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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 JULY 31, 2003
Commission File Number 0-25312
STARTECH ENVIRONMENTAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1286576
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.
YES NO X
----- -----
The number of shares outstanding for each of Registrant's classes of Common
Stock are as follows:
Title of each class Outstanding at September 12, 2003
------------------- ---------------------------------
Common Stock - No Par Value 15,567,356
STARTECH ENVIRONMENTAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Balance sheets - July 31, 2003 3
(unaudited) and October 31, 2002
Consolidated Statements of operations for the three months 4
and nine months ended July 31, 2003 and 2002 (unaudited)
Consolidated Statements of cash flows for the nine months 5
ended July 31, 2003 and 2002 (unaudited)
Notes to Consolidated Financial Statements (unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial 9-15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceeding 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited) (audited)
July 31, October 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 2,784,949 $ 509,321
Accounts receivable ............................................................... 14,000 290,000
Inventory ......................................................................... 343,829 273,706
Prepaid expenses .................................................................. 15,000 5,000
Other current assets .............................................................. 3,166 17,380
------------ ------------
Total current assets ..................................................... 3,160,944 1,095,407
Property and equipment, net ....................................................... 1,671,529 1,794,067
Other assets ...................................................................... 276,420 248,756
------------ ------------
Total assets ............................................................. $ 5,108,893 $ 3,138,230
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable .................................................................. $ 145,110 $ 260,116
Capital lease - short-term ........................................................ 24,997 44,885
Customer deposits ................................................................. 790,000 120,000
Other accrued expenses ............................................................ 302,599 301,221
------------ ------------
Total current liabilities ................................................ 1,262,706 726,222
Long-term liability:
Capital lease payable net of current portion ..................................... 6,725 17,580
------------ ------------
Total liabilities ........................................................ 1,269,431 743,802
------------ ------------
Stockholders' equity:
Preferred stock, no par value 10,000,000 shares authorized; Shares
issued and outstanding: 2,645 at July 31, 2003, (aggregate liquidation
preference of $26,450); 35,655 (aggregate liquidation preference of
356,990) at October 31, 2002 ...................................................... 26,453 356,553
Common stock, no par value, 800,000,000 shares authorized;
Shares issued and outstanding: 15,564,356 at July 31, 2003
and 10,293,392 at October 31, 2002 ................................................ 19,021,813 14,790,453
Additional paid-in capital ........................................................ 1,742,745 1,742,745
Accumulated deficit ............................................................... (16,951,549) (14,495,324)
------------ ------------
Total stockholders' equity ........................................................ 3,839,462 2,394,427
------------ ------------
Total liabilities and stockholders' equity ............................... $ 5,108,893 $ 3,138,230
============ ============
See accompanying notes to consolidated financial statements
3
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
July 31, 2003 July 31, 2002 July 31, 2003 July 31, 2002
------------ ------------ ------------ ------------
Revenue ................................. $ 70,000 $ 0 $ 70,000 $ 136,471
Cost of sales ........................... 31,530 165,257 113,537 321,575
------------ ------------ ------------ ------------
Gross profit ............................ 38,470 (165,257) (43,537) (185,104)
------------ ------------ ------------ ------------
Operating expenses
Selling expense .................. 171,791 257,017 574,428 714,664
Research and development ......... 78,133 60,428 223,279 143,695
General and administrative expense 675,469 738,775 1,604,347 2,137,662
------------ ------------ ------------ ------------
Total operating expense ................. 925,393 1,056,220 2,402,054 2,996,021
------------ ------------ ------------ ------------
Loss from operations .................... (886,923) (1,221,477) (2,445,591) (3,181,125)
------------ ------------ ------------ ------------
Other income (expense):
Other income ............................ 0 0 (1,371) 0
Interest income ......................... 929 9,432 2,603 23,148
Gain/Loss on sale of asset .............. 0 0 193 0
Interest expense ........................ (1,538) 0 (5,888) 0
------------ ------------ ------------ ------------
Total other income ...................... (609) 9,432 (4,463) 23,148
------------ ------------ ------------ ------------
