (34,548) (182,698)
Accrued compensation 107,275 (157,996)
Deferred revenue - 109,194
Other (8,909) -
----------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (2,009,168) (3,107,892)
CASH FLOWS FROM INVESTING ACTIVITES
Minority interest investment in LLC 6,037
Sale of investment w/nonreadily ascertainable
value 100,000
Deposits made for leased equipment 50,905 1,119
Purchases of licenses and intellectual property (25,986) (16,826)
Purchase of property and equipment, net - (101,473)
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITES 124,919 (111,143)
CASH FLOWS FROM FINANCING ACTIVIES
Proceeds from sale of common stock and warrants 1,447,140 2,783,117
Principal payments on capital lease (8,688) (8,088)
Proceeds from long-term debt - (27,252)
Proceeds from exercise of options and warrants 110,753 548,611
----------------- -----------------
NET CASH RECEIVED FROM FINANCING ACTIVITIES 1,549,205 3,296,388
NET INCREASE (DECREASE) IN CASH (335,044) 77,353
CASH, BEGINNING OF PERIOD 356,281 75,300
----------------- -----------------
CASH, END OF PERIOD $ 21,237 $ 152,653
================= =================
Supplemental disclosure of cash flow information:
Cash paid for
Interest $ 2,766 $ 31,164
Income taxes 2,275 1,950
The Accompanying Notes are an Integral Part of these Financial Statements
6
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 six months ended June 30, 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 June 30, 2002
------------------ ---------------
Raw Materials $ 296,560 $ 524,007
Work in Process 221,630 5,238
Finished Goods 10,252 103,569
------------------ ---------------
Subtotal $ 528,442 $ 632,814
Less reserve $ - $ (316,407)
------------------ ---------------
$ 528,442 $ 316,407
================== ===============
(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, 2002 cumulative net
operating losses, which have not been deducted for income tax reporting
purposes, amount to approximately $28 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.
7
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) has been
engaged since 1995 in the acquisition, development, and commercialization of
hydrogen-based technologies.
We have focused on hydrogen-specific gas sensors through our wholly-owned
subsidiary DCH Sensors, Inc. and hydrogen-based proton exchange membrane (PEM)
fuel cells through our wholly-owned subsidiary Enable Fuel Cell Corporation. We
have also provided hydrogen safety services through our Center for Hydrogen
Safety LLC.
In the quarter ended June 30, 2002, our financial condition remained
challenging. Since June 30, 2002, it has continued to deteriorate. Throughout
the period, and as of the date of filing of this Quarterly Report, we have been
experiencing a very severe cash shortfall. We have attempted to meet this
challenge in several ways. In June 2002, we furloughed substantially all of our
employees. We undertook diligent efforts to find a strategic investor or
partner, but to date have not reached any agreement or understanding with any
such party. We have solicited and are currently negotiating offers to purchase
our existing subsidiaries; however, to date no such transaction has been
consummated. All of these efforts have been made more challenging by the
economic downturn in the sensor and fuel cell markets as well as the United
States economy in general. In the event that we cannot secure sufficient
working capital in the next few weeks through the sale of one or more
subsidiaries, location of a strategic partner or investor, or otherwise, we will
be required to pursue certain strategic options including but not limited to
ceasing operations.
Effective August 15, 2002, our common stock was delisted for trading on the
American Stock Exchange. It is now traded on the Over-the-Counter Bulletin
Board under the symbol "DCHT."
Hydrogen Sensors
- -----------------
During the three-month period ending June 30, 2002, we shipped $184,741
worth of hydrogen sensors. Since mid June, we have operated with a much-reduced
staff and a minimal operation designed to satisfy existing customer orders.
Fuel Cells
- ----------
During the three-month period ending June 30, 2002, we shipped one 5kW fuel
cell on May 14, 2002 to a major east coast utility. In mid-une 2002, we
curtailed all operations at our Enable Fuel Cell Corporation.
8
Center for Hydrogen Safety (CHS)
- --------------------------------
During the three-month period ending June 30, 2002, there were no
activities at the Center for Hydrogen Safety.
Results of Operations
- ------------------------------
Three and Six Months Ended June 30, 2002, Compared With Three and Six Months
Ended June 30, 2001
- --------------------------------------------------------------------------------
In the three months ended June 30, 2002, we had sales of $192,441 compared
to sales of $231,525 for the three months ended June 30, 2001. Our sales for the
six months ended June 30, 2002 equaled $404,451 compared to sales of $420,276
for the comparable period in 2002. The lower sales for the three- and six-month
periods in 2002 primarily reflected a general slowdown in hydrogen related
equipment and DCH's own difficult working capital position.
