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 September 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 October 31, 2000, the issuer had 25,572,616 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
Independent Accountant's Report 4
Consolidated Balance Sheets 5
Consolidated Statements of Operations 6
Consolidated Statements of Cash Flows 7
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 20
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
INDEX TO EXHIBITS 23
PART I. FINANCIAL INFORMATION
Independent Accountant's Report
Board of Directors and Shareholders
DCH Technology, Inc.
We have reviewed the accompanying consolidated condensed balance sheet of DCH
Technology, Inc. and subsidiary as of September 30, 2000, and the related
consolidated condensed statements of operations and cash flows for the three and
nine 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 condensed financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
Los Angeles, California
October 19, 2000
DCH TECHNOLOGY, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
CURRENT ASSETS
Cash $ 1,663,393 $ 1,193,084
Accounts receivable 93,864 143,128
Inventory 294,708 127,319
Prepaid expenses 230,072 90,248
Other receivable -- 191,100
------------ ------------
TOTAL CURRENT ASSETS 2,282,037 1,744,879
PLANT, PROPERTY AND EQUIPMENT - NET 1,997,379 217,665
OTHER ASSETS
Restricted cash deposit 718,057 --
Deposits 95,690 --
Intangible assets, net of amortization 136,536 98,577
Investments with no readily determinable fair value 215,000 215,000
------------ ------------
TOTAL OTHER ASSETS 1,165,283 313,577
------------ ------------
$ 5,444,699 $ 2,276,121
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 240,657 $ 244,539
Accrued payroll and vacation 185,352 74,872
Accrued expenses 475,069 510,690
Capital lease obligation, net of long-term portion 16,336 13,833
Current portion of long term debt 54,615 --
Unearned revenue 4,450 --
------------ ------------
TOTAL CURRENT LIABILITIES 976,479 843,934
LONG TERM LIABILITIES
Capital lease obligation, net of current portion 16,627 30,344
Long-term debt, net of current portion 725,120 --
------------ ------------
TOTAL LIABILITIES 1,718,227 874,278
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,
25,552,717 and 19,325,995 shares
issued and outstanding, respectively 255,527 193,259
Additional paid-in-capital 17,489,741 9,775,433
Common stock subscribed, 0 and 62,914 shares, respectively -- 131,000
Less: investment in limited liability companies (68,864) (79,445)
------------ ------------
17,676,404 10,020,247
Accumulated deficit (13,949,931) (8,618,404)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,726,473 1,401,843
------------ ------------
$ 5,444,699 $ 2,276,121
============ ============
See Accompanying Notes to Consolidated Financial Statements
DCH TECHNOLOGY,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
Sales $ 150,578 $ 218,811 $ 727,009 $ 435,584
Cost of products sold 97,046 48,535 578,157 191,413
------------ ------------ ------------ ------------
Gross profit 53,532 170,276 148,852 244,171
Operating expenses:
Selling, general and administrative expenses 1,942,639 570,911 4,771,611 1,604,695
Depreciation and amortization 95,161 14,377 164,930 38,391
Research and development 291,824 348,583 650,276 668,082
------------ ------------ ------------ ------------
2,329,624 933,871 5,586,817 2,311,168
------------ ------------ ------------ ------------
Net loss from operations (2,276,092) (763,595) (5,437,965) (2,066,997)
Other income/expenses
Interest income and other expenses,net 34,896 2 106,437 47
------------ ------------ ------------ ------------
Net loss $ (2,241,196) $ (763,593) $ (5,331,528) $ (2,066,950)
============ ============ ============ ============
Weighted average common shares outstanding 25,416,995 14,760,872 23,757,397 13,703,628
============ ============ ============ ============
Net loss per common share
Basic and diluted (see note 2) $ (0.09) $ (0.05) $ (0.22) $ (0.15)
============ ============ ============ ============
See Accompanying Notes to Consolidated Financial Statements
DCH TECHNOLOGY, INC AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,331,528) $(2,066,950)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Depreciation and amortization 164,930 38,391
Issuance of stock, warrants and options for services 973,209 590,071
Loss on disposal of equipment 12,248 --
Loss from investment in partnerships 10,581 --
Investment received in lieu of cash for services -- (150,000)
Change in:
Accounts receivable 49,264 (84,414)
Inventory (167,389) 104,824
Prepaid expenses (139,824) (45,482)
Other receivable 60,100 (127,804)
Bank overdraft -- (3,212)
Accounts payable (3,882) 57,164
Accrued expenses 55,504 302,801
Accrued payroll and vacation 110,480 --
Deferred revenue 4,450 --
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (4,201,857) (1,384,611)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in certificate of deposit (718,057) --
Deposits made for equipment, leases (95,690) --
Loan to shareholders, net -- (68,140)
Purchase of licenses and intellectual property (50,000) (42,000)