Loss before income taxes ................ (887,532) (1,212,045) (2,450,054) (3,157,977)
------------ ------------ ------------ ------------
Income tax expense (benefit) ............ (259) 1,988 6,171 10,598
------------ ------------ ------------ ------------
Net loss ................................ $ (887,273) $ (1,214,033) $ (2,456,225) $ (3,168,575)
============ ============ ============ ============
Net loss ................................ $ (887,273) $ (1,214,033) $ (2,456,225) $ (3,168,575)
Less: preferred dividends ............... 0 6,990 0 22,307
------------ ------------ ------------ ------------
Loss attributable to common
shareholders $ (887,273) $ (1,221,023) $ (2,456,225) $ (3,190,882)
============ ============ ============ ============
Net loss per share ...................... $ (0.07) $ (0.12) $ (0.22) $ (0.33)
============ ============ ============ ============
Weighted average common
shares outstanding ...................... 12,214,438 10,271,306 11,094,752 9,623,297
============ ============ ============ ============
See accompanying notes to these consolidated financial statements
4
STARTECH ENVIRONMENTAL CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
July 31, 2003 July 31, 2002
----------- -----------
Cash flows from operating activities:
Net loss .............................................. $(2,456,225) $(3,168,575)
Adjustments to reconcile net loss to net cash provided
By operating activities:
Depreciation .......................................... 146,953 142,814
401K plan match made by the issuance of shares ........ 54,974 64,974
Expenses paid through the issuance of commons stock ... 0 15,624
Gain on sale of asset ................................. (193) 0
(Increase) decrease in accounts receivable ............ 276,000 0
(Increase) decrease in inventory ...................... (70,122) (4,004)
(Increase) decrease in prepaid and other current assets 4,213 (35,434)
(Increase) decrease in other assets ................... 27,664 1,200
Increase (decrease) in accounts payable ............... (115,006) (53,870)
Increase (decrease) in customer deposits .............. 670,000 137,500
Increase (decrease) in accrued expense ................ 1,377 (16,201)
----------- -----------
Net cash used in operating activities ................. (1,515,693) (2,915,972)
----------- -----------
Cash flows used in investing activities:
Capital expenditures .................................. (26,203) (142,013)
Proceeds from sale of assets .......................... 5,593 0
----------- -----------
Net Cash used in investing activities ................. (20,610) (142,013)
----------- -----------
Cash flows from financing activities:
Payment for capital leases ............................ (34,355) (33,691)
Proceeds from common stock issuance ................... 3,846,286 2,284,114
----------- -----------
Net cash provided by financing activities ............. 3,811,931 2,250,423
----------- -----------
Net increase (decrease) in cash ....................... 2,275,628 (807,562)
Cash at beginning of period ........................... 509,321 2,207,328
----------- -----------
Cash and cash equivalents at end of period ............ $ 2,784,949 $ 1,399,766
=========== ===========
Supplemental disclosure- taxes paid ................... 6,171 10,598
=========== ===========
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 our opinion these financial statements
include all adjustments necessary for a fair presentation of the financial
position. Results for the nine months ended and three months ended July 31, 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 computers 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 $115,520 and is
being depreciated over five to fifteen years. Depreciation expense for the nine
months ended July 31, 2003 was $12,327.
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 July 31 of each
period indicated (shares in millions): Diluted earnings per share is computed
using the weighted average number of common shares outstanding during the
period, plus the dilutive effect of potential future issuances of common stock
relating to stock option programs and other potentially dilutive securities. In
calculating diluted earnings per share, the dilutive effect of stock options is
computed using the average market price for the period. Shares related to
convertible debt financing and certain of the Company's outstanding stock
options were excluded because they were anti-dilutive, however, these shares
could be dilutive in the future. The following table sets forth the computation
of basic and diluted earnings per share:
THREE MONTHS ENDED JULY 31, NINE MONTHS ENDED JULY 31,
--------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Number of common shares outstanding at end of
period......................................... 15.6 10.3 15.6 10.3
Effect of using weighted average common shares
outstanding.................................... 3.4 0.0 4.5 (0.7)
Basic common shares outstanding................ 12.2 10.3 11.1 9.6
Dilutive effect of common stock options and
warrants....................................... (0.5) 0.0 0.6 0.1
---- --- --- ---
Diluted common shares outstanding.............. 11.7 10.3 11.7 9.7
6
For the nine months ended July 31, 2003 and July 31, 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 July 31, 2003, there were approximately 19.3 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.
