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, 2000
[_] 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 August 1, the issuer had 25,260,220 shares of common stock, $.01 par
value per share, outstanding.
DCH TECHNOLOGY, INC.
CONTENTS
Page No.
--------
PART I - FINANCIAL INFORMATION
Independent Accountant's Report
Item 1. Financial Statements
Consolidated Balance Sheets 1
Consolidated Statements of Operations 2
Consolidated Statements of Cash Flows 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES
INDEX TO EXHIBITS
Independent Accountant's Report
Board of Directors and Shareholders
DCH Technology, Inc.
We have reviewed the accompanying consolidated balance sheet of DCH
Technology,Inc. and subsidiary as of June 30, 2000, and the related consolidated
statements of income and cash flows for the three and six month periods 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.
The balance sheet for the year ended December 31, 1999, were audited by other
accountants, and they expressed an unqualified opinion on it in their report
dated February 22, 2000, but they have not performed any auditing procedures
since that date.
Moss Adams LLP
Los Angeles, California
July 19, 2000
PART I. FINANCIAL INFORMATION
DCH TECHNOLOGY, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
CURRENT ASSETS (UNAUDITED)
Cash $ 3,297,079 $ 1,193,084
Accounts receivable 556,009 143,128
Inventory 218,485 127,319
Prepaid expenses 277,053 90,248
Other receivable 10,442 191,100
----------- ------------
TOTAL CURRENT ASSETS 4,359,068 1,744,879
----------- ------------
PLANT, PROPERTY AND EQUIPMENT - NET 1,749,496 217,665
----------- -----------
OTHER ASSETS
Restricted cash deposit 700,000 -
Deposits 127,267 -
Intangible assets, net of
amortization 86,051 98,577
Investments with no readily
determinable fair value 215,000 215,000
------------ -----------
TOTAL OTHER ASSETS 1,128,318 313,577
------------ -----------
$ 7,236,882 $ 2,276,121
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 217,388 $ 244,539
Accrued payroll and vacation 169,095 74,872
Accrued expenses 486,963 510,690
Capital lease obligation, net of
long-term portion 13,571 13,833
Long-term debt, net of long-term portion 55,000 -
------------ -----------
TOTAL CURRENT LIABILITIES 942,017 843,934
----------- -----------
LONG TERM LIABILITIES
Capital lease obligation, net of current
portion 22,749 30,344
Long-term debt, net of current portion 737,483 -
----------- -----------
TOTAL LIABILITIES 1,702,249 874,278
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $0.10 par value
5,000,000 shares authorized,
- 0 - shares issued and outstanding - -
Common stock, $0.01 par value,
50,000,000 shares authorized,
25,098,136 and 19,325,995 shares
issued and outstanding, respectively 250,981 193,259
Additional paid-in-capital 17,061,389 9,775,433
Common stock subscribed, 0 and 62,914 shares,
respectively - 131,000
Less: investment in limited liability
companies (69,002) (79,445)
------------ ------------
17,243,368 10,020,247
Accumulated deficit (11,708,735) (8,618,404)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,534,633 1,401,843
------------ ------------
$ 7,236,882 $ 2,276,121
============ ============
See Accompanying Notes to Consolidated Financial Statements
1
DCH TECHNOLOGY,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------- ----------- ------------ -----------
Sales $ 265,756 $ 50,551 $ 576,431 $ 216,773
Cost of products sold 323,428 63,262 481,111 142,878
----------- ----------- ------------ -----------
Gross profit (loss) (57,672) (12,711) 95,320 73,895
Operating expenses:
Selling, general and administrative expenses 1,453,608 643,222 2,828,972 1,033,784
Depreciation and amortization 42,003 12,638 69,769 24,014
Research & development 207,434 185,411 358,452 319,498
----------- ----------- ------------ -----------
1,703,045 841,271 3,257,193 1,377,296
----------- ----------- ------------ -----------
Net loss from operations (1,760,717) (853,982) (3,161,873) (1,303,401)
Other income
Interest income and other 52,602 2 71,541 44
----------- ----------- ------------ -----------
Net loss $(1,708,115) $ (853,980) $ (3,090,332) $(1,303,357)
=========== =========== ============ ===========
Weighted average common shares outstanding 24,501,567 13,579,439 22,918,479 13,166,244
=========== =========== ============ ===========
Net loss per common share
Basic and diluted $ (0.07) $ (0.06) $ (0.13) $ (0.10)
=========== =========== ============ ===========
See Accompanying Notes to Consolidated Financial Statements
2
DCH TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
2000 1999
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,090,332) $ (1,303,357)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization 69,769 24,014
Issuance of stock, warrants and
options for services 752,154 136,549
Loss from investment in partnerships 10,443 -
Change in:
Accounts receivable (412,881) (106,753)
Inventory (91,166) 103,866
