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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 JANUARY 31, 2004
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 [ ]
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 the Registrant's Common Stock is as
follows:
Title of each class Outstanding at March 12, 2004
------------------- -----------------------------
Common Stock - No Par Value 17,436,834
STARTECH ENVIRONMENTAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated balance sheets - January 31, 2004 3
(unaudited) and October 31, 2003
Consolidated statements of operations for the three 4
months ended January 31, 2004 and 2003 (unaudited)
Consolidated statements of cash flows for the three 5
months ended January 31, 2004 and 2003 (unaudited)
Notes to consolidated financial statements (unaudited) 6-12
Item 2. Management's Discussion and Analysis of Financial 13-17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market 18
Risk
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited) (audited)
January 31, October 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 2,197,110 $ 2,601,558
Accounts receivable .............................................. 52,680 0
Inventory ........................................................ 627,536 320,048
Prepaid expenses ................................................. 15,000 15,000
Other current assets ............................................. 12,026 2,773
------------ ------------
Total current assets .................................... 2,904,352 2,939,379
Property and equipment, net ...................................... 1,643,991 1,669,787
Other assets ..................................................... 276,420 276,420
------------ ------------
Total assets ............................................ $ 4,824,763 $ 4,885,586
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................. $ 150,140 $ 40,167
Capital lease - short-term ....................................... 13,412 15,994
Customer deposits ................................................ 1,665,000 1,040,000
Other accrued expenses ........................................... 256,842 396,872
------------ ------------
Total current liabilities ............................... 2,085,394 1,493,033
Long-term liability:
Capital lease payable net of current portion .................... 604 4,316
------------ ------------
Total liabilities ....................................... 2,085,998 1,497,349
------------ ------------
Stockholders' equity:
Preferred stock, no par value 10,000,000 shares authorized; Shares
issued and outstanding: 0 at January 31, 2004, 2,645 (aggregate
liquidation preference of $26,453) at October 31, 2003 ........... 0 26,453
Common stock, no par value, 800,000,000 shares authorized;
Shares issued and outstanding: 16,334,793 at January 31, 2004
and 16,134,122 at October 31, 2003 ............................... 19,780,474 19,536,077
Additional paid-in capital ....................................... 1,742,745 1,742,745
Accumulated deficit .............................................. (18,784,454) (17,917,038)
------------ ------------
Total stockholders' equity ....................................... 2,738,765 3,388,237
------------ ------------
Total liabilities and stockholders' equity .............. $ 4,824,763 $ 4,885,586
============ ============
See accompanying notes to consolidated financial statements.
3
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Three Months Ended
January 31, 2004 January 31, 2003
---------------- ----------------
Revenue ...................................... $ 43,380 $ 0
Cost of sales ................................ 26,500 83,306
----------- -----------
Gross profit(loss) ........................... 16,880 (83,306)
----------- -----------
Operating expenses
Selling expense ....................... 188,795 201,980
Research and development .............. 76,851 72,161
General and administrative expense .... 621,221 647,053
----------- -----------
Total operating expense ...................... 886,867 921,194
----------- -----------
Loss from operations ......................... (869,987) (1,004,500)
----------- -----------
Other income (expense):
Other income ................................. 0 (1,371)
Interest income .............................. 5,712 1,330
Gain on sale of asset ........................ 0 193
Interest expense ............................. (724) (2,346)
----------- -----------
Total other income ........................... 4,988 (2,194)
----------- -----------
Loss before income taxes ..................... (864,999) (1,006,694)
----------- -----------
Income tax expense ........................... 2,417 4,663
----------- -----------
Net loss ..................................... $ (867,416) $(1,011,357)
=========== ===========
Net loss per share............................... $ (0.05) $ (0.10)
=========== ===========
Weighted average common
shares outstanding............................... 16,172,164 10,477,453
=========== ===========
See accompanying notes to these consolidated financial statements.