Note 3. Cash Flow..
During the nine months ended July 31, 2003 and 2002, 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.
Nine months ended: July 31, July 31,
- ------------------- 2003 2002
-------- --------
Preferred stock dividend 0 22,307
Series A convertible preferred shares converted to
common shares 330,100 140,426
Accrued preferred dividends 0 2,761
401k plan match 54,974 64,974
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 nine months ended July
31, 2003 and 2002, included herein, have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities Exchange
Commission (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 July 31, 2003 were $22,938, which
represents the issuance of approximately 22,902 shares of our common stock.
Contributions for the nine months ended July 31, 2003 were $54,974, which
represents the issuance of approximately 60,805 shares of our common stock.
Note 7. Private Placement
On July 18th 2003 we announced a private placement with Northshore Asset
Management LLC ("Northshore"). This offering was for an aggregate amount of
$3,000,000 which equaled 4,000,000 restricted common shares. We received
7
$1,600,000 on July 18, 2003 and the remaining balance of $1,400,000 on July 22,
2003. Northshore has agreed to invest up to an additional $1 million dollars on
or before October 15, 2003 at a price per share of common stock equal to the
average closing price of the common stock during the 30 consecutive trading days
prior to the date of such closing less a 25% discount to such average price. In
addition, Startech and Northshore agreed to extend the date on which Northshore
has the right at its sole discretion to purchase an additional $1 million of
common stock on or before December 15, 2003 at a price per share equal to the
average closing price of the common stock during the 30 consecutive trading days
prior to the date of such closing less a 25% discount to such average price.
Note 8. Special Charges.
The following table illustrates the estimated one time special charges
related to the Change in Control. These charges will be reflected in the 4th
quarter 2003.
Severance Other Total
--------- ----- -----
Estimated for Fiscal 2003:
- --------------------------
Total $128,726 $217,328 $346,054
8
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.
9
Recent Developments
- -------------------
1. Change in control and financing
On July 18, 2003, we issued a press release announcing the resignation of all
members of the Board of Directors of Startech, other than Joseph F. Longo, and
an investment of $1.6 million from Northshore Asset Management, LLC, an
investment management group, in exchange for 2,133,333 shares of common stock,
no par value, pursuant to the terms of a Stock Purchase and Registration Rights
Agreement dated as of July 18, 2003.
On July 24, 2003, we issued a press release announcing the purchase of 1,866,667
shares of common stock, no par value, by Northshore Asset Management, LLC, in
exchange for additional $1.4 million in cash, pursuant to the terms of a Stock
Purchase Agreement dated as of July 22, 2003.
Northshore has also agreed to purchase an additional $1 million of common stock
on or about July 25, 2003 on substantially the same terms. As a result of the $3
million invested by Northshore, Northshore owns an aggregate of 4,000,000 shares
of common stock, representing approximately 25% of the issued and outstanding
shares of common stock. In addition, Northshore had agreed to invest up to an
additional $1 million, at its sole option, on or before August 15, 2003 at a
price per share equal to a 25% discount to the average closing price of the
common stock during the 30 consecutive trading days prior to the date of such
closing.
On August 1, 2003, we issued a press release announcing certain modifications to
the Stock Purchase Agreement entered into with Northshore on July 22, 2003. We
agreed with Northshore to extend the date on which Northshore agreed to purchase
an additional $1 million of our common stock. The extension changed the date
from on or about July 25, 2003 to on or before October 15, 2003. The price per
share at which the common stock will be purchased will be equal to the average
closing price of the common stock during the 30 consecutive trading days prior
to the date of such closing less a 25% discount to such average price. In
addition, we agreed with Northshore to extend the date on which Northshore
agreed, at its sole option, to purchase an additional $1 million of our common
stock. The extension changed the date from on or before August 15, 2003 to on or
before December 15, 2003. The price per share will remain equal to the average
closing price of the common stock during the 30 consecutive trading days prior
to the date of such closing less a 25% discount to such average price.