The cost of products sold was $434,868 for the three months ended June 30,
2002 as compared to $121,224 for the three months ended June 30, 2001, and
$629,945 for the six months ended June 30, 2002 as compared to $224,420 for the
six months ended June 30, 2001. Included in cost of goods sold is a writedown of
inventory in the amount of $316,407. Due to various economic factor described
herein, management determined that the carrying value of inventory as of June
30, 2002 is not likely to be realized in the normal course of business, and
therefore, inventory was adjusted to estimated net realizable value during the
quarter ended June 30, 2002.
We incurred $959,441 in selling, general and administrative expenses for
the three months ended June 30 2002, compared to $1,770,951 for the three months
ended June 30, 2001. Our selling, general and administrative expenses for the
six months ended June 30, 2002 equaled $2,126,451 compared to $4,069,050 for the
six months ended June 30, 2001. Selling, general and administrative expense for
the period ended June 30, 2002 includes a writeoff of prepaid expenses of
$255,411. These prepaid amounts pertained to a three-year consulting contract
initiated in fiscal 2001, and to prepaid rent. During the quarter ended June 30,
2002, management determined that it was unlikely that this contract, or the
prepaid rent, would provide future benefit to DCH, and therefore, the amount was
charged to operations. Included in selling, general and administrative expenses
for the three and six months ended June 30, 2002 was $17,677 and $218,412,
respectively, of expense related to the issuance of fully vested options to
purchase 167,456 and 1,053,216 shares of stock, respectively, to employees and
consultants in lieu of cash compensation. We issued the fully vested options in
order to conserve cash for our operations.
Depreciation and amortization increased to $321,566 for the three months
ended June 30, 2002, compared to $105,890 for the three months ended June 30,
2001, and increased to $377,093 for the six months ended June 30, 2002 compared
to $203,088 for the comparable period in 2001. Depreciation and amortization
includes a charge of $200,000 made during the quarter ended June 30, 2002. Due
to the curtailment of the operations of our fuel cell division, and due to the
general economic environment and financial condition of DCH, management has
determined that the value of property, plant and equipment has been impaired.
Accordingly, a charge to reduce the carrying value of property, plant and
equipment to estimated fair value has been made during the period ended June 30,
2002.
We expended a total of $409,078 on research and development during the
three months ended June 30, 2002, compared to expenditures of $581,884 for the
three months ended June 30, 2001. Research and development expenses equaled
$693,642 for the six months ended June 30, 2002, compared to $1,376,593 for the
six months ended June 30, 2001. The decreases in 2002 in research and
development expenses reflected a greater focus on the commercialization and
production of products, especially for our fuel cell operation.
9
Due primarily to these factors, we incurred a loss from operations of
$1,932,512 for the three months ended June 30, 2002, compared to an operating
loss of $2,348,424 for the three months ended June 30, 2001, and an operating
loss of $3,422,680 for the six months ended June 30, 2002, compared to a loss
from operations of $5,452,875 for the six months ended June 30, 2001. DCH had
36,126,683 weighted average common shares outstanding for the three months ended
June 30, 2002, as compared to 28,889,286 weighted average common shares
outstanding for the comparable period in 2001, and 34,891,812 weighted average
common shares outstanding for the six months ended June 30, 2002, compared to
28,238,191 weighted average common shares outstanding for the comparable period
in 2001. Our net loss per share decreased to $0.05 per share for the three
months ended June 30, 2002, as compared to a loss of $0.08 per share for the
comparable period in 2001, and decreased to $0.10 per share for the six months
ended June 30, 2002, as compared to a net loss per share of $0.19 for the six
months ended June 30, 2001.
Liquidity and Capital Resources
- ----------------------------------
DCH generated a total of $1,549,205 in net cash from financing activities
for the six months ended June 30, 2002, as compared to $3,296,388 during the
comparable six months in 2001. Substantially all of the financing activities for
the six months ended June 30, 2002 consisted of equity financings, supplemented
by proceeds from the exercise of options and warrants.