Purchase of equipment (1,135,286) (45,456)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (1,999,033) (155,596)
CASH FLOWS FROM FINANCING ACTIVITIES
Private placement of common stock and warrants 5,210,000 1,459,257
Principal payments on capital lease (11,213) --
Principal payments on long-term debt (20,265) --
Proceeds for exercise of warrants 1,361,677 18,750
Proceeds from common stock subscriptions receivable 131,000 100,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,671,199 1,578,007
----------- -----------
NET INCREASE IN CASH 470,309 37,800
CASH, BEGINNING OF PERIOD 1,193,084 1,802
----------- -----------
CASH, END OF PERIOD $ 1,663,393 $ 39,602
=========== ===========
Supplemental disclosure of cash flow information is as follows:
Cash paid for
Interest $ 23,320 --
Income taxes 2,544 $ 1,600
Non-cash transactions:
Investing and Financial Transactions
Common stock issued in connection with a patent license 9,566 --
Issued Long Term Debt in connection with the purchase of
Property, Plant and Equipment 800,000 --
See Accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with the instructions to Form 10-QSB. The
consolidated condensed balance sheet, statement of operations and cash flows at
and for the periods ended September 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. 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 considered necessary for a fair presentation have been included in
the interim period. Operating results for the nine months ended September 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 were not included in the determination of the weighted average
number of shares outstanding, as they would be antidilutive.
(3) CONTINGENCIES
The Company is currently a defendant in a lawsuit filed in the Superior
Court Of Justice, Ontario, Canada, by a promotional company claiming breach of
contract under a consulting agreement. The Company has filed a counter claim
against plaintiff in Superior Court of Justice and a complaint against its
parent company in a US District Court. The Company is vigorously defending its
position, however, at this time, it is not possible to predict the ultimate
outcome of the litigation. No accrual for potential loss has been recorded as of
September 30, 2000.
(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 these estimates.
(5) 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 September 30, 2000,
cumulative net operating losses, which have not been deducted for income tax
reporting purposes amount to approximately $13,200,000. These losses may be
carried forward and used to offset future taxable income. Unused loss carry
forward amounts will start to expire for Federal and State purposes between 2013
and 2002, respectively. The deferred tax asset resulting from this loss carry
forward is approximately $3,100,000. The entire amount of this deferred tax
asset has been reserved and reduced to $-0- because of the uncertainty regarding
the future utilization of the loss carry forward amounts.
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 four hydrogen sensor products. We began to commercialize a low power (up
to 10 kWs) fuel cell 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 total cash
requirement.
On August 10, 2000, our common stock began trading on the American Stock
Exchange under the symbol "DCH."
Hydrogen Sensors
- ----------------
In the quarter ended September 30, 2000, we designed, assembled and
installed a hydrogen safety system on a hydrogen-powered bus under development
by the University of Nevada, Las Vegas. This achievement represents a future
market opportunity for our fuel cells.
On September 1, 2000, we moved our sensor production to a new building
located at 24832 Avenue Rockefeller, Santa Clarita, California, which will house
our advanced sensor development and full scale manufacturing operations. This
move represents the second expansion of our sensor division and will include on-
site hydrogen production capabilities. Our new facility includes new
capabilities that will help us meet the growing demand for hydrogen sensors.
Fuel Cells
- ----------
In June 2000, we announced a joint venture agreement with Daido Metal
Company, Ltd., a Japanese high volume production manufacturer of precision metal
components. During the third quarter of 2000, the joint venture agreement was
signed and is now being implemented. Under the agreement, Daido will
manufacture and assemble fuel cell products, initially small portable fuel cells
ranging from less than one watt to 50 watts. The joint venture will also
encompass future production of larger fuel cells for stationary applications.
During the quarter ended September 30, 2000, we delivered a 3kW fuel cell
to the Electric Power Research Institute (EPRI) PEAC Corporation. EPRI is a
leading research and development institute serving major power utilities. To
date, EPRI has demonstrated the system to more then 50 energy companies and
utilities, including international clients at its laboratories in Knoxville,
Tennessee. We have been informed by representatives of EPRI that the Enable fuel
cell has performed up to EPRI's expectations.
