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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2003
Commission File Number 0-25312
STARTECH ENVIRONMENTAL CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
- ----------------------------- -------------------
Colorado 84-1286576
15 Old Danbury Road, Suite 203
Wilton, Connecticut 06897
------------------- -----
(Address of principal executive offices) Zip Code
(203) 762-2499
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO ___
The number of shares outstanding for each of Registrant's classes of Common
Stock are as follows:
Title of each class Outstanding at June 12, 2003
------------------- ----------------------------
Common Stock - No Par Value 11,544,454
STARTECH ENVIRONMENTAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Balance sheets - April 30, 2003 (unaudited) 3
and October 31, 2002
Consolidated Statements of operations for the three 4
months and six months ended April 30, 2003 and 2002
(unaudited)
Consolidated Statements of cash flows for the six months 5
ended April 30, 2003 and 2002 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial 8-15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceeding 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited) (audited)
April 30, October 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and Cash Equivalents ............................................. $ 367,527 $ 509,321
Accounts receivable ................................................... 0 290,000
Inventory ............................................................. 318,798 273,706
Prepaid Expenses ...................................................... 15,000 5,000
Other current assets .................................................. 13,023 17,380
------------ ------------
Total current assets ......................................... 714,348 1,095,407
Property and equipment, net ........................................... 1,701,044 1,794,067
Other assets .......................................................... 254,300 248,756
------------ ------------
Total assets ................................................. $ 2,669,692 $ 3,138,230
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable ...................................................... $ 220,825 $ 260,116
Capital lease - short-term ............................................ 32,310 44,885
Customer Deposits ..................................................... 561,000 120,000
Other accrued expenses ................................................ 189,287 301,221
------------ ------------
Total Current liabilities .................................... 1,003,422 726,222
Long-term liability:
Capital lease payable net of current portion ......................... 10,352 17,580
------------ ------------
Total liabilities ............................................ 1,013,774 743,802
------------ ------------
Stockholders' equity:
Preferred stock, no par value 10,000,000 shares authorized; Shares
issued and outstanding: 5,773 at April 30, 2003, (aggregate liquidation
preference of $57,730); 35,655 (aggregate liquidation preference of
356,990) at October 31, 2002 .......................................... 57,733 356,553
Common stock, no par value, 800,000,000 shares authorized;
Shares issued and outstanding: 11,527,816 at April 30, 2003
and 10,293,392 at October 31, 2002 .................................... 15,976,594 14,790,453
Additional paid-in capital ............................................ 1,742,745 1,742,745
Accumulated deficit ................................................... (16,064,275) (14,495,324)
------------ ------------
1,712,797 2,394,427
Less Subscription receivable .......................................... (56,879) 0
------------ ------------
Total stockholders' equity ............................................ 1,665,918 2,394,427
------------ ------------
Total liabilities and stockholders' equity ................... $ 2,669,692 $ 3,138,230
============ ============
See accompanying notes to consolidated financial statements
3
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
April 30, 2003 April 30, 2002 April 30, 2003 April 30, 2002
-------------- -------------- -------------- --------------
Revenue ............................................ $ 0 $ 20,266 $ 0 $ 136,471
Cost of sales ...................................... 1,298 84,345 82,007 156,318
------------ ------------ ------------ ------------
Gross Loss ......................................... (1,298) (64,079) (82,007) (19,847)
------------ ------------ ------------ ------------
Operating expenses
Selling expense ........................... 200,657 247,472 402,637 457,647
Research and Development .................. 72,984 32,823 145,146 83,267
General and administrative expense ........ 281,826 721,484 928,879 1,398,887
------------ ------------ ------------ ------------
Total operating expense ............................ 555,467 1,001,779 1,476,662 1,939,801
------------ ------------ ------------ ------------
Loss from operations ............................... (554,169) (1,065,858) (1,558,669) (1,959,648)
------------ ------------ ------------ ------------
Other income (expense):
Other income ....................................... 0 0 (1,371) 0
Interest income .................................... 344 3,396 1,675 13,715
Gain/Loss on sale of asset ......................... 0 0 193 0
Interest expense ................................... (2,003) 0 (4,350) 0
------------ ------------ ------------ ------------
Total other income ................................. (1,659) 3,396 (3,853) 13,715
------------ ------------ ------------ ------------
Loss before Income Taxes ........................... (555,828) (1,062,462) (1,562,522) (1,945,933)
------------ ------------ ------------ ------------
Income tax expense ................................. 1,767 10,303 6,430 8,610
------------ ------------ ------------ ------------
Net loss ........................................... $ (557,595) $ (1,072,765) $ (1,568,952) $ (1,954,543)
============ ============ ============ ============
Net loss ........................................... $ (557,595) $ (1,072,765) $ (1,568,952) $ (1,954,543)