4
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Ended Three Months Ended
January 31, 2004 January 31, 2003
---------------- ----------------
Cash flows from operating activities:
Net loss ................................................... $ (867,416) $(1,011,357)
Adjustments to reconcile net loss to net cash provided
By operating activities:
Depreciation ............................................... 50,245 48,758
401K plan match made by the issuance of shares ............. 8,644 20,572
Gain on sale of asset ...................................... 0 (193)
(Increase) decrease in accounts receivable ................. (52,680) 290,000
(Increase) decrease in inventory ........................... (307,488) (33,780)
(Increase) decrease in prepaid and other current assets .... (9,253) 4,730
(Increase) decrease in other assets ........................ 0 (5,544)
Increase (decrease) in accounts payable .................... 109,973 (80,880)
Increase (decrease) in customer deposits ................... 625,000 0
Increase (decrease) in accrued expense ..................... (140,030) 51,261
----------- -----------
Net cash used in operating activities ...................... (583,005) (716,433)
----------- -----------
Cash flows used in investing activities:
Capital expenditures ....................................... (24,449) (3,749)
Proceeds from sale of assets ............................... 0 5,593
----------- -----------
Net Cash used in investing activities ...................... (24,449) (1,844)
----------- -----------
Cash flows from financing activities:
Payment for capital leases ................................. (6,294) (12,027)
Proceeds from common stock issuance ........................ 209,300 561,499
----------- -----------
Net cash provided by financing activities .................. 203,006 549,472
----------- -----------
Net (decrease) in cash ..................................... (404,448) (165,117)
Cash and cash equivalents at beginning of period ........... 2,601,558 509,321
----------- -----------
Cash and cash equivalents at end of period ................. $ 2,197,110 $ 344,204
=========== ===========
Supplemental disclosure- Taxes Paid ........................ 2,417 4,663
=========== ===========
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 three months ended January 31, 2004 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 notes for the year ended October 31, 2003 which are
included in the Company's annual report on Form 10-K for the period ended
October 31, 2003.
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 $1,372 at interest rates
ranging from 9.25% to 19.1%. The equipment capitalized was $35,224 and is being
depreciated over five to fifteen years. Depreciation expense for the three
months ended January 31, 2004 was $2,709.
Note 2. Equity Transactions.
- ----------------------------
The following reconciles the number of shares of common stock outstanding to the
weighted average number of shares of common stock outstanding and the weighted
average number of common and dilutive potential shares of common stock
outstanding for the purposes of calculating basic and diluted earnings per
common share at January 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 not
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 JANUARY 31,
2004 2003
---- ----
Number of shares of common stock outstanding at
end of period.................................. 16.4 11.3
Effect of using weighted average of common stock
outstanding.................................... 0.2 0.9
Basic shares of common stock outstanding....... 16.2 10.4
Dilutive effect of common stock options and
warrants....................................... 2.9 0.0
Diluted shares of common stock outstanding..... 19.1 10.4
6
For the three months ended January 31, 2004 and January 31, 2003, the effect of
the Company's common stock options and warrants are excluded from the diluted
earnings per share calculation since the inclusion of such items would be
anti-dilutive.
At January 31, 2004, there were approximately 19.1 million shares of common
stock potentially issuable with respect to stock options and warrants, which
could dilute basic earnings per share in the future.
Stock Options
At January 31, 2004, we had two stock-based employee compensation plans, which
are described more fully in Note 6. We have adopted the disclosure provisions
allowed by Statement of Financial Accounting Standards ('SFAS') No. 148,
'Accounting for Stock-Based Compensation -- Transition and Disclosure -- An
Amendment of FASB Statement No. 123.' In addition, we have elected to continue
using the intrinsic value method to measure the compensation costs of
stock-based awards granted to employees in accordance with Accounting Principles
Board ('APB') Opinion No. 25, 'Accounting for Stock Issued to Employees'; as a
result, we recognize compensation expense for employee stock options granted at
a price less than the market value of our common stock on the date of grant. The
following table illustrates the effect on net loss and net loss per share had
stock-based employee compensation been recorded based on the fair value method
under SFAS No. 123.