During the same quarter, we delivered a 12-watt passive fuel cell to the
US Army CECOM. The unit is currently under test and, we are informed, is
operating as specified. Also during the third quarter of 2000, four prototype
portable lighting systems (systems that integrate a passive fuel cell, hydride
hydrogen storage, and fuel delivery system in one small package) were delivered
to an OEM for evaluation and testing.
Results of Operations
- ---------------------
Three Months Ended September 30, 2000, Compared With Three Months Ended
- -----------------------------------------------------------------------
September 30, 1999
- ------------------
For the three months ended September 30, 2000, DCH had sales of $150,578
compared to sales of $218,811 for the three months ended September 30, 1999. The
decreased sales in the third quarter of 2000 were, in part, due to the
relocation of the Hydrogen sensor manufacturing during the quarter. The cost of
products sold increased to $97,046 for the three months ended September 30,
2000, compared to $48,535 for the three months ended September 30, 1999. In
percentage terms, cost of goods sold represented 64% of total sales for the
three months ended September 30, 2000, versus 22% for the same period in 1999.
The cost of sales could continue to fluctuate until such time as normal
production levels are reached for our products.
We incurred a loss from operations of $2,276,092 for the three months
ended September 30, 2000, compared to an operating loss of $763,595 for the
three months ended September 30, 1999. Selling, general and administrative
expenses were $1,942,639 for the three months ended September 30, 2000, compared
to $570,911 for the comparable period in 1999. Substantially all of the
increases in selling, general and administrative expenses during the third
quarter of 2000 were as a result of building the corporate infrastructure in
anticipation of future growth, increased emphasis on our thick film hydrogen
sensor, expansion of our sensor business and the expansion of our fuel cell
production activity. Our internal manufacturing capabilities will be broader in
the future, and should allow improved cost control.
Depreciation and amortization increased to $95,161 for the three months
ended September 30, 2000, compared to $14,377 for the three months ended
September 30, 1999, due to the purchase of the Rockefeller building and
additional equipment purchases to support these operations.
A total of $291,824 was spent on research and development during the three
months ended September 30, 2000, compared to expenditures of $348,583 for the
three months ended September 30, 1999. The relatively slight decrease in
research and development expenses during the period was due to a greater focus
on commercialization and development of products.
Due in part to an increase in the number of shares outstanding during the
period (we had 25,416,995 weighted average common shares outstanding for the
three months ended September 30, 2000, as compared to 14,760,872 weighted
average common shares outstanding for the comparable period in 1999), the net
loss per share increased to $0.09 per share for the three months ended September
30, 2000, as compared to a loss of $0.05 per share for the comparable period in
1999.
Nine Months Ended September 30, 2000, Compared With Nine Months Ended September
- -------------------------------------------------------------------------------
30, 1999
- --------
For the nine months ended September 30, 2000, sales were $727,009 as
compared to sales of $435,584 for the nine months ended September 30, 1999. The
increased sales during this period were due primarily to a 41% increase in the
sales of our Robust Hydrogen Sensor products and a 126% increase in sales of our
fuel cell products. The cost of products sold increased by 202% to $578,157 for
the nine months ended September 30, 2000, compared to $191,413 for the nine
months ended September 30, 1999. For the nine-month period ended September 30,
2000, the gross profit margin was 20% or $148,852, as compared to a gross profit
of $244,171 and gross profit margin of 56% for the nine months ended September
30, 1999. The cost of sales, and therefore our gross profit margin, could
continue to fluctuate until such time as normal production levels are reached
for our products.
Selling, general and administrative expenses were $4,771,661 for the nine
months ended September 30, 2000, compared to $1,604,695 for the comparable
period in 1999. Substantially all of the selling, general and administrative
expenses resulted from the building of a corporate infrastructure, the expansion
of fuel cell production activity, development of new sensor products, and an
increased emphasis on the thick film sensor.
Depreciation and amortization increased to $164,930 for the nine months
ended September 30, 2000, compared to $38,391 for the nine months ended
September 30, 1999, reflecting the purchase of additional equipment and the
Rockefeller building.
Research and development expenses during the nine months ended September
30, 2000, totaled $650,276, essentially the same as the expenditures of $668,082
for the nine months ended September 30, 1999.