Less: preferred dividends .......................... 0 6,908 0 15,317
------------ ------------ ------------ ------------
Loss attributable to common shareholders ........... $ (557,595) $ (1,079,673) $ (1,568,952) $ (1,969,860)
============ ============ ============ ============
Net loss per share ................................. $ (0.05) $ (0.11) $ (0.15) $ (0.21)
============ ============ ============ ============
Weighted average common
shares outstanding ................................. 11,408,131 9,850,589 10,477,453 9,449,274
============ ============ ============ ============
See accompanying notes to these consolidated financial statements
4
STARTECH ENVIRONMENTAL CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended Six Months Ended
April 30, 2003 April 30, 2002
-------------- --------------
Cash flows from operating activities:
Net loss ........................................................................... $(1,568,952) $(1,954,543)
Adjustments to reconcile net loss to net cash provided By operating activities:
Depreciation ....................................................................... 97,671 94,513
401K plan match made by the issuance of shares ..................................... 32,036 40,828
Expenses paid through the issuance of commons stock ................................ 0 15,624
Gain on sale of asset .............................................................. (193) 0
(Increase) decrease in accounts receivable ......................................... 290,000 0
(Increase) decrease in inventory ................................................... (45,092) 5,796
(Increase) decrease in other current assets ........................................ (5,643) (38,856)
(Increase) decrease in other assets ................................................ (5,544) 1,200
Increase (decrease) in accounts payable ............................................ (39,291) (53,870)
Increase (decrease) in customer deposits ........................................... 441,000 137,500
Increase (decrease) in accrued expense ............................................. (111,934) (119,143)
----------- -----------
Net cash used in operating activities .............................................. (915,942) (1,870,951)
----------- -----------
Cash flows used in investing activities:
Capital expenditures ............................................................... (6,436) (76,033)
Proceeds from sale of assets ....................................................... 5,593 0
----------- -----------
Net Cashed used in investing activities ............................................ (843) (76,033)
----------- -----------
Cash flows from financing activities:
Payment for capital leases ......................................................... (23,415) (22,240)
Proceeds from stock subscription receivable ........................................ 93,121 0
Proceeds from common stock issuance ................................................ 705,285 2,283,706
----------- -----------
Net cash provided by financing activities .......................................... 774,991 2,261,466
----------- -----------
Net increase (decrease) in cash .................................................... (141,794) 314,482
Cash at beginning of period ........................................................ 509,321 2,207,328
----------- -----------
Cash and cash equivalents at end of period ......................................... $ 367,527 $ 2,521,810
=========== ===========
Supplemental Disclosure- Taxes Paid ................................................ 10,303 8,610
=========== ===========
See accompanying notes to consolidated financial statements
5
STARTECH ENVIRONMENTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements of Startech Environmental Corporation
(referred to herein as the "Company", unless the context indicates otherwise)
presented herein are unaudited. In the opinion of management, these financial
statements include all adjustments necessary for a fair presentation of the
financial position. Results for the six months ended and three months ended
April 30, 2003 are not necessarily indicative of results for the entire year.
The accompanying financial statements should be read in conjunction with the
Company's financial statements and related footnotes for the year ended October
31, 2002 which are included in the Company's annual report on form 10-K for the
period ended October 31, 2002.
Note 1. Capital Lease Obligation:
The Company has entered into capital lease obligations for computer, telephone,
and capital equipment. The term of the leases range from 36 to 48 months, with
principal and interest due in aggregate monthly installments of $4,159 at
interest rates ranging from 9.25% to 27.5%. The equipment was capitalized at
$122,076 and is being depreciated over five to fifteen years. Depreciation
expense for the six months ended April 30, 2003 was $6,775.
Note 2. Equity Transactions
The following reconciles the number of common shares outstanding to the weighted
average number of common shares outstanding and the weighted average number of
common and dilutive potential common shares outstanding for the purposes of
calculating basic and diluted earnings per common share at April 30 of each
period indicated (shares in millions):
THREE MONTHS SIX MONTHS
ENDED APRIL 30, ENDED APRIL 30,
2003 2002 2003 2002
---- ---- ---- ----
Number of common shares outstanding at end of
period........................................ 11.5 10.2 11.5 10.2
Effect of using weighted average common shares
outstanding................................... 0.1 (0.4) 1.0 (0.8)
Basic common shares outstanding............... 11.4 9.8 10.5 9.4
Dilutive effect of common stock options and
warrants...................................... 0.0 0.2 0.0 0.2
---- ---- ---- ----
Diluted common shares outstanding............. 11.4 10.0 10.5 9.6
For the six months ended April 30, 2003 and April 30, 2002, the effect of the
Company's common stock options and warrants and convertible preferred stock are
excluded from the diluted earnings per share calculation since the inclusion of
such items would be anti-dilutive.