2004 2003
----------- -----------
Net loss applicable to common stockholders
-- as reported $ (867,416) $(1,011,357)
Stock-based compensation - pro forma (9,204) (38,000)
Net loss applicable to common stockholders
-- pro forma $ (876,620) $(1,049,357)
Net loss per share applicable to common
stockholders (basic) -- as reported $ (.05) $ (.10)
Net loss per share applicable to common
stockholders (basic and) -- pro forma $ (.05) $ (.10)
Option valuation models require highly subjective assumptions, including the
expected stock price volatility, which may be significantly different from those
of traded options. Because changes in subjective assumptions can materially
affect the fair value estimate, it is our opinion that the existing models do
not necessarily provide a reliable single measure of the fair value of our
stock-based awards. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. The pro forma stock-based employee
compensation was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions for each year:
7
FOR THE QUARTER ENDED JANUARY
2004 2003
---- ----
Risk-free interest rate 4.00% 4.24%
Expected life of options - years 10.00 10.00
Expected stock price volatility 39% 76%
Expected dividend yield N/A N/A
In accordance with APB Opinion No. 25, we use the intrinsic value method to
measure the compensation costs of stock-based awards granted to employees as the
excess of the market value of our common stock on the date of grant over the
amount that must be paid to acquire our common stock. We record these
compensation costs over the vesting period of the stock-based award.
We account for stock-based awards granted to non-employees at fair value in
accordance with SFAS No. 123, 'Accounting for Stock-Based Compensation.' In
accordance with Financial Accounting Standards Board ('FASB') Interpretation No.
44, 'Accounting for Certain Transactions Involving Stock Compensation,' we
record compensation charges or benefits related to re-priced stock options based
on the market value of our common stock until the re-priced stock options are
exercised, forfeited or expire. At this time no options have been repriced.
Note 3. Cash Flow
- -----------------
During the three months ended January 31, 2004 and 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.
Three months ended: January 31, 2004 January 31, 2003
- ------------------- ---------------- ----------------
Series A convertible preferred converted to
common stock $26,453 $221,160
401k plan match 8,644 25,187
Property & Equipment acquired under capital
lease 0 3,612
Note 4. Interim Financial Information (Unaudited).
- --------------------------------------------------
The interim financial statements of the Company for the three months ended
January 31, 2004 and 2003, included herein, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities Exchange
Commission (`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.
8
Note 6. Employee Benefits Plan.
- -------------------------------
Contributions for the three months ended January 31, 2004 were $8,644, which
represents the issuance of approximately 3,905 shares of our common stock.
Note 7. Stockholders Equity
- ---------------------------
Common Stock
We completed a private placement on December 19, 2003, in which we raised
$200,000 through the issuance of 173,913 shares of our unregistered common stock
at $1.15 per share, or a 25% percent discount to average closing price of the
common stock for the thirty consecutive trading days immediately preceding
December 19, 2003. We did not pay any commissions or issue any warrants in
connection to this offering.
Additionally, on February 20, 2004, we completed a private placement of our
common stock and warrants. We received aggregate proceeds of approximately
$2,391,000. Each share of common stock was issued at a price per share of $2.26,
or a 25% percent discount to average closing price of the common stock for the
thirty consecutive trading days immediately preceding January 22, 2004, the date
on which the Company started receiving subscriptions for its common stock. In
addition, for each share of common stock purchased, an investor received a
warrant to purchase one-third of a whole share of common stock at an exercise
price of $4.89, a warrant to purchase one-third of a whole share of common stock
at an exercise price of $5.89 and a warrant to purchase one-third of a whole
share of common stock at an exercise price of $6.89. The proceeds from the
private placement will be used for general corporate purposes.
Preferred Stock
In 1999, the Company issued 696,978 shares of its 8% Series A cumulative,
convertible, redeemable, preferred stock. Shares of our common stock outstanding
as of January 31, 2004 include the remaining shares of preferred stock
converted. During the quarter ended January 31, 2004, 2,645 preferred shares
were converted into shares of common stock. Currently there are no shares of
preferred stock outstanding.
Warrants
In connection with the private placement dated February 20, 2004 we issued
1,058,168 warrants. The warrants were priced in three traunches; 352,723 of the
warrants granted has an exercise price of $4.89 per share, 352,723 of the
warrants granted has an exercise price of $5.89 per share, and the final 352,722
has an exercise price of $6.89 per share. These warrants will expire on February
20, 2007.