On July 18, 2003 we filed an Information Statement on form 14f-1 that announced
we would be mailing the Information Statement to shareholders on or about July
23, 2003. The Information Statement stated that on the tenth day following the
mailing the appointment to the Board of four (4) identified individuals to our
Board of Directors would be effective. Two of the previously identified
individuals have withdrawn their previously stated intention of sitting as Board
members. Those two (2) individuals are Henry Ciocca and Peter Shipman. The
information statement mistakenly implied that the four designated board members
10
had already been appointed to the board at the time of the filing and that the
mere passage of time (10 days) would result in their appointment becoming
effective. Such an implication was incorrect. On September 4, 2003 we announced
the appointment of Nicholas S. Perna, Kenneth J. Slepicka, Douglas R. Ballew and
Joseph A. Equale to the Board of Directors, effective October 1, 2003, to fill
the vacancies on the Board resulting from the July 18, 2003 resignations of all
members of the Board, other than Joseph F. Longo. Messrs. Perna and Equale were
appointed in place of Messrs. Ciocca and Shipman, who notified the Company that
they would be unable to serve on the Board notwithstanding the disclosure made
by the Company in its Schedule 14f-1, as filed with the Securities Exchange
Commission on July 18, 2003.
2. NASDAQ Delisting
On July 1, 2003 we were notified that our appeal of our delisting from the
NASDAQ Stock Market, Inc. had been denied and that we would have our common
stock delisted from the Nasdaq Stock Market, effective with the open of business
on July 3, 2003. The delisting was a result of Startech's failure to maintain
NASDAQ's stockholders equity listing requirement of a minimum of $2.5 million.
Startech's common stock has been trading on the Over-the-Counter Bulletin Board
(OTC:BB) under the symbol STHK since that time. It is our intention to apply for
listing on NASDAQ or AMEX as soon as we are eligible.
3. Project Update
A. On October 18, 2002 we entered into a sales contract with Chempol, Sp. z.o.o.
for a ten (10) ton per day Plasma Converter System. As of this date, the project
has not yet been funded by Chempol. The contract included a provision that
required the initial progress payment within thirty days after signing. We have
reported the status and expectations of this project in previous filings.
However, despite repeated and ongoing assurances from Chempol executives we have
received only $170,000 of the required partial payments as called for by the
contract. We have now notified Chempol that if payment arrangements are not
confirmed we can no longer consider the contract to be in good standing and may
need to declare it in default if payments do not begin within the next thirty
(30) days.
After sending a notification we have received written communications informing
us that Chempol had signed an agreement with a local financier that will provide
us with a two million dollar ($2,000,000.00) payment in September. Once this
payment is received, we have agreed to accelerate the manufacture and delivery
of the Chempol system.
The contract with Ekologia was signed between the parties on October 17, 2002
with first payments due thirty days after signing. Ekologia has not yet received
their funding. Despite repeated and ongoing assurances from Ekologia executives,
we have not received the required payments. We have notified Ekologia that if
payment arrangements are not confirmed, we can no longer consider the contract
to be in good standing and may need to declare it in default if payments do not
begin within the next thirty (30) days.
11
After notifying Ekologia of the above possibility, we received a written
communication informing us that Ekologia had formed an alliance with Ekoplazma
to join forces in funding a Startech PCS in Poland. Ekoplazma has also
contracted to purchase a 10 TPD Startech PCS. By joining forces with Ekoplazma,
Ekologia will have access to funding for government projects due to the fact
that Ekoplazma is a partnership with the municipality of Bytom, Poland. In a
joint letter, the executives of Ekologia and Ekoplazma have provided us with a
validation letter representing that a funding organization called the
Municipality Foundation has agreed to fund both their joint projects and that
the first down payment of $525,000 will be made before the end of September.
Because we have received previous indications of funding, there can be no
assurances that the first payment will be received within this timeframe.