At April 30, 2003, there were approximately 15.3 million shares of common stock
potentially issuable with respect to stock options, warrants and convertible
preferred, which could dilute basic earnings per share in the future.
6
Note 3. Cash Flow
During the six months ended April 30, 2003 the Company had non-cash
transactions. The following is a listing of these transactions and the dollar
value of the stock associated with these transactions.
Six months ended: April 30, 2003 April 30, 2002
- ------------------ -------------- --------------
Preferred stock dividend 0 15,317
Series A convertible preferred shares
converted to common shares 298,820 140,426
Accrued Preferred Dividends 0 2,761
401k Plan Match 32,036 40,828
Property & Equipment acquired under
capital lease 3,612 25.539
Common shares for services rendered 0 15,624
Stock issued for subscription receivable 150,000 0
Note 4. Interim Financial Information (Unaudited)
The interim financial statements of the Company for the six months ended April
30, 2003 and 2002, included herein, have been prepared by the Company, without
audit, pursuant to the rules and regulations of the SEC. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principals generally accepted in the United States of
America have been condensed or omitted pursuant to the rules and regulations
relating to interim financial statements.
Note 5. Revenue Recognition
The Company recognizes revenue on the sale of its manufactured products at the
date of shipment. Revenues earned from consulting and design services are
recognized when the services are completed.
Note 6. Employee Benefit Plan
Contributions for the three months ended April 30, 2003 were $12,875, which
represents the issuance of approximately 10,820 shares of our common stock.
Contributions for the six months ended April 30, 2003 were $32,036, which
represents the issuance of approximately 37,903 shares of our common stock.
Note 7. Stock Subscription Receivable
On January 14th we announced a private placement with Paradigm Group LLC. This
offering was for an aggregate amount of $750,000 which equaled 882,352 common
shares. While the offering officially closed on January 14th part of the
proceeds were not received prior to April 30, 2003. Resulting in a note
receivable in the amount of $56,879. As of June 14, 2003 the Company has
received the remaining balance of the note receivable.
7
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements that are
made pursuant to the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements involve risks, uncertainties and
assumptions as described from time to time in registration statements, annual
reports and other periodic reports and filings of the Company filed with the
Securities and Exchange Commission. All statements, other than statements of
historical facts, which address the Company's expectations for the future with
respect to financial performance or operating strategies, can be identified as
forward-looking statements. As a result, there can be no assurance that the
Company's future results will not be materially different from those described
herein as "believed," "anticipated," "estimated" or " expected," which reflect
the current views of the Company with respect to future events. We caution
readers that these forward-looking statements speak only as the date hereof. The
Company hereby expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any such statements to reflect any change
in the Company's expectations or any change in events, conditions or
circumstances on which such statement is based.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Our core Plasma Converter Technology addresses waste and resource issues by
offering remediation solutions that are integrated with a range of equipment
solutions and services. Our products add value to our customers' business so
they can now realize revenue streams from tipping fees, as well as from the sale
of resulting commodity products and services.
Since 1995 we have been actively discussing the superiority of plasma over other
waste remediation technologies. This ongoing education of the public and
government is continuing today. Similar to other new technologies we have been
met with varying degrees of resistance. In 2001, recognizing the increasing
importance of alternative energy and power sources in general, and hydrogen in
particular, we expanded our product line to include a StarCell (TM) hydrogen
separation technology. Working in conjunction with our core product, the Plasma
Converter(TM), StarCell(TM) will provide a green and renewable source of
hydrogen for power and processing applications. In 2003 this brings significant
change and, due to the factors mentioned above, as well as the rising comfort
level with plasma based technologies through our educational and informational
efforts we are now being greeted by a much more receptive marketplace. We have
taken steps to transform our business model from being solely a seller of
equipment to a total solutions provider, including waste facility ownership or
management. This change was dictated by the needs of our customers and the
demands of the marketplace. This change began in January 2002 and continues to
be integrated.
Our business model and its market development strategies arise from our goal,
which is to change the way the world views and employs discarded materials
commonly referred to as waste. We expect to achieve these objectives by
strategically marketing a series of products and services emanating from our
core Plasma Converter (TM) technology, resulting in saleable fossil fuel
alternatives while providing a safer and healthier environment. This shifting
strategy will be implemented through the use of our enhanced business model that
provides for direct sales, build own operate/build own and waste processing
transfer projects, joint development projects, engineering services and direct
equipment sales with after sales support and service.
