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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, 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 September 14, 2004
------------------- ---------------------------------
Common Stock - No Par Value 17,540,698
STARTECH ENVIRONMENTAL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated balance sheets - July 31, 2004 (unaudited) 3
and October 31, 2003
Consolidated statements of operations for the three and 4
nine months ended July 31, 2004 and 2003 (unaudited)
Consolidated statements of cash flows for the nine months 5
ended July 31, 2004 and 2003 (unaudited)
Notes to consolidated financial statements (unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial Condition 12-18
and Results of Operations
Item 3. Quantitative and Qualitative Disclosure about Market Risk 18
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 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited) (audited)
July 31, October 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 2,948,615 $ 2,601,558
Inventory .............................................................. 336,533 320,048
Prepaid expenses ....................................................... 15,000 15,000
Other current assets ................................................... 6,690 2,773
------------ ------------
Total current assets .......................................... 3,306,838 2,939,379
Property and equipment, net ............................................ 1,646,489 1,669,787
Other assets ........................................................... 276,420 276,420
------------ ------------
Total assets .................................................. $ 5,229,747 $ 4,885,586
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................................... $ 57,745 $ 40,167
Capital lease - short-term ............................................. 6,081 15,994
Customer deposits ...................................................... 351,409 1,040,000
Other accrued expenses ................................................. 358,128 396,872
------------ ------------
Total current liabilities ..................................... 773,363 1,493,033
Long-term liability:
Capital lease payable net of current portion ........................... 595 4,316
------------ ------------
Total liabilities ............................................. 773,958 1,497,349
------------ ------------
Stockholders' equity:
Preferred stock, no par value 10,000,000 shares authorized; Shares
issued and outstanding: 0 at July 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: 17,540,698 at July 31, 2004
and 16,134,122 at October 31, 2003 ..................................... 22,399,518 19,536,077
Additional paid-in capital ............................................. 1,742,745 1,742,745
Accumulated deficit .................................................... (19,686,474) (17,917,038)
------------ ------------
Total stockholders' equity ............................................. 4,455,789 3,388,237
------------ ------------
Total liabilities and stockholders' equity .................... $ 5,229,747 $ 4,885,586
============ ============
See accompanying notes to consolidated financial statements.
3
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
July 31, 2004 July 31, 2003 July 31, 2004 July 31, 2003
------------- ------------- ------------- -------------
Revenue ............................................ $ 68,576 $ 70,000 $ 1,629,196 $ 70,000
Cost of sales ...................................... 31,250 31,530 604,506 113,537
------------ ------------ ------------ ------------
Gross profit(loss) ................................. 37,326 38,470 1,024,690 (43,537)
------------ ------------ ------------ ------------
Operating expenses
Selling expense ............................. 234,070 171,791 673,703 574,428
Research and development .................... 82,372 78,133 241,838 223,279
General and administrative expense .......... 736,062 675,469 1,893,285 1,604,347
------------ ------------ ------------ ------------
Total operating expense ............................ 1,052,504 925,393 2,808,826 2,402,054
------------ ------------ ------------ ------------
Loss from operations ............................... (1,015,178) (886,923) (1,784,136) (2,445,591)
------------ ------------ ------------ ------------
Other income (expense):
Other income ....................................... 0 0 0 (1,371)
Interest income .................................... 8,077 929 22,599 2,603
Gain on sale of asset .............................. 0 0 0 193
------------ ------------ ------------ ------------
Interest expense ................................... (309) (1,538) (1,486) (5,888)
------------ ------------ ------------ ------------
Total other income ................................. 7,768 (609) 21,113 (4,463)
------------ ------------ ------------ ------------
Loss before income taxes ........................... (1,007,410) (887,532) (1,763,023) (2,450,054)
------------ ------------ ------------ ------------