The net effect of the forgoing revenue and expenses was a loss for the nine
months of $5,331,528 for the nine-month period ended September 30, 2000,
compared to a net loss of $2,066,950 for the same nine-month period ended
September 30, 1999. Due in part to an increase in the number of shares
outstanding during the period (from a weighted average of 13,703,628 shares for
the nine months ended September 30, 1999 to 23,757,397 for the nine-month period
ended September 30, 2000) the net loss per share increased to $0.22 for the nine
months ended September 30, 2000, from $0.15 for the comparable period in 1999.
Liquidity and Capital Resources
- -------------------------------
We generated a total of $6,671,199 in net cash from financing activities
for the nine months ended September 30, 2000, as compared to net cash from
financing activities of $1,578,007 generated during the comparable period in
1999. Substantially all of the financing activities for the nine months ended
September 30, 2000 consisted of a private placement of common stock and
warrants, together with the exercise of warrants.
We utilized $4,201,857 of net cash for operating activities in the nine
months ended September 30, 2000, compared to the utilization of $1,384,611 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 inventory and the issuance of common stock for services. We used
$1,999,033 of net cash for investing activities in the nine months ended
September 30, 2000, compared to $155,596 of net cash for investing activities in
the nine months ended September 30, 1999. These funds were primarily used in
both years to purchase production facilities and equipment for the Company's
sensor and fuel cell production.
At September 30, 2000, we had $1,663,393 in unrestricted cash, compared to
$39,602 in cash at September 30, 1999. We also had accounts receivable of
$93,864 at September 30, 2000, compared to accounts receivable of $143,243 at
September 30, 1999. The decrease in accounts receivable was due in part to the
commencement of an aggressive collections policy in 2000. Investment in
inventory totaled $294,708 at September 30, 2000 versus $38,890 for the same
period in 1999.
DCH has sufficient capital to support operations through the remainder of
2000. In addition, we have received indications that certain holders of our
warrants will exercise a portion of those warrants in the foreseeable future,
providing additional capital. We anticipate that our capital requirements for
the year ending December 31, 2001 will require that additional cash be raised
from external sources. We currently believe that this requirement will be met by
cash equity investments. However, there is no assurance that we will be able to
generate capital sufficient to meet these long-term needs. If we cannot meet
these capital requirements, we may be able to extend the period for which
available resources would prove adequate by not proceeding with planned major
operation expansions and deferring planned staff increases.
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, 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
$5,331,528 for the nine months ended September 30, 2000. We had an accumulated
deficit of $8,618,404 at December 31, 1999, and $13,949,931 at September 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 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 carbonate, phosphoric acid, polymer electrolyte or solid
oxide fuel cells systems, as well as traditional fossil fuels (such as oil,
gasoline, and batteries). 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 either of them. Competition
for qualified personnel in technology, particularly in the fuel cell industry,
is intense and we may not be able to retain or hire necessary personnel as a
result of the highly specialized nature of our products. In addition, the amount
of our limited working capital may impose compensation 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 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. Our manufacturing
partner ICCI fabricates electronic circuit boards for the Robust Hydrogen
Sensor. Sensor casing and other hardware are fabricated by various small
manufacturers. Although delays in the shipment and receipt of our component
parts may occur, historically we have experienced only those delays that tend to
occur in the normal course of business.
Growth in the volume of orders for our products may strain the capacity of
these component suppliers, and delays or other problems with component suppliers
could have a material and adverse effect on our business. Although we test the
component parts that we receive from our suppliers, we cannot be assured that
our components will be completely free of all defects.
The markets for our fuel cell products are at a very early stage of development,
are rapidly changing and are characterized by an increasing number of market
entrants.
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 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
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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, 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 [sic] 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. 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 retained California counsel and filed a Motion to
Dismiss our complaint against them. We opposed the Motion to Dismiss, and,
following a hearing on September 18, 2000, the court refused to dismiss the
case. We plan to pursue this litigation aggressively; however, we are unable at
this time to predict how this litigation will ultimately be resolved.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Since September 30, 2000, a total of three members of our Board of
Directors, Dr. William Firestone, Randall Firestone and John A. Barclay,
have resigned to pursue other business and personal interests. None of
these Directors have indicated any disagreement with us on any matter
relating to our operations, policies or practices. We are currently
evaluating potential strategic replacements for these vacancies.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27.1 Financial Data Schedule.
(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: November 14, 2000 By: /s/ Dr. Johan A. Friedericy
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Dr. Johan A. Friedericy,
President
By: /s/ Ronald Ilsley
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Ronald Ilsley,
Chief Financial Officer
(Principal Accounting and
Financial Officer)