8
Recent Developments
1. Sales and Project Update
As previously reported we have three (3) signed Purchase Agreements with three
(3) separate and distinct private Polish companies totaling sales of fifteen
million seven hundred fifty thousand dollars ($15,750,000.00). The Agreements
are with private companies named Ekologia, Sp. Z o.o., Chempol, Sp. Z o.o., and
Ekoplazma, Sp. Z o.o. Total down payments that we now expect to be paid by the
end of June 2003 equal one million five hundred seventy five thousand dollars
($1,575,000.00). However, we have consistently expected these payments to be
made in previous months and can provide no reasonable assurance that such
payments will be made as expected. If the payments do begin, the payment
schedule then calls for progress payments of an additional two million three
hundred sixty two thousand five hundred dollars ($2,362,500.00) within thirty
(30) days of the initial deposits referred to above. The balance of payments are
then required in accord with the payment schedule which includes regularly
scheduled progress payments at defined manufacturing and delivery milestones.
While we understand and appreciate the fact that these payments were expected to
begin much earlier, our most recent communications with the entities over the
last two weeks indicate the projects are still very viable and funding is
expected. The delay in the initial deposits has contributed significantly to the
liquidity problem now facing the Company.
The delay in the down payment due on two of the contracts has been the securing
of grant money from the Ecofund and the Polish National Environmental Fund.
These Funds provide financing support for environmental projects within Poland.
We have been informed by the companies and our representative in Poland that
both projects met the criteria for a grant and have been formally approved for
funding. We have already received a $170,000.00 deposit on the contract from
Chempol, and we expect a decision on the amount of the grant and the remaining
funding to begin by the end of June. On May 13 we received notification from our
representative that Ekologia is negotiating a letter of credit from a Polish
bank based upon the approval of their project.
The third contract was signed in Poland on February 3, 2003. The Municipality of
Bytom created a dedicated private company to contract for, and operate, the
facility on behalf of the Municipality. We have signed the contract with this
entity. The financing contingency date of March 15, 2003 has been extended to
June 30, 2003 due to a change in control of the operating company and we expect
funding to begin in accord with the payment schedule on or before that date. The
municipality remains a shareholder in the new company.
On April 16, 2003 we signed a Distributorship with Mihama, Inc. Mihama will
market and sell Startech products and services in Japan. The company received a
$250,000.00 distributorship fee. In addition to the Distributor price the
contract requires that Mihama place an order for no less than a ten (10) ton per
day system within sixty (60) days of signing the Distributorship. A further down
payment of $250,000 towards the purchase price has also been received and this
system will mean an additional sale of approximately $5,500,000.00.
9
We signed a Joint Development Agreement with Vitech Enterprises on December 19,
2001. The Agreement calls for the two parties to collaborate on a 10 ton per day
system in South Carolina to process outdated pharmaceutical products. While the
project has received local, county and state support it has been held up by the
permitting authority's interpretation of a 1989 EPA opinion letter. Our
environmental consultant has informed us that he expects to receive an EPA
clarification letter to that opinion that will allow the project to move
forward. Once that clarification is received it is our understanding that the
necessary approvals to process outdated pharmaceuticals will be granted to
Vitech. The result will be a sale of approximately $3,700,000.00. The reason for
the reduced sale price is that Startech agreed to provide equipment discounts in
return for a 25% equity stake in the project. This equity stake should provide
significantly more profit over the long term than would be provided by a one
time equipment sale.
In addition to the above referenced signed Development Agreements, we have just
completed a test program totaling seventy thousand dollars ($70,000.00). The
test program is with Concurrent Technologies Corporation (CTC) to demonstrate
the processing of end-of-life-electronics. Payments totaling $56,000.00 have
been received. The balance of $14,000.00 is due after the submission of a final
test report due on or before June 30, 2003. Representatives from CTC attended
and witnessed the test program. The National Defense Center for Environmental
Excellence (NDCEE) is a U.S. Department of Defense (DoD) contract operated by
Concurrent Technologies Corporation for the development, application and
dissemination of advanced environmental technologies. The DoD initiated the
Demanufacturing of Electronic Equipment for Reuse and Recycling (DEER2) project
to investigate, test and deploy technology upgrades in the public and private
sectors. DEER2 is a task under the National Defense Center for Environmental
Excellence (NDCEE), to encourage electronic reuse and recycling. More
information on this program can be found at http://www.deer2.com/index.html.
We have been supporting a project in South Africa for over two years. The
process has been long, but the accomplishments to date have been significant.