B. On April 16, 2003, we signed a Distributorship Agreement with Mihama, Inc.
Mihama will market and sell Startech products and services in Japan. We received
a $250,000 distributorship fee from Mihama. In addition to the Distributor fee,
the terms of the Distributorship require that Mihama place an order for no less
than a ten (10) ton per day system within sixty (60) days of signing the
Distributorship. Prior to the sixty day period expiring, Mihama requested an
extension of time within which to place the order that is required pursuant to
the terms of the Distributorship. In order to extend the time within which an
order was required, we received a down payment of $250,000 towards the purchase
price. Subsequent to the receipt of the deposit, the sixty (60) day period was
extended by joint agreement between the parties to August 15, 2003. Meetings
were held in September between the parties and Mihama has agreed that the
remaining $250,000 will be paid in September. In addition an equipment purchase
contract is expected to be signed in October. As previously reported on January
8, 2003 we were notified by a firm representing Eico Systems Corporation that
Eico had filed for Civil Rehabilitation under Japan's Civil Rehabilitation Law.
Our understanding is that Eico is continuing to work through the reorganization.
Company representatives met with executives of Mihama, Inc. in Japan in the
latter half of August. Mihama is actively trying to form an alliance with the
parties involved in our project with Eico Systems Corporation that would allow
Mihama to take control of the Plasma Converter System in Japan.
C. We signed a Joint Development Agreement with Vitech Enterprises on December
19, 2001. The agreement provides Startech a 25% equity ownership in Vitech. 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. We have not
yet received an EPA clarification letter that had been expected in June 2003.
Based upon the uncertainty surrounding the receipt of the necessary
clarification, we have been looking for alternative sites and have identified
two possible sites for the project. ViTech has recently provided updated letters
of intent from handlers of outdated pharmaceuticals that accounts for 100% of
the capacity for the 10 ton per day system.
D. We have been paid in full for the successful completion of the test program
with Concurrent Technologies Corporation (CTC) to demonstrate the processing of
end-of-life-electronics. The final report was accepted by CTC and has been
forwarded to the appropriate Department of Defense (DOD) representatives for
review. Once the review process has been completed we expect to be provided
further information by CTC as to whether we will proceed further with the
program. The National Defense Center for Environmental Excellence (NDCEE) 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. In our opinion, the "end-of-life-electronics"
is an important Startech market both domestically and internationally.
12
E. The project in South Africa has made a significant step forward. Our
representative's conditional Record Of Decision (ROD) for a site specific permit
was approved by the government authorities on August 12, 2003. This approval
allows the project financing, which had previously been committed by 3rd party
financiers in South Africa, to be confirmed. The project will be located in
Gauteng, South Africa. 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. 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. We are finalizing the engineering requirements for the
contract. Additionally, we own 40% of Desert Charm (The development Company).
4. Lease Financing
We have recently signed a lease financing agreement program with Plasma Leasing
Company of Stamford, Connecticut that will provide long-term leasing programs
(12 years) for our customers.
5. Departure of executive and former director
On August 29, 2003 we announced the departure of Kevin M. Black, an executive
and former director. The Separation Agreement with Mr. Black in its entirety is
attached as an exhibit.
Results of Operations
- ---------------------
Comparison of three months ended July 31, 2003 and 2002
Revenues. Total revenues were $ 70,000 for the three months ended July 31, 2003,
as compared to $0 for the same period in 2002. The increase is related to a test
program of "end of life electronics" that was completed for Concurrent
Technologies Corp during the quarter ended.
Gross Profit. Gross profit was $38,470 for the three months ended July 31, 2003
compared to a gross loss of $165,257 in the same period in 2002, an increase of
$203,727. Our gross margins were favorably impacted as a result of test program
completed with Concurrent Technologies Corp. versus additional installation and
start up costs related to the Eico Systems Corp project.
General and Administrative Expenses. General and administrative expenses for the
three months ended July 31, 2003 were $675,469 compared to $738,775 for the same
period in 2002, an decrease of $63,306 or 8.6%, 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. Research and development expenses for the
three months ended July 31, 2003 were $78,133 an increase $17,705 or 29.3%, 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. Selling expenses for the three months ended July 31, 2003 were
$171,791 an decrease of $85,226 or 33.2%, 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 three months ended July 31, 2003
was $929, as compared to $9,432 in the same period in 2002 a decrease of 90.1%.