We utilized $2,016,485 of net cash for operating activities in the six
months ended June 30, 2002, compared to $3,107,892 for the comparable period in
2001. The decrease in net cash used for operating activities was primarily
related to cost reductions and curtailment of operating activities. We received
$132,237 of net cash in investing activities in the six months ended June 30,
2002, compared to the expenditure of $111,143 of net cash for investing
activities in the six months ended June 30, 2001. The majority of the funds
received during the first six months of 2002 represent proceeds from sale of our
investment in CryoFuel Systems, Inc., a privately held company, and from
deposits made for the purchase and lease of equipment.
At June 30, 2002, we had $21,237 in cash, compared to $356,281 in cash at
December 31, 2001. We also had accounts receivable (net of allowances) of
$103,663 at June 30, 2002, compared to accounts receivable of $230,192 at
December 31, 2001. Investment in inventory totaled $316,407 at June 30, 2002
compared to $528,442 at December 31, 2001. The decrease in inventory is a result
of management's decision to reduce inventory values as discussed above.
At June 30, 2002 DCH had accounts payable of $570,736, compared to accounts
payable of $469,292 at December 31, 2001, reflecting our difficult working
capital position. Our accrued compensation increased to $320,193 at June 30,
2002 from $212,919 at December 31, 2001, as management elected to defer salaries
in consideration of our cash requirements. We had unearned revenue of $75,000 at
June 30, 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.
In the quarter ended June 30, 2002, our financial condition remained
challenging. Since June 30, 2002, it has continued to deteriorate. Throughout
the period, and as of the date of filing of this Quarterly Report, we have been
experiencing a very severe cash shortfall. We have attempted to meet this
challenge in several ways. In June 2002, we furloughed substantially all of our
employees. We undertook diligent efforts to find a strategic investor or
partner, but to date have not reached any agreement or understanding with any
such party. We have solicited and are currently negotiating offers to purchase
our existing subsidiaries; however, to date no such transaction has been
consummated. All of these efforts have been made more challenging by the
economic downturn in the sensor and fuel cell markets as well as the United
States economy in general. In the event that we cannot secure sufficient working
capital in the next few weeks through the sale of one or more subsidiaries,
location of a strategic partner or investor, or otherwise, we will be required
to pursue certain strategic options including but not limited to ceasing
operations.
10
Subsequent Events
On July 9 the Board of Directors of DCH approved and directed the company to
seek buyers for both the Enable Fuel Cell Corporation and DCH Sensors, Inc. in a
competitive process. This action was taken by the Board as a result of our
very challenging financial and cash position. Management is in detailed
negotiations with a potential buyer for our sensor subsidiary and still seeking
offers for Enable. The difficult cash position of DCH and the present economic
climate present a very difficult position for us, and our Board of Directors
will continually monitor the issues and take action as needed.
Forward-Looking Statements
- ---------------------------
The forward-looking statements contained in this Quarterly Report on Form
10-QSB are subject to various risks, uncertainties and other factors that could
cause actual results to differ materially from the results anticipated in such
forward-looking statements. Included among the important risks, uncertainties
and other factors are those discussed below.
RISKS RELATED TO DCH'S OPERATIONS
WE 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 have solicited and are
currently negotiating offers to purchase our existing subsidiaries; however, to
date no such transaction has been consummated. 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.
Obtaining capital has been, and will continue to be, extremely challenging in a
difficult environment, due to the economic downturn in the sensor and fuel cell
markets, as well as the United States economy in general. In the event that we
cannot secure sufficient working capital in the next few weeks through the sale
of one or more subsidiaries, location of a strategic partner or investor, or
otherwise, we will be required to pursue certain strategic options including but
not limited to ceasing operations.
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 $1,951,511 for the three months ended June
30, 2002. For the year ended December 31, 2001, we had a comprehensive net loss
of $9,935,119. We had an accumulated deficit of $29,639,825 at June 30, 2002.
We anticipate that in the event we continue operations, of which there can
be no assurance, 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.
11
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.
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.
12
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
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.
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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.
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
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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(TM). 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.
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.
15
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.
Exhibit No. Name of Exhibit
----------- ---------------
99.1 Certification of Chief Executive Officer
And Chief Financial Officer
(b) Reports on Form 8-K.
On June 13, 2002, we filed a Current Report on Form 8-K, reporting
under Item 5 thereof the furloughing of substantially all of our employees.
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 19, 2002 By: /s/ John Donohue
--------------------------------------
John Donohue,
President and CEO
By: /s/ Ronald Ilsley
--------------------------------------
Ronald Ilsley,
Chief Financial Officer
(Principal Accounting and
Financial Officer)
17