South Africa has put in place one of the most, if not the most, rigorous
hazardous waste site application processes in the world. We were the first
technology to apply for and receive a General Technical Assessment (GTA)
approval. This process took well over one year from beginning to end. It
includes an extended and rigorous public participation segment. Our final
submission for a site specific permit was submitted to the government on May 9,
2003 and a Record of Decision (ROD) is required within the next ninety (90)
days. By applying for and receiving the GTA approval prior to submitting the
plan for a specific site we have eliminated long delays on all future projects
that use the Startech technology. Financing for the project is being put in
place and has received significant pre-commitments pending the successful
outcome of the ROD. The sale for South Africa will be for a 50 ton per day
system, consisting of two 25 ton per day systems using some common components,
at an approximate sale price of $9,000,000.00. Additionally, we have purchased
40% of the development company in return for some late term project funding we
provided. Our ownership percentage will be a much smaller percentage of the
final operating company due to the use of leveraged financing to fund the
project.
We have also received notice from our representative in China that we have been
approved for a 10 ton per day demonstration project for the Shenyang
Environmental Protection Bureau to process PCBs and other hazardous chemical
wastes. A 10 ton per day system will bring a sale valued at approximately
$4,700,000.00.
10
2. Actions taken by Joseph F. Longo, shareholder and director
On May 29, 2003 a director and a greater than 10% shareholder of the Company,
Joseph F. Longo ("Mr. Longo"), filed an amendment to a previously filed Schedule
13D initially filed in January 2003. The amendment filed on May 29, 2003
indicates that Mr. Longo has requested that the Company call a Special Meeting
of Shareholders for July 16, 2003 in order to vote upon a restructuring of the
Board of Directors. This document was followed by a preliminary 14A filed on
June 11, 2003. Those documents identify Northshore Asset Management as the
source of financing for Mr. Longo's activities.
Up until the filing of Mr. Longo's 13D on May 29, 2003 we considered Northshore
our most viable funding source and relied upon their representations and made a
good-faith counter-proposal to them as late as May 15, 2003. This
counter-proposal was based upon NASDAQ's stated position to the Company,
articulated by our Listing Agent, who advised us that NASDAQ would only approve
a proportional representation on our Board from any funding source, and that
Northshore's request for 33% board representation for an approximate investment
of 12-14% would not satisfy NASDAQ regulations regarding proportionality. We
never received a response from Northshore to our counter-proposal.
The Schedule 13D and 14A filed by Mr. Longo contains many misleading statements.
The board of directors worked in good faith directly with Northshore in order to
consummate an investment of equity capital. The board continually attempted to
find acceptable compromise positions in order to effectuate a mutually agreeable
deal. Northshore failed to respond to those attempts by the board and ignored
some of the concerns raised by the board surrounding the structure of the deal
proposed by Northshore.
The Company was actively pursuing the Northshore deal until the filing of Mr.
Longo's Schedule 13D on May 29, 2003. Startech placed substantial reliance on
the representations made by Northshore that this investment was already approved
subject to some last details. Although the Company was communicating with other
funding sources at the time, it substantially relied upon the representations of
Northshore that it was prepared to make the deal, and that only a few details
needed to be resolved. This loss of time and effort with other funding sources
significantly impaired the Company's ability to meet the time requirements
imposed by NASDAQ to meet its qualitative listing criteria.
The Startech board of directors has actively sought further detail and
information from Mr. Longo's representatives as to its proposal and the
financial capability of its funding source. Those negotiations to secure
necessary capital to support ongoing operations continue at the present time.
3. Funding Plan
Despite the set back with Northshore we are currently involved with other
financing alternatives that will provide us the capital we need to continue
operations and satisfy our shareholder equity needs relative to the pending
delisting process. We believe we can possibly raise up to two million dollars
($2,000,000.00) through one of these potential investors. We are currently
working with two funding sources, each of which could provide us with the
necessary capital, although there is no assurance that either source will close
in the time necessary or on terms acceptable to the Company.
Additionally, we will also continue to negotiate, as we have in good faith since
October 2002, with Northshore and Mr. Longo in an attempt to bridge the
differences between our respective groups and find a solution that is in the
11
best long term interests of the Company and its shareholders. We believe, based
upon the communications from Mr. Longo and the information contained within his
Schedule 14A that Northshore is still desirous of making the investment if the
appropriate deal can be structured.
We currently have approximately $232,000 in cash as of June 20, 2003 on hand to
meet our ongoing expenses until at least July 31, 2003. In order to provide the
Company the operating capital it requires for that time period the six highest
paid members of management have temporarily agreed to defer all salary payments
until further funding is secured or received.