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.
13
Income Taxes. During the three months ended July 31, 2003 corporate income taxes
refunded were $259 as compared to a tax payment $1,988 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 yet
been profitable.
Comparison of nine months ended July 31, 2003 and 2002
Revenues. Total revenues were $70,000 for the nine months ended July 31, 2003;
as compared to $136,471 for the same period in 2002 this is a decrease of
$66,471 or 48.7%. Our revenues were lower as a result of only one test program
being performed during 2003, versus additional equipment purchased as well as
payment for shipping charges as it related to the Eico system in Japan. We also
performed an additional test program 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 $43,537 for the nine months ended July 31, 2003
compared to a gross loss of $185,104 in the same period in 2002, a decrease of
$141,567. 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. General and administrative expenses for the
nine months ended July 31, 2003 were $1,604,347 compared to $2,137,662 for the
same period in 2002, a decrease of $533,315 or 25.0%, 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. Research and development expenses for the
nine months ended July 31, 2003 were $223,279 an increase $79,584 or 55.4%, 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 nine months ended July 31, 2003
were $574,428 an decrease of $140,236 or 19.6%, 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 nine months ended July 31, 2003 was
$2,603, as compared to $23,148 in the same period in 2002 a decrease of 88.8%.
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 nine months ended July 31, 2003 corporate income taxes
paid were $6,171 as compared to $10,598 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 $14.2 million to offset against
any future profits.
14
Liquidity and Capital Resources
- -------------------------------
As of July 31, 2003, we had cash and cash equivalents of $2,784,949 and working
capital of $1,898,238. During the nine months ended July 31, 2003, our cash
increased by $2,275,628. This increased resulted from equity private placements
that were completed during this period. Our current cash position of
approximately $2,507,776 as of August 31, 2003 will allow us to continue
operations through July 31, 2004 unless further cash is generated or equity
received during that time period or unless we begin to receive progress payments
related to current executed contracts.
Accounts receivable of $14,000 at July 31, 2003 decreased $276,000 from $290,000
at the end of the fourth quarter of fiscal 2002. The decrease in accounts
receivable is primarily attributable to a customer payment.
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
believe these progress payments, along with a recently completed sole source
private placements dated July 18, 2003 and July 22, 2003 which raised $3,000,000
that required the issuance of 4,000,000 shares of our unregistered common stock
at $.75 per share, along with the Northshore commitment of $1 million due on or
before October 15, 2003 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 October 2003.
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. Unrealized gains and
losses were not material during the first nine months of fiscal year 2003 and
2002. No realized gains or losses were recorded during the three or nine months
ended July 31, 2003 or fiscal 2002.
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.
15
ITEM 4. CONTROLS AND PROCEDURES
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) of the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
Quarterly Report on Form 10-Q. The evaluation process, including the inherent
limitations on the effectiveness of such controls and procedures is more fully
discussed in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 2002. Based upon their evaluation, the principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective. There have been changes in the Company's internal
control over financial reporting during the Company's most recent fiscal quarter
as it relates to the Change in Control and the structure of the Board of
Directors, however these issues shall be resolved in the next quarter.
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 July 18th and July 22nd 2003 we announced a private placement with Northshore
Asset Management LLC. This offering was for an aggregate amount of $3,000,000
which 4,000,000 restricted common shares. Northshore has agreed to invest up to
an additional $1 million dollars on or before October 15, 2003 and that the
price per share at which the common stock will be purchased will be equal to the
average closing price of the common stock during the 30 consecutive trading days
prior to the date of such closing less a 25% discount to such average price. In
addition, the Company and Northshore agreed to extend the date on which
Northshore has at their option to purchase an additional $1 million of common
stock from on or before August 15, 2003 to on or before December 15, 2003 at a
price per share equal to the average closing price of the common stock during
the 30 consecutive trading days prior to the date of such closing less a 25%
discount to such average price. There were no commissions paid on this
transaction.