Prepaid expenses (186,805) (71,178)
Other receivable 49,658 -
Bank overdraft - (3,212)
Accounts payable (27,151) 3,276
Accrued expenses 67,398 263,475
Accrued payroll and vacation 94,223 61,005
Deferred revenue - 8,250
------------ -------------
NET CASH USED BY OPERATING ACTIVITIES (2,764,690) (884,065)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in certificate of deposit (700,000) -
Deposits made for equipment, leases (127,267) -
Loan to shareholders, net - (51,634)
Purchase of licenses and intellectual
property - (25,000)
Purchase of equipment (789,073) (21,678)
------------ -------------
NET CASH PROVIDED BY INVESTING ACTIVITIES (1,616,340) (98,312)
CASH FLOWS FROM FINANCING ACTIVITIES
Private placement of common stock and
warrants 5,210,000 900,356
Principal payments on capital lease (7,857) -
Principal payments on long-term debt (7,518) -
Proceeds for exercise of warrants 1,159,400 18,750
Proceeds from common stock subscriptions
receivable 131,000 100,000
------------ -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,485,025 1,019,106
------------ -------------
NET INCREASE IN CASH 2,103,995 36,729
CASH, BEGINNING OF PERIOD 1,193,084 1,802
------------ -------------
CASH, END OF PERIOD $ 3,297,079 $ 38,531
============ =============
Supplemental disclosure of cash flow
information is as follows:
Cash paid for
Interest $ 5,069 -
Income taxes 1,950 $ 1,600
Non-cash transactions:
Building acquired with debt $ 800,000
============
Accrued expenses settled with stock
issuance $ 91,125
============
See Accompanying Notes to Consolidated Financial Statements
3
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, income statement and cash flows at and for the periods ended June
30, 2000, 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. The Company's independent auditors have not performed any audit,
review or compilation procedures on the June 30, 1999 financial statement
information. 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, 1999. In the opinion of Management, all adjustments (consisting of
normal recurring adjustments and accruals) considered necessary for a fair
presentation have been included in the interim period. Operating results for the
six months ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
(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 are not included in the determination of the weighted average number
of shares outstanding, as they would be antidilutive.
(3) INVENTORY
Inventory is stated at the lower of cost or market value using the
first-in, first-out (FIFO) method. Inventories consist primarily of parts and
assemblies to be used in finished products.
(4) USE OF ESTIMATES
Management has made estimates and assumptions relating to the reporting of
assets, liabilities, revenue, expenses and disclosure of contingencies in
preparing these financial statements in accordance with generally accepted
accounting principles. Actual results may differ from those estimates.
4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT
LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS
OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES",
"INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON
THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED
BELOW UNDER "FORWARD-LOOKING STATEMENTS" AND ELSEWHERE IN THIS QUARTERLY REPORT
ON FORM 10-QSB ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED THE
COMPANY'S RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto.
General
- -------
DCH Technology, Inc. is a leader in hydrogen technology. Our hydrogen
sensors and safety systems provide real time monitoring of hydrogen gas for
various industries, and our fuel cell products provide clean and reliable power
from hydrogen. 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 commenced initial production of our first hydrogen gas detector product
line, the Robust Hydrogen Sensor product line, in November 1998, and currently
offer 4 hydrogen sensor products. We began to commercialize our low power (up
to 10 kWs) fuel cells in 1998, and in March 2000 created a wholly owned
subsidiary, the Enable Fuel Cell Corporation, to focus on this market. We
currently obtain our funding from private placements of equity securities and
product sales. As production activity increases, production facilities are more
fully utilized and we fully implement our marketing strategies, we expect
revenues from sales of products to increase as a proportion of our funding.
In May 2000, we acquired a new building located at 24832 Avenue
Rockefeller, Santa Clarita, California, which will house our advanced sensor
development and full scale manufacturing operations. This acquisition
represents the second expansion of our
5
sensor division and will include on-site hydrogen production capabilities. Our
new facility will help us meet the growing demand for complete hydrogen sensor
by allowing for large-scale production of sensors.