4. NASDAQ Appeal
On June 5, 2003 the Company appeared before a NASDAQ Appeal Panel relative to
its appeal of a NASDAQ staff determination that Startech Environmental
Corporation should be delisted from the NASDAQ SmallCap market due to its
failure to maintain $2,500,000.00 in shareholders equity. The Company presented
its plan to satisfy the shareholder's equity requirement in the near future and
the time it needed to implement this plan. While the Panel members gave our
executives every opportunity to present all relevant information towards
compliance with the quantitative requirements of its listing agreement, there is
certainly no guarantee in that regard. The Company has submitted follow up data
to the Appeals Panel at this time and will await a decision.
Results of Operations
- ---------------------
Comparison of three months ended April 30, 2003 and 2002
Revenues. Our total revenues were $ 0 for the three months ended April 30, 2003,
as compared to $20,266 for the same period in 2002. Until our product matures
and is readily accepted in the marketplace we will continue to experience
volatility in our revenues.
Gross Loss. Our gross loss was $1,298 for the three months ended April 30, 2003
compared to a gross loss of $64,079 in the same period in 2002, an decrease of
$62,781. Our gross margins were impacted as a result of expenses related to the
systemization and optimization of the Eico system in Japan.
General and Administrative Expenses. Our general and administrative expenses for
the three months ended April 30, 2003 were $281,826 compared to $721,484 for the
same period in 2002, an decrease of $439,658 or 60.9%, from the same period in
2002. This decrease is related to cost measures related to reduced employee
benefits and lower operating expenses.
Research and Development Expenses. Our research and development expenses for the
three months ended April 30, 2003 were $72,984 an increase $40,161 or 122.4%,
from the same period in 2002. This increase is related to focusing additional
resources for the continued development of our products as well as improvements
and upgrades relative to our anticipated testing program in our Bristol
demonstration facility.
Selling Expenses. Our selling expenses for the three months ended April 30, 2003
were $200,657 an decrease of $46,815 or 18.9%, for the same period in 2002.
Selling expenses decreased as a result of reduced reliance on outside
consultants.
12
Interest Income. Our interest income for the three months ended April 30, 2003
was $344, as compared to $3,396 in the same period in 2002 a decrease of 89.9%.
The decrease is due to lower average cash balances, and lower interest rates
earned on our investments as a result of the Federal Reserve's lowering
short-term interest rates.
Income Taxes. During the three months ended April 30, 2003 corporate income
taxes paid were $1,767 as compared to$10,303 in the same period 2002. This
payment was related to an estimated tax payment to the State of Connecticut. We
have minimal tax obligations due to the fact that we have not as yet had any
profitability.
Comparison of six months ended April 30, 2003 and 2002
Revenues. Our total revenues were $0 for the six months ended April 30, 2003, as
compared to $136,471 for the same period in 2002. Until our product matures and
is readily accepted in the marketplace we will continue to experience volatility
in our revenues.
Gross Loss. Our gross loss was $82,007 for the six months ended April 30, 2003
compared to a gross loss of $19,847 in the same period in 2002, a decrease of
$62,160. Our gross margins were negatively impacted as a result of expenses
related to the systemization and optimization of the Eico system in Japan.
General and Administrative Expenses. Our general and administrative expenses for
the six months ended April 30, 2003 were $928,879 compared to $1,398,887 for the
same period in 2002, a decrease of $470,008 or 33.6%, from the same period in
2002. This decrease is due to personnel reductions, lower employee benefits, and
lower operating expenses resulting from cost reduction measures.
Research and Development Expenses. Our research and development expenses for the
six months ended April 30, 2003 were $145,146 an increase $61,879 or 74.3%, from
the same period in 2002. This increase is related to focusing some of our
personnel resources on the continued development of our products as well as
research and development improvements and upgrades relative to our Bristol
demonstration facility.
Selling Expenses. Our selling expenses for the six months ended April 30, 2003
were $402,637 an decrease of $55,010 or 12.0%, for the same period in 2002.
Selling expenses decreased as a result of reduced reliance on outside
consultants.
Interest Income. Our interest income for the six months ended April 30, 2003 was
$1,675, as compared to $13,715 in the same period in 2002 a decrease of 87.8%.
The decrease is due to lower average cash balances, and lower interest rates
earned on our investments as a result of the Federal Reserve's lowering
short-term interest rates.
Income Taxes. During the six months ended April 30, 2003 corporate income taxes
paid were $6,430 as compared to $8,610 in the same period 2002. This payment was
related to an estimated tax payment to the State of Connecticut. We have minimal
tax obligations due to the fact that we have not as yet had any profitability.
We have loss carry forwards of $13.3 million to offset against any future
profits.