In connection with the private placement dated January 2003, 882,353 warrants to
purchase shares of common stock at a price of $1.80 per share. These warrants
are schedule to expire in January 2006 provided the common stock is trading at
$1.80 per share at this time. If the stock is trading below $1.80 per share on
the expiration date, the Company has agreed to extend the exercise period for up
to two consecutive years. There were no warrants issued related to the other
private placements transacted in 2003.
9
In connection with the private placement in 2002; the Company issued one common
stock warrant for each share of common stock purchased, exercisable at a price
equal to 120% of the market price of the common stock based on the average
closing price per share for the ten (10) trading days immediately preceding
March 25, 2002. Accordingly, the exercise price per share is $3.34 and will
expire on March 25, 2005. The warrants are callable anytime at the discretion of
the Company twelve months after an effective registration statement, and after
the average closing bid prices exceeds in excess of a 150% gain over the
exercise price for 10 consecutive trading days.
In connection with the issuance of the series A preferred stock in 2000, the
Company issued warrants to purchase 396,464 shares of common stock at an
exercise price of $15.00 per share. These warrants were set to expire on August
1, 2002 however the price of the stock did not exceed $15.00 per share and the
expiration date was extended to August 31, 2004.
1995 Stock Option Plan
In November 1995, the Company registered 2,000,000 shares of common stock,
issuable upon exercise of stock options issued by the Company under its 1995
Non-qualifying Stock Option Plan (the 1995 Plan) for employees, directors and
other persons associated with the Company whose services have benefited the
Company. The options must be issued within 10 years from November 20,1995.
Determination of the option price per share and exercise date is at the sole
discretion of the Compensation Committee. During the years ended October 31,
2003, 2002, and 2001, the Company issued 0, 10,000 and 297,500 stock options
under the 1995 Plan, respectively. The options have an exercise price of $3.38
and $5.63 per share, respectively. On the issuance dates, the market value was
the same as the exercise price, therefore, no compensation expense was recorded.
As of January 31, 2004, 8,089 options have not been granted under the 1995 Plan.
Options outstanding - 1995 Plan
Options outstanding, October 31, 2000 900,000
Options granted in 2001 297,500
---------
Options outstanding, October 31, 2001 1,197,500
=========
Options granted in 2002 10,000
---------
Options outstanding October 31, 2003 & January 31, 2004 1,207,500
=========
2000 Stock Option Plan
Our 2000 Stock Option Plan (the "2000 Plan") was adopted by our board of
directors in January 2000 and was approved by our stockholders in February 2000.
The 2000 Plan authorizes the issuance of up to 1,000,000 shares of our common
stock. During the quarter ended January 31, 2004, 23,332 options have been
granted under the 2000 Plan at an average exercise price of $3.02 per share, and
10,000 options were exercised during the three months ended January 31, 2004. A
total of 370,332 options under the 2000 Plan have been granted at an average
exercise price of $4.99 per share. On the issuance dates, the market value was
the same as the exercise price, therefore, no compensation expense was recorded.
As of January 31, 2004, 629,668 options are available to be granted under the
2000 Plan.
10
Options outstanding - 2000 Plan
Options outstanding, October 31, 2000 0
Options granted in 2002 277,000
Options cancelled in 2002 0
--------
Options outstanding, October 31, 2002 277,000
========
Options granted in 2003 100,000
Options exercised in 2003 0
--------
Options cancelled in 2003 (20,000)
========
Options outstanding October 31, 2003 357,000
========
Options exercised in 2004 (10,000)
--------
Options granted in 2004 23,332
--------
Options cancelled in 2004 0
========
Options outstanding January 31, 2004 370,332
========
The 2000 Plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code and non-statutory stock
options. Our officers, directors, employees and consultants, and employees and
consultants of our majority-owned affiliated companies, are eligible to receive
awards under the 2000 Plan.
The options may be granted at an exercise price greater than or equal to the
fair market value of our common stock on the date of grant or not less than 110%
of the fair market value in the case of incentive stock options granted to
persons holding more than 10% of the voting power of the Company. Fair market
value for purposes of the 2000 Plan is the closing market price of our common
stock on the relevant date.
2000 Compensation Plan
The Company established the 2000 Stock Compensation Plan (the "2000 Comp Plan")
which replaced the 1995 Stock Compensation Plan.