In June 2000, we announced a joint venture agreement with Daido Metal
Company, Ltd., a Japanese high volume production manufacturer of precision metal
components. Under the agreement, Daido will manufacture and assemble fuel cell
products, initially small portable fuel ranging from less than one watt to 50
watts. The joint venture will also encompass future production of larger fuel
cells for stationary applications.
In June 2000, we reincorporated the company in Delaware. Our principal
reasons for reincorporation were the greater flexibility afforded under Delaware
corporate law, the existence of well-established principles of corporate
governance in that state, and the potential for our increased ability to attract
and retain qualified directors and investors.
On August 10, 2000, our common stock began trading on the American Stock
Exchange under the symbol "DCH."
Results of Operations
- ---------------------
Three Months Ended June 30, 2000, Compared With Three Months Ended June 30, 1999
- --------------------------------------------------------------------------------
For the three months ended June 30, 2000, we had sales of $265,756 compared
to sales of $50,551 for the three months ended June 30, 1999. The increased
sales in the second quarter of 2000 were due primarily to an increase in sales
of our Robust Hydrogen Sensor and Fuel Cell products. In accordance with the
growth in sales, the cost of products sold increased to $323,428 for the three
months ended June 30, 2000, compared to $63,262 for the three months ended June
30, 1999. We incurred a gross loss of $57,672 for the three months ended June
30, 2000, compared to a gross loss of $12,711 for the three months ended June
30, 1999. These losses resulted primarily from special government and research
and development contracts we engaged in during this period where cost
substantially exceed revenues.
Selling, general and administrative expenses were $1,453,608 for the three
months ended June 30, 2000, compared to $643,222 for the comparable period in
1999. Substantially all of the selling, general and administrative expenses in
the second quarter of 2000 were derived from the building of a more advanced
corporate infrastructure, an increased emphasis on our thick film hydrogen
sensor, and the expansion of our fuel cell production activity.
Depreciation and amortization increased to $42,003 for the three months
ended June 30, 2000, compared to $12,638 for the three months ended June 30,
1999, due to additional equipment purchases for our operations.
We expended $207,434 on research and development during the three months
ended June 30, 2000, compared to expenditures of $185,411 for the three months
ended
6
June 30, 1999. The relatively slight increase in research and development
expenses in 2000 was due to a greater focus on commercialization and development
of products.
As a result of the foregoing factors, our net loss increased to $1,760,717
for the three months ended June 30, 2000, from a net loss of $853,982 for the
three months ended June 30, 1999. Due in part to an increase in the number of
shares outstanding during the period, the net loss per share increased slightly
to $0.07 for the three months ended June 30, 2000, from $0.06 for the comparable
period in 1999.
Six Months Ended June 30, 2000, Compared With Six Months Ended June 30, 1999
- ----------------------------------------------------------------------------
For the six months ended June 30, 2000, we had sales of $576,431 compared
to sales of $216,773 for the six months ended June 30, 1999. The increased
sales during this period were due primarily to an increase in the sales of our
Robust Hydrogen Sensor products and in part to an increase in sales of our fuel
cell products. In accordance with the growth in sales, the cost of products sold
increased to $481,111 for the six months ended June 30, 2000, compared to
$142,878 for the six months ended June 30, 1999. Despite this increase in cost
of products sold, we recognized a gross profit of $95,320 for the six months
ended June 30, 2000, compared to a gross profit of $73,895 for the six months
ended June 30, 1999.
Selling, general and administrative expenses were $2,828,972 for the six
months ended June 30, 2000, compared to $1,033,784 for the comparable period in
1999. Substantially all of the selling, general and administrative expenses
during this period were derived from the building of a more advanced corporate
infrastructure, the expansion of fuel cell production activity and an increased
emphasis on the thick film sensor.
Depreciation and amortization increased to $69,769 for the six months ended
June 30, 2000, compared to $24,014 for the six months ended June 30, 1999, due
to additional equipment purchases for our operations.
We expended $358,452 on research and development during the six months
ended June 30, 2000, compared to expenditures of $319,498 for the six months
ended June 30, 1999. This slight increase in research and development expenses
during this period was due to a greater focus on commercialization and
development of products.