13
Liquidity and Capital Resources
- -------------------------------
As of April 30, 2003, we had cash and cash equivalents of $367,527 and a
negative working capital of $289,074. During the six months ended April 30,
2003, our cash decreased by $141,794. Our current cash position of approximately
$232,000 as of June 20, 2003 will only allow us to continue operations through
July 31, 2003 unless further cash is generated during that time period. Unless
we secure investment capital or generate cash from operations and sales we will
be unable to continue as a going concern beyond that date.
The Company has taken measures to reduce costs, we have reviewed all internal
and external expenses and have reduced and eliminated expenses to reduce our
burn rate, in addition we are currently discussing with potential investors an
equity private placement to satisfy our listing requirement with NASDAQ. While
there are no assurances a deal will be executed it must be noted, however, that
if the progress payments are not received in a timely manner or additional sales
of Plasma Converters or funding is not available we may not have enough working
capital to maintain our operations beyond July 31, 2003. The Company will
require immediate additional financing to fund current operations through the
remainder of 2003. The Company has historically satisfied its capital needs
primarily by issuing equity securities. The Company will require approximately
$1.0 million to finance operations through fiscal 2003 and intends to seek such
financing through sales of its equity securities.
Since October 2002 the Company announced that contracts to sell three Plasma
Converters were signed aggregating in excess of $15 million dollars in sales.
The contracts include an established payment schedule coordinated to provide
progress payments at various stages of the manufacturing and delivery cycle. We
believed these progress payments, along with a recently completed sole source
private placement dated March 28, 2003 which raised $138,757 after commissions
that required the issuance of 152,480 shares of our unregistered common stock at
$1.00 per share, would be enough operating capital to sustain company operations
at the current level for more than 1 year. However, the expected down payments
for these sales have been consistently delayed since December 2002 up until the
present time and there can be no reasonable assurance that they will be received
before the end of July 2003.
In addition to the internally generated investment opportunities, the Company is
also working with a group of investors led by Joseph F. Longo, a director and
greater than 10% shareholder. While an agreement with this group would cause a
change in board control and management personnel, we are taking every step
available to secure the capital necessary to protect the long term interests of
the Company.
Assuming the aforementioned $1.0 million in financing is obtained, the Company
believes that continuing operations for the longer term will be supported
through anticipated growth in revenues and through additional sales of the
Company's securities. Although longer-term financing requirements may vary
depending upon the Company's sales performance there can no assurance that
management will be able to obtain any additional financing on terms acceptable
to the Company, if at all. We are in discussions with several potential
investors for additional financing, however at this time the company has no
binding commitments.
Our investing activities have consisted primarily of short-term high quality
liquid investments, with maturities with three months or less when purchased,
which are considered cash equivalents. The primary investments are high quality
commercial paper, U.S. treasury notes and Treasury-bills.
14
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in the United States and market our products in North
America, Japan, Europe, Asia, Africa, Middle East, South America as well as
other parts of the world. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. Because a significant portion of our revenues are
currently denominated in U. S. dollars, a strengthening of the dollar could make
our products less competitive in foreign markets. Our interest income is
sensitive to changes in the general level of U.S. interest rates, particularly
since the majority of our investments are in short - term instruments. Due to
the short-term nature of our investments, we believe that there is not a
material risk exposure.
Part II - Other Information
ITEM 1. LEGAL PROCEEDING
On June 5, 2002, the Company received a Demand for Arbitration filed with the
American Arbitration Association in East Hartford, CT by Peter Francisco and
Fran Environmental, LLC. Fran Environmental has a Representatives Agreement with
the Company. Peter Francisco is the principal member of Fran Environmental. The
claim being made is that Startech has failed to provide proper support to assist
this representative in its effort to market and sell our products in Brazil. The
relief sought is for no less than $150,000. The Company does not believe the
claim is subject to Arbitration under the terms of its agreement with the
representative and has so advised the American Arbitration Association. On
January 6, 2003 a temporary injunction was granted to Startech to stop the
arbitration process and conduct a hearing as to whether a permanent injunction
should be granted to enjoin the arbitration proceeding from continuing. A
hearing was held for this purpose on February 24, 2003. However no final
determination was made as the moving party requested a continuance. As of the
date of this filing the temporary injunction is still in place and no final
determination has been made.
ITEM 2 - CHANGES IN SECURITES AND USE OF PROCEEDS
On March 28, 2003 the Company completed a sole source private placement of its
securities pursuant to which we issued 152,480 shares of its common stock at
$1.00 per share, resulting in aggregate net proceeds of approximately $138,757
after commissions of $13,723.