The 2000 Comp Plan authorizes awards of the following type of equity-based
compensation: incentive stock options, nonqualified stock options, stock
appreciation rights, restricted stock, deferred stock, annual grants of stock
options to directors, stock options to directors in lieu of compensation for
services rendered as directors, and other stock-based awards valued in whole or
in part by reference to stock of the Company. No incentive stock options may be
granted on or after February 1, 2010, nor shall such options remain valid beyond
ten years following the date of grant.
The total number of shares of common stock reserved and available for
distribution under the 2000 Comp Plan originally was 1,000,000 shares, a maximum
of 1,000,000 of which may be issued as incentive stock options.
At January 31, 2004, there were 637,757 shares of common stock reserved for
issuance upon the exercise of outstanding options under all plans and 629,668
shares available for grant of options under the 2000 Comp Plan.
In the first quarter of 2004, we granted 23,332 options, respectively, to its
directors and one executive officer. These options were granted under the 2000
Comp Plan. Fifty percent of these options vest at the time of the grant and the
other 50% vest six months after date of grant and expire not more than ten years
from date of grant.
11
The 2000 Comp Plan is administered by our compensation committee. The
compensation committee has the authority to adopt, amend and repeal the
administrative rules, guidelines and practices relating to the 2000 Comp Plan
and to interpret its provisions. The committee selects the recipients of awards
and determines the number of shares of common stock covered by the options and
the dates upon which the options become exercisable and terminate, subject to
provisions of the plan. Incentive stock options must terminate within ten years
of the grant. Non-statutory options must terminate within fifteen years of the
date of grant. The committee has the right to alter the terms of any option when
granted or while outstanding, pursuant to the terms of the plan, except the
option price.
All options automatically become excisable in full in the event of a change in
control, as defined in the 2000 Comp Plan, death or disability of the option
holder or as decided by the compensation committee. Upon retirement, options
held for at least one year prior thereto become exercisable in full. If an
option holder's employment with us is terminated for any reason, except upon
death, disability or retirement, the option holder has three months in which to
exercise an option, but only to the extent exercisable immediately after
termination, unless the option by its terms expires earlier. Termination or
other changes in employment status may affect the exercise period.
Note 8. Private Placement
- -------------------------
We completed a private placement on December 19, 2003, in which we raised
$200,000 through the issuance of 173,913 shares of our unregistered common stock
at $1.15 per share, or a 25% percent discount to average closing price of the
common stock for the thirty consecutive trading days immediately preceding
December 19, 2003. We did not pay any commissions or issue any warrants in
connection to this offering.
Additionally, on February 20, 2004, we completed a private placement of our
common stock and warrants. We received aggregate proceeds of approximately
$2,391,000. Each share of common stock was issued at a price per share of $2.26,
or a 25% percent discount to average closing price of the common stock for the
thirty consecutive trading days immediately preceding January 22, 2004, the date
on which the Company started receiving subscriptions for its common stock. In
addition, for each share of common stock purchased, an investor received a
warrant to purchase one-third of a whole share of common stock at an exercise
price of $4.89, a warrant to purchase one-third of a whole share of common stock
at an exercise price of $5.89 and a warrant to purchase one-third of a whole
share of common stock at an exercise price of $6.89. The proceeds from the
private placement will be used for general corporate purposes.
12
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 educating the marketplace on 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 brought
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 effort 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.
13
Recent Developments
- -------------------
The Mihama Plasma Converter in Japan
The Company has successfully completed the upgrades and modifications of the 5
ton-per-day Plasma Converter(TM) for Mihama Inc in Japan. The performance of the
modified system was successfully demonstrated in continuous processing
operations throughout February and Mihama has signed the Certificate of
Completion.
Mr. Hama, President of Mihama said, "We are absolutely delighted with the
performance of the system and it will support our aggressive sales and marketing
campaign in Japan and other Asian countries. The market for Startech systems is
great."
The $1,250,000 million Mihama contract completed the modification of the Plasma
Converter that was formerly owned and operated by the Eico Systems Corporation.
That system, now owned by Mihama, is now being prepared to be moved to Mihama's
new facility near Kobe, Japan where it will be used to safely and irreversibly
destroy PCBs (polychlorinated byphenyls) commercially. As the Company's Japan
distributor, Mihama will also use the system to support its Startech sales and
marketing operations and be able to demonstrate a Plasma Converter System in a
commercial operation to its customers.