As a result of the foregoing factors, our net loss increased to $3,090,332
for the six months ended June 30, 2000, from a net loss of $1,303,357 for the
six months ended June 30, 1999. Due in part to an increase in the number of
shares outstanding during the period, the net loss per share increased slightly
to $0.13 for the six months ended June 30, 2000, from $0.10 for the comparable
period in 1999.
Liquidity and Capital Resources
- -------------------------------
To date, we have funded our operations primarily through private placements
of equity securities and secondarily through product sales. Such placements
generated net
7
proceeds of $1,350,000 during the three months ended June 30, 2000, compared to
proceeds of $885,689 for the three months ended June 30, 1999. We generated net
cash from financing activities of $6,485,025 for the six months ended June 30,
2000, as compared to net cash from financing activities of $1,019,106 for the
comparable period in 1999. Substantially all of the financing activities for the
six months ended June 30, 2000 consisted of a private placement of common stock
and warrants together with the exercise of warrants.
We utilized $2,764,690 of net cash for operating activities in the six
months ended June 30, 2000, compared to the utilization of $884,065 of net cash
for operating activities for the comparable period in 1999. 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
accounts receivable and the issuance of common stock for services. We used
$1,616,340 of net cash for investing activities in the six months ended June 30,
2000, compared to $98,312 of net cash for investing activities in the six months
ended June 30, 1999, primarily due to the availability of additional funds from
our private placement in early 2000.
At June 30, 2000, we had $3,297,079 in cash, compared to $1,193,084 in cash
at December 31, 1999. We also had accounts receivable of $556,009 at June 30,
2000, compared to accounts receivable of $143,128 at December 31, 1999.
We currently have sufficient capital to support our operations through the
remainder of 2000. We anticipate that our capital requirements for the balance
of the period ending December 31, 2001 will be met through cash generated from
operations and from equity investments. However, additional capital may be
required to fund our operations (including the commercialization of our products
and ongoing research and development) through this period. There can be no
assurance that we will be able to generate capital sufficient to meet these
long-term needs. If we cannot meet these capital requirements, we may be able
to extend the period for which available resources would prove adequate by not
proceeding with planned operation expansions and deferring planned commitments.
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 operation expansions and deferring planned commitments.
Impact of the Year 2000
- ---------------------------
In our previous filings with the Securities and Exchange Commission, we
have discussed the nature and progress of our plans to deal with potential Year
2000 problems. These problems arise from the fact that many currently installed
computer systems and software products were coded to accept or recognize only
two digit entries in the date code field. These systems may recognize a date
using "00" as the year 1900 rather than the year 2000. As a result, computer
systems and/or software used by many companies and governmental agencies needed
to be upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities. Prior to
December 31, 1999, we completed our assessment of all material information
technology and non-information technology systems at our headquarters, as well
as our review of Year 2000 compliance by our key vendors,
8
distributors and suppliers. To date, we have experienced no significant
disruptions in mission critical information technology and non-information
technology systems and we believe those systems successfully responded to the
Year 2000 date changes. We are not aware of any material problems resulting from
Year 2000 issues, either with our own internal systems or the products and
services of third parties. We will continue to monitor our mission critical
computer applications and those of our suppliers and vendors throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
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.
Risk Factors
- ------------
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 net loss equaled $3,587,473 for the year ended December 31, 1999, and
$3,090,332 for the six months ended June 30, 2000. We had an accumulated
deficit of $8,618,404 at December 31, 1999, and $11,708,735 at June 30, 2000.
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.
To date, we have generated substantially all of our revenues from one
product line, the Robust Hydrogen Sensor line. We expect that the Robust
Hydrogen Sensor group of products will continue to account for a substantial
majority of our revenues for the foreseeable future. Currently, five other
technologies are under development, including three sensors and two hydrogen
fuel cells. Our future financial performance is dependent, in significant part,
upon the successful development, introduction and customer acceptance of new and
enhanced versions of the Robust Hydrogen Sensor, other hydrogen sensors, our
hydrogen fuel cell technologies and related new products that we may develop.
We cannot assure you that we will be successful in upgrading the Robust Hydrogen
Sensor or that we will successfully develop new products, or that any new
product will achieve market acceptance. For more information on the sources of
our
9
revenues, please see the section of this Form 10-QSB entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Hydrogen sensor and fuel cell technologies are new and evolving technologies,
they compete with other gas sensor products and methods of power generation, and
may not receive widespread acceptance.