The above securities were issued in reliance on the exemption from registration
under Section 4(2) as not involving any public offering. Claims of these
exemptions are based upon the following: (1) all of the purchasers in these
transactions were with a sophisticated investor with the requisite knowledge and
experience in financial and business matters to evaluate the merits and risk of
an investments in the Company, were able to bear the economic risk of an
investment in the Company, had access to or were furnished with the kinds of
information that registration under the Securities Act would have provided and
acquired securities for their own accounts in transactions not involving any
general solicitations or advertising, and not with a view to the distribution
15
thereof, and (2) a restrictive legend was placed on each certificate evidencing
the securities; (3) each purchaser acknowledged in writing the he knew the
securities were not registered under the Securities Act or any State securities
laws, and are restricted securities that term is defined in Rule 144 under the
Securities Act, that the securities may not be offered for sale, sold or
otherwise transferred within the United States and except pursuant to an
effective registration statement under the Securities Act and any applicable
State securities laws, or pursuant to any exemption from registration under the
Securities Act, the availability of which is to be established to the
satisfaction of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Registrant held its Annual Meeting of Shareholders March 7, 2003.
(b) The following persons were elected Directors pursuant to the votes
indicated:
Name For Against Abstain
---- --- ------- -------
Joseph S. Klimek 5,294,657 763,063 66,458
Thomas E. Atkins 5,167,149 890,571 66,458
Kevin M. Black 5,107,424 950,296 66,458
John E. Joyner 5,173,849 883,871 66,458
Brendan J. Kennedy 5,266,774 790,946 66,458
Joseph F. Longo 5,225,865 831,855 66,458
Richard M. Messina 5,280,656 777,064 66,458
(c) The only other matter to be voted upon was the ratification of the
appointment of Kostin, Rufkess & Company, LLC as the Registant's
independent accountants as follows:
For Against Abstain
--- ------- -------
5,447,359 150,848 525,971
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 99.1: Certification by the CEO (annexed hereto)
Exhibit 99.2: Certification by the Principal Financial Officer (annexed
hereto)
Reports on Form 8-K: None
16
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 20th day of
June 2003.
STARTECH ENVIRONMENTAL CORPORATION
(Registrant)
BY: /S/ Joseph S. Klimek
------------------------
Joseph S. Klimek
CEO & President
BY: /S/ Robert L. DeRochie
--------------------------
Chief Financial Officer,
Vice President Investor Relations,
(Principal Financial Officer)
17
CERTIFICATIONS
Certification requirements set forth in Section 302(a) of the Sarbanes-Oxley
Act.
I, Joseph S. Klimek certify that:
1. I have reviewed this quarterly report on Form 10-Q of Startech
Environmental Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining internal controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such internal controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's internal controls and
procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the internal controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
18
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
I am responsible for preparing the Company's consolidated financial
statements and the other information that appears in this Form 10-Q. I believe
that the consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
appropriate in the circumstances to reflect, in all material respects, the
substance of events and transactions that should be included, and that the other
information in this Form 10-Q is consistent with those statements. In preparing
the consolidated financial statements, management makes informed judgments and
estimates of the expected effects of events and transactions that are currently
being accounted for.
In meeting its responsibility for the reliability of the consolidated
financial statements, I depend on the Company's system of internal accounting
controls. This system is designed to provide reasonable assurance that assets
are safeguarded and transactions are executed in accordance with management's
authorization, and are recorded properly to permit the preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America.
Date: June 20, 2003
/s/ Joseph S. Klimek
- -------------------------
Joseph S. Klimek
President and Chief Executive Officer
19
CERTIFICATIONS
Certification requirements set forth in Section 302(a) of the Sarbanes-Oxley
Act.
I, Robert DeRochie certify that:
1. I have reviewed this quarterly report on Form 10-Q of Startech
Environmental Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining internal controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such internal controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's internal controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the internal controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
20
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
I am responsible for preparing the Company's consolidated financial
statements and the other information that appears in this Form 10-Q. I believe
that the consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
appropriate in the circumstances to reflect, in all material respects, the
substance of events and transactions that should be included, and that the other
information in this Form 10-Q is consistent with those statements. In preparing
the consolidated financial statements, management makes informed judgments and
estimates of the expected effects of events and transactions that are currently
being accounted for.
In meeting its responsibility for the reliability of the consolidated
financial statements, I depend on the Company's system of internal accounting
controls. This system is designed to provide reasonable assurance that assets
are safeguarded and transactions are executed in accordance with management's
authorization, and are recorded properly to permit the preparation of
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America.
Date: June 20, 2003
/s/ Robert L. DeRochie
- -------------------------
Robert L. DeRochie
Chief Financial Officer &
Vice President, Investor Relations
21