$34 Million Contract in Italy
On February 17, 2004, the Company announced that it had signed a $34,300,000
contract for the delivery and startup of two 50 ton-per-day Plasma Converter
Systems with FP Immobiliare srl to process electronic waste (e-waste) and
specialty waste in a new FP Immobiliare facility in Frosinone, a city about 50
miles from Rome.
E-waste is the name given to outdated and discarded electronic waste such as
computers, printers, cell phones, monitors, copiers, fax machines and other
electronic and electrical devices. A Waste Age magazine article said, "The EU
(European Union) estimates that e-waste accounts for 6 million tons of garbage
across Europe..."
The Customer will be employing lease financing for this program. Upon the
successful completion of the lease-financing arrangements between the Customer
and the Leasing Company, Startech will receive the first of its scheduled
payments and manufacturing will then commence immediately. The 50 TPD systems
will be built in the Company's 30,000 square foot Broad Street manufacturing
facility in Bristol, Connecticut with the shipment of the first system scheduled
for 11 months after commencement of manufacturing.
Poland
Financing of the projects continues to be the immediate focus and is well
underway. All projects are being considered under the leasing program previously
announced.
14
Rhode Island
The organization has been formed to manage the 50 TPD Plasma Converter System
destined for this prime location. Significant state and local cooperation has
been assured and the formal processing of applications is proceeding. All
interested parties have witnessed the required demonstrations and have indicated
their acceptance.
Vitech
Site selection has been underway during the past few months and has been
resolved down to specific locations in New Jersey, Texas, Rhode Island in
addition to South Carolina. Financing has been assured and the project will
proceed upon final site documentation and state approval.
South Africa
All site approvals have been received and the contract negotiations are
proceeding to establish all project responsibilities. Final phase financing is
expected to close shortly and this projects will place (2) 25 TPD Plasma
Converter Systems in place within 12 months of the closing. The facility
selected has the ability for significant growth potential. The financial
institutions involved have provided assurance for closure upon receipt of all
project documentation and contracts.
Schwartz Communications
Schwartz Communications, the Company's Public Relations firm has been
instrumental in having the following business and trade media outlets publish
original stories about Startech between December 2003 and March 3, 2004:
American Recycler
Chemical Engineering
Chemical Engineering Progress
Chemical Processing
Connecticut Business Times
Connecticut Post
Environmental Data Interactive Exchange
Fairfield County Business Journal
Forbes.com
Fox Channel 61- Hartford (3 minute news piece)
Hartford Courant
Mass High Tech (3)
Newsweek
PowerPulse.net
Reuters
Technology Review
Tide Pool
USA Today Tech
Waste News (20)
Waterbury Republican
15
Results of Operations
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Comparison of three months ended January 31, 2004 and 2003
Revenues. Total revenues were $43,380 for the three months ended January 31,
2004, as compared to $0 for the same period in 2003. The increase is related to
the materials delivered as required for the Mihama project in Japan.
Gross Profit. Gross profit was $16,880 for the three months ended January 31,
2004 compared to a gross loss of $83,306 in the same period in 2003, or an
increase of $100,186 from the same period in 2003. Gross margins were favorably
impacted as a result of the shipment of the goods to Mihama versus the
unanticipated additional installation and start up costs related to the Eico
Systems Corp. project in 2003.
General and Administrative Expenses. General and administrative expenses for the
three months ended January 31, 2004 were $621,221, compared to $647,053 for the
same period in 2003, a decrease of $25,832 or 4.0%, from the same period in
2003. This decrease was 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 January 31, 2004 were $76,851, an increase $4,690 or 6.5%,
from the same period in 2003. This increase was related to the continued efforts
to improve our product with particular emphasis on enhancing the performance of
our gas polisher.
Selling Expenses. Selling expenses for the three months ended January 31, 2004
were $188,795 a decrease of $13,185, or 6.5%, for the same period in 2003.
Selling expenses decreased as a result of renewed focus on specific customer
target market areas and consolidating our marketing approach.
Interest Income. Interest income for the three months ended January 31, 2004 was
$5,712, compared to $1,330 in the same period in 2003, an increase of 329.5%.