Hydrogen sensor and fuel cell technologies are in their very early stages
of development. 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.
Our hydrogen sensor equipment competes against other gas sensor products
that may be more sensitive or more reliable than those we offer. Although the
need for hydrogen monitoring devices is increasing as more hazards are
identified, many industries that utilize hydrogen may choose not to adopt
expensive hydrogen sensing safety systems. In addition, because the adoption of
hydrogen monitoring systems by various industries is largely driven by the
passage of new regulatory laws by the Occupational Safety and Health
Administration and other federal, state and local governing bodies, industries
may choose to forgo the advantages of these detection systems until they are
required to adopt them. These factors may delay or lessen the demand for our
hydrogen sensor products.
In the hydrogen fuel cell market, businesses and consumers remain
uneducated about the benefits of alternative power sources. This ignorance 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 power
generation, including batteries, carbonate, phosphoric acid, polymer electrolyte
or solid oxide fuel cells systems, as well as traditional fossil fuels (such as
oil and gasoline). These methods may maintain or even increase their acceptance
to the detriment of our hydrogen fuel cell technology. We believe that
virtually all of the raw materials used in our hydrogen fuel cell products are
readily available from a variety of vendors in the United States and Canada.
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 Dr. Johan (Hans) Friedericy, our
President, David A. Walker, our Executive Vice President and Chief of Operations
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 any of them.
Competition for qualified personnel in technology, particularly in the fuel cell
industry, is intense and
10
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.
Governmental regulation of the hydrogen fuel cell and hydrogen sensor technology
may restrict our business.
Government regulation of the use of hydrogen for industrial applications
and fuel cell generation varies greatly from country to country. There is some
risk that the United States and other countries will increase their regulation
of these technologies in the future. As our products are utilized solely in
connection with hydrogen, any new law or regulation pertaining to the commercial
use of hydrogen, or the application or interpretation of existing laws, could
adversely impact our sales, increase our cost of doing business or otherwise
have a material and adverse effect on our business, results of operations and
financial condition.
DCH and our future hydrogen fuel cell manufacturing facilities will also be
subject to various federal, state and local laws and regulations relating to,
among other things, land use, safe working conditions, handling and disposal of
hazardous and potentially hazardous substances. 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 software
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 element. For example, hydrogen is highly explosive when it reaches
concentrations in the
11
air of four percent or greater. The volatility of hydrogen may compromise the
safety and effectiveness of our products, which may cause damage to our
reputation, result in lost sales and revenues or have other material and adverse
effects on our business.
We have not experienced any product liability claims to date, 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 would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant.
To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues, nor have we experienced any significant
failures due to the Year 2000 date changes. However, we may fail to discover
Year 2000 compliance problems in our systems that will require substantial
revisions or replacements. In the event that the operational facilities that
support our business are not Year 2000-compliant, there may be a decrease in
sales of our products. In addition, there can be no assurance that third-party
software, hardware or services incorporated into our material systems will not
need to be revised or replaced, which could be time-consuming and expensive. Our
inability to fix or replace third-party software, hardware or services on a
timely basis could result in lost revenues, increased operating costs and other
business interruptions, any of which could have a material and adverse effect on
our business, results of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in our software,
hardware or systems could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and time-
consuming to defend.
In addition, there can be no assurance that our major partners, including
the governmental agencies, and others outside our control will be Year 2000
compliant. The failure by these entities to be Year 2000 compliant could result
in a systemic failure beyond our control, including for example delays in
shipments from suppliers and services providers, any of which would have a
material and adverse effect on our business, results of operations and financial
condition. See "Impact of the Year 2000."
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 have been heavily reliant on the ability of Allied Signal, Inc. to
manufacture the CMOS wafer for the Robust Hydrogen Sensor. With the acquisition
of Honeywell by Allied Signal, the silicon foundry has been closed. Currently
our CMOS process is accomplished at Silicon Valley Sensors, Inc., in San Jose,
California. We have purchased equipment from Honeywell, Inc. that will enable us
to process the new wafers in-house commencing in October 2000; however, there
can be no assurance that our manufacturing efforts will be successful or cost-
effective. Electronic circuit boards for the Robust Hydrogen Sensor are
fabricated by our manufacturing partner ICCI.
12
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 cells are at a very early stage of development, 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 patters 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 its business.