The above securities were issued in reliance on the exemption from registration
under Section 4(2) as not involving any public offering. Claims of this
exemption is based upon the following: (1) Northshore was a sophisticated
16
investor with the requisite knowledge and experience in financial and business
matters to evaluate the merits and risk of an investment 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 its own accounts
in transactions not involving any general solicitations or advertising, and not
with a view to the distribution thereof, and (2) a restrictive legend was placed
on each certificate evidencing the securities; (3) Northshore acknowledged in
writing it 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 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are attached to this report are
incorporated by reference herein.
Exhibit Item
- ------- ----
2.1 Agreement and Plan of Reorganization between Company and
Kapalua Acquisitions, Inc. dated November 17, 1995
(incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K, filed on November 29, 1995,
Commission File No. 0-25312).
3(i).1 Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form
10, filed on February 19, 1995, Commission File No.
0-25312).
3(i).2 * Articles of Amendment to the Audit Committee Charter
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 as filed with the SEC on
April 27, 2000, Commission File No. 333-35786).
17
3(ii) Bylaws (incorporated by reference to Exhibit 3.2* Filed with
the Registration Statement on Form S-1 on April 27, 2000,
Commission File No. 333-35786
10.1 * Separation Agreement dated as of August 27, 2003 by and
between Kevin M. Black and Startech Environmental
Corporation.
10.2 * Stock Purchase and Registration Rights Agreement dated as
of July 18, 2003, by and between Northshore Asset
Management, LLC and Startech Environmental Corporation.
10.3 * Stock Purchase Agreement dated as of July 22, 2003, by and
between Northshore Asset Management, LLC and Startech
Environmental Corporation.
10.4 * First Amendment to Stock Purchase Agreement dated as of July
30, 2003, by and between Northshore Asset Management, LLC
and Startech Environmental Corporation.
32.1 * Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
99.1 Form of Stock Purchase Agreement, dated as of July 18,
2003 (the "First Purchase Agreement"), by and among Startech and
the individual purchaser of the Startech Common Stock
(Incorporated by reference to Startech's Form 8-K filed on July
22, 2003). *
99.2 Form of Stock Purchase Agreement, dated as of July 22,
2003 (the "Second Purchase Agreement"), by and between Startech
and an individual purchaser (Incorporated by reference to
Startech's Form 8-K filed on July 25, 2003). *
99.3 Form of Stock Purchase Agreement, dated as of July 30,
2003 (the "Amendment of the First Purchase Agreement"), by and
between Startech and an individual purchaser (Incorporated by
reference to Startech's Form 8-K filed on July 25, 2003). *
* Filed Herewith
b) Reports on Form 8-K:
Date Description Item Reported
---- ----------- -------------
July 22, 2003 Financial Statement, Pro Forma 1, 5 and
July 25, 2003 Financial Statement, Pro Forma 5 and
18
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 15th day of
September 2003.
STARTECH ENVIRONMENTAL CORPORATION
(Registrant)
BY: /s/ Joseph S. Klimek
--------------------------------
Joseph S. Klimek
CEO & President
BY: /s/ Robert L. DeRochie
--------------------------------
Robert L. DeRochie
Chief Financial Officer,
Vice President Investor
Relations,
(Principal Financial
Officer)
19
CERTIFICATIONS
Certification requirements set forth in Section 302(a) of the Sarbanes-Oxley
Act of 2002.
I, Joseph S. Klimek certify that:
1. I have reviewed this quarterly report on Form 10-Q of Startech
Environmental Corporation;
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: September 15, 2003
/s/ Joseph S. Klimek
- -------------------------
Joseph S. Klimek
President and Chief Executive Officer
21
CERTIFICATIONS
Certification requirements set forth in Section 302(a) of the Sarbanes-Oxley
Act of 2002.
I, Robert DeRochie certify that:
1. I have reviewed this quarterly report on Form 10-Q of Startech
Environmental Corporation;
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
22
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: September 15, 2003
/s/ Robert L. DeRochie
- -------------------------
Robert L. DeRochie
Chief Financial Officer &
Vice President, Investor Relations
23