The increase is due to higher average cash balances, offset by lower interest
rates earned on our investments as a result of the Federal Reserve's lowering of
short-term interest rates.
Income Taxes. During the three months ended January 31, 2004, corporate income
taxes were $2,417, as compared to $4,663 in the same period 2003. We have
minimal tax obligations due to the fact that we have not yet been profitable.
These taxes represent the state tax on capital.
16
Liquidity and Capital Resources
- -------------------------------
This liquidity section 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 of sources of capital
or which express the Company's expectation 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 of 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.
As of January 31, 2004, we had cash and cash equivalents of $2,197,110 and
working capital of $818,958. During the three months ended January 31, 2004, our
cash decreased by $404,448. The decrease in cash resulted primarily from
obligations related to project costs in progress as well as normal operating
costs of the Company. We expect that these project costs along with the
associated revenues will be recognized in the second quarter of 2004.
Accounts receivable was $52,680 at January 31, 2004, an increase of that same
amount at the end of the fourth quarter of fiscal 2003. The increase in accounts
receivable is primarily attributable to outstanding invoices related to the
Mihama project.
We believe the private placement that closed on February 20, 2004, in which the
company raised approximately $2,390,000 together with the $200,000 private
placement completed during the first quarter 2004 provide the company with
enough operating capital to sustain operations at current levels for more than
one year. It must be noted, however, that if progress payments are not received
in a timely manner or additional sales of the Plasma Converter Systems or
additional sources of financing are not available, we may have to significantly
cut expenses to maintain our operations.
The Company has historically satisfied its capital needs primarily by the sale
of equity securities. We are currently in discussions with several funding
sources to raise additional capital through the issuance of additional equity
securities. However, there is no assurance that this financing will be available
when needed or that management will be able to obtain this or any additional
financing on terms acceptable to the Company. As stated, we believe these
financing needs will be satisfied but there can be no assurance this will be the
case.
Our investing activities have consisted primarily of short-term, high quality
liquid investments, with maturities of 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 three months of fiscal year 2004 and
2003. No realized gains or losses were recorded during the three months ended
January 31, 2004 or 2003.
17
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.
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, 2003. Based upon their evaluation, the principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and procedures are effective.
18
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 December 19, 2003 we completed a sole source private placement in which we
raised $200,000 through the issuance of 173,913 shares of our common stock at
$1.15 per share or a 25% percent discount to average closing price of the common
stock for the thirty consecutive trading days immediately preceding December 19,
2003. The private placement did not pay any commissions and no warrants were
attached to this offering. In addition, we received $9,300 in proceeds from
options being exercised during the quarter ended 2004. The securities were
issued by the Company with the exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended.
Additionally, on February 20, 2004, we completed a private placement of our
common stock and warrants and received aggregate proceeds of approximately
$2,391,000. Each share of common stock was issued at a price per share of $2.26,
or a 25% percent discount to average closing price of the common stock for the
thirty consecutive trading days immediately preceding January 22, 2004, the date
on which the Company started receiving subscriptions for its common stock and
warrants. In addition, for each share of common stock purchased, an investor
received a warrant to purchase one-third of a whole share of common stock at an
exercise price of $4.89, a warrant to purchase one-third of a whole share of
common stock at an exercise price of $5.89 and a warrant to purchase one-third
of a whole share of common stock at an exercise price of $6.89. The proceeds
from the private placement will be used for general corporate purposes. The
securities were issued by the Company with the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
19
ITEM 5. Other Information None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are attached to this report or are
incorporated by reference herein.
Exhibit Item
- ------- ----
31.1 Certificate of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 *
31.2 Certificate of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 *
32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 *
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 *
- ----------
* Filed herewith
(b) Reports on Form 8-K:
Date Description Item, Reported
---- ----------- -------------
November 23, 2003 Northshore Extension 5
20
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
March 2004.
STARTECH ENVIRONMENTAL CORPORATION
(Registrant)
BY: /S/ Joseph S. Klimek
------------------------
Joseph S. Klimek
CEO & President
BY: /S/ Peter J. Scanlon
------------------------
Chief Financial Officer,
Vice President
(Principal Financial Officer)
21