Our products do not provide the exclusive means for accomplishing an
objective, and customers may choose alternative means. The markets for hydrogen
sensors and fuel cells are intensely competitive, and we expect competition to
increase significantly. Many of our competitors have significantly greater
financial and other resources than we do, which may enable such competitors to
market their products in a manner that achieves commercial success even in the
fact of technical superiority on the part of our products.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The StockPage Dispute
- ---------------------
On January 10, 2000, 1252966 Ontario Limited, carrying on business as The
StockPage, a corporation incorporated pursuant to the laws of the Province of
Ontario, Canada, filed a Statement of Claim against us in the Superior Court of
Justice, Ontario,
13
Canada. The file number for this claim is 00-CV-183123. The Statement of Claim
involves a breach of contract action in which damages of $1,500,000 are sought.
The breach of contract claim is based on a consulting agreement entered
into between The StockPage and us on April 17, 1998. Under that agreement The
StockPage agreed to provide us with promotional services in exchange for 250,000
shares of our common stock. We agreed to grant The StockPage 100,000 shares of
the common stock within a week of executing the consulting agreement and another
150,000 common shares within one week of our becoming a fully reporting
corporation pursuant to the United States federal securities laws. We delivered
100,000 shares of our common stock to The StockPage as payment for services
rendered under the consulting agreement in a timely fashion. On January 6,
1999, we terminated the contract and refused to grant the remaining 150,000
common shares as a result of alleged fraudulent conduct undertaken by The
StockPage.
In our Statement of Defense and Counterclaim, filed March 7, 2000, in
the Ontario Superior Court of Justice we allege that The StockPage deliberately
created an inflated market for our common shares in order to then improperly
sell our common shares to receive an artificially induced gain on such sales. A
Reply and Defense to Statement of Defense and Counterclaim was filed by The
StockPage on May 1, 2000, denying our allegations. Currently, the parties are
proceeding with discovery and expect to have a trial date set early on in 2001.
We plan to defend our position vigorously and are unable at this time to predict
how this litigation will ultimately be resolved.
On May 3, 2000, we filed a complaint against Level Jump, Inc., a U.S.
corporation which is the parent company of StockPage, and against StockPage, in
the United States District Court in Los Angeles. The case number for this
complaint is 00-04646-RJK (CTx). The complaint involves claims of fraud in the
inducement of the original contract entered into between StockPage and us, and a
claim under the California Unfair Competition Act. These causes of action
represent different claims than those being determined under the case in Canada.
Level Jump and Stockpage have retained California counsel and have filed a
Motion to Dismiss our complaint against them. Our Opposition to the Motion to
Dismiss is due September 5, 2000 and a hearing on that motion has been set for
September 18, 2000. We plan to defend our position vigorously and are unable at
this time to predict how this litigation will ultimately be resolved.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Set forth below is information regarding shares of common stock issued and
options and warrants and other convertible securities granted by us during the
three month period ending June 30, 2000. Also included is the consideration, if
any, received by us for such shares and options and information relating to the
section of the Securities Act of 1933, as amended, or rule of the SEC under
which exemption from registration was claimed.
On April 24, 2000, we issued an aggregate of 5,000 shares of common stock
to one consultant for services previously rendered to us. At the date of
issuance, the shares had an aggregate approximate value of $33,750. The shares
were issued to the consultant for bona fide services previously provided to us,
and were not in connection with a capital-raising transaction. The issuance and
sale of these shares was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) thereof as a transaction by an issuer
not involving a public offering. The consultant represented to us that it was
acquiring the shares for its own account and not for the account or benefit of
another person; that the shares were being acquired for investment and not with
a view to the distribution thereof; and that the consultant did not intend to
sell or otherwise dispose of all or any part of the shares at the time of
purchase or upon the occurrence or
14
nonoccurrence of any predetermined event. The consultant also agreed that it
would offer or resell shares only if the shares were registered under the
Securities Act or an exemption from such registration was available. No
advertising or public solicitation was used in the placement. We placed a
restrictive legend on the certificates representing the shares and placed "stop
transfer" instructions with the transfer agent.
On May 3, 2000, we issued an aggregate of 62,500 shares of common stock to
one consultant for services previously rendered to us. At the date of issuance,
the shares had an aggregate approximate value of $355,437. The shares were
issued to the consultant for bona fide services previously provided to us, and
were not in connection with a capital-raising transaction. The issuance and sale
of these shares was exempt from the registration requirements of the Securities
Act pursuant to Section 4(2) thereof as a transaction by an issuer not involving
a public offering. The consultant represented to us that it was acquiring the
shares for its own account and not for the account or benefit of another person;
that the shares were being acquired for investment and not with a view to the
distribution thereof; and that it did not intend to sell or otherwise dispose of
all or any part of the shares at the time of purchase or upon the occurrence or
nonoccurrence of any predetermined event. The consultant also agreed that it
would offer or resell shares only if the shares were registered under the
Securities Act or an exemption from such registration was available. No
advertising or public solicitation was used in the placement. We placed a
restrictive legend on the certificates representing the shares and placed "stop
transfer" instructions with the transfer agent.
On June 29, 2000, we closed a private placement of 600,000 shares of our
common stock to an aggregate of 2 purchasers. An aggregate of $1,350,000 was
raised in this placement. The issuance and sale of these shares was exempt from
the registration requirements of the Securities Act pursuant to Section 4(2)
thereof as a transaction by an issuer not involving a public offering. All of
the purchasers represented to us that they were acquiring the shares for their
own accounts and not for the account or benefit of another person; that the
shares were being acquired for investment and not with a view to the
distribution thereof; and that the purchasers did not intend to sell or
otherwise dispose of all or any part of the shares at the time of purchase or
upon the occurrence or nonoccurrence of any predetermined event. Each purchaser
also agreed that he or she would offer or resell shares only if the shares were
registered under the Securities Act or an exemption from such registration was
available. No advertising or public solicitation was used in the placement. We
placed a restrictive legend on the certificates representing the shares and
placed "stop transfer" instructions with the transfer agent.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
15
On June 2, 2000 we held our Annual Shareholders Meeting. During the
meeting there were a total of 18,075,326 shares of voting common stock 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:
- ----------------------------------------------------------------
Director Nominee Name Votes For
- ----------------------------------------------------------------
David A. Walker 17,984,949
- ----------------------------------------------------------------
David P. Haberman 17,984,949
- ----------------------------------------------------------------
Randall S. Firestone 17,984,949
- ----------------------------------------------------------------
Dr. William L. Firestone 17,026,957
- ----------------------------------------------------------------
Daniel Teran 17,984,949
- ----------------------------------------------------------------
Robert S. Walker 17,984,949
- ----------------------------------------------------------------
Raymond N. Winkel 17,984,949
- ----------------------------------------------------------------
Dr. John Barclay 17,984,949
- ----------------------------------------------------------------
Dr. Johan (Hans) Friedericy 17,984,949
- ----------------------------------------------------------------
In addition, the shareholders cast 17,171,559 shares in favor of approving
and adopting the DCH 1999 Stock Option Plan, which was mailed to each
shareholder prior to the Annual Shareholders Meeting. 542,259 shares were cast
against the adoption of the 1999 Stock Option Plan and 361,507 shares abstained
from voting on this matter.
The shareholders also cast 17,533,066 shares in favor of approving the DCH
Reincorporation and Plan of Merger Agreement, a copy of which was sent to each
shareholder prior to the Annual Shareholders Meeting. The DCH Reincorporation
and Plan of Merger Agreement set forth the terms and conditions under which we
proposed to reincorporate DCH in the state of Delaware. 361,506 shares were
cast against the approval of this matter and 180,753 shares abstained from
voting on this matter.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
16
On June 6, 2000, we filed a Form 8-K to report on the termination of our
relationship with independent certified accountants, Lucas, Horsfall, Murphy &
Pindroh, LLP and the approval of our engagement of Moss Adams, LLP as our new
independent certified public accountants.
On June 9, 2000, we filed a Form 8-K to report on our acquisition of
certain real property located in the City of Santa Clarita, County of Los
Angeles, State of California, commonly known as 24832 Avenue Rockefeller (the
"Property") from CRBC, LLC, a California Limited Liability Company.
On June 26, 2000, we filed an amendment to the earlier Form 8-K regarding
our change in independent certified accountants.
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, 2000 By: /s/ Dr. Hans Friedericy
-------------------------
Dr. Hans Friedericy,
President
By: /s/ Dr. Hans Friedericy
-------------------------
Anna Rhee,
Principal Accounting and
Financial Officer
17