Income tax expense ................................. 3,633 (259) 6,411 6,171
------------ ------------ ------------ ------------
Net loss ........................................... $ (1,011,043) $ (887,273) $ (1,769,434) $ (2,456,225)
============ ============ ============ ============
Net loss per share ................................. $ (0.06) $ (0.07) $ (0.11) $ (0.22)
============ ============ ============ ============
Weighted average common
shares outstanding ................................. 17,505,736 12,214,438 16,710,763 11,094,752
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
STARTECH ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended Nine Months Ended
July 31, 2004 July 31, 2003
------------- -------------
Cash flows from operating activities:
Net loss .............................................. $(1,769,434) $(2,456,225)
Adjustments to reconcile net loss to net cash provided
By operating activities:
Depreciation .......................................... 155,846 146,953
Common stock issued for services ...................... 42,000 0
401K plan match made by the issuance of shares ........ 43,416 54,974
Gain on sale of asset ................................. 0 (193)
(Increase) decrease in accounts receivable ............ 0 276,000
(Increase) decrease in inventory ...................... (16,485) (70,122)
(Increase) decrease in prepaid and other current assets (3,917) 4,213
(Increase) decrease in other assets ................... 0 27,664
Increase (decrease) in accounts payable ............... 17,578 (115,006)
Increase (decrease) in customer deposits .............. (688,591) 670,000
Increase (decrease) in accrued expense ................ (38,744) 1,377
----------- -----------
Net cash used in operating activities ................. (2,258,331) (1,515,693)
----------- -----------
Cash flows used in investing activities:
Capital expenditures .................................. (132,548) (26,203)
Proceeds from sale of assets .......................... 0 5,593
----------- -----------
Net Cash used in investing activities ................. (132,548) (20,610)
----------- -----------
Cash flows from financing activities:
Payment for capital leases ............................ (13,634) (34,355)
Proceeds from common stock issuance ................... 2,751,570 3,846,286
----------- -----------
Net cash provided by financing activities ............. 2,737,936 3,811,931
----------- -----------
Net increase (decrease) in cash ....................... 347,057 2,275,628
Cash and cash equivalents at beginning of period ...... 2,601,558 509,321
----------- -----------
Cash and cash equivalents at end of period ............ $ 2,948,615 $ 2,784,949
=========== ===========
Supplemental disclosure- Taxes Paid ................... 6,411 6,171
=========== ===========
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 July 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 19.14%. The equipment capitalized was $35,224 and is being
depreciated over five to fifteen years. Depreciation expense for the nine months
ended July 31, 2004 was $6,323.
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 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 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 NINE MONTHS ENDED
JULY 31, JULY 31,
2004 2003 2004 2003
---- ---- ---- ----
Number of shares of common stock
outstanding at end of period............... 17.5 15.6 17.5 15.6
Effect of using weighted average
of common stock outstanding................ (0.0) 3.4 (.8) 4.5
Basic shares of common stock outstanding... 17.5 12.2 16.7 11.1
Dilutive effect of common stock options
and warrants............................... .9 (0.5) .9 .6
---- ---- ---- ----
Diluted shares of common stock outstanding 18.4 11.7 17.6 11.7
6
For the nine months ended July 31, 2004 and July 31, 2003, the effect of the
Company's common stock options and warrants are not included for the diluted
earnings per share calculation since the inclusion of such items would be
anti-dilutive.
At July 31, 2004, there were approximately 18.4 million shares of common stock
and potentially issuable with respect to stock options and warrants, which could
dilute basic earnings per share in the future.
Stock Options
At July 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.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
July 31, 2004 July 31, 2003 July 31, 2004 July 31, 2003
------------- ------------- ------------- -------------
Net loss applicable to common stockholders ... $(1,011,043) $ (887,273) (1,769,434) $(2,456,225)
Stock-based compensation pro forma ........... (397,238) (43,100) (437,642) (81,100)
Net loss applicable to common stockholders pro
forma ........................................ (1,408,281) (930,373) (2,207,076) (2,537,325)
----------- ----------- ----------- -----------
Net profit/(loss) per share applicable to
common stockholders basic .................... $ (.06) $ (.05) $ (.11) $ (.22)
----------- ----------- ----------- -----------
Net profit/(loss) per share applicable to
common stockholders (basic and) pro forma ... $ (.08) $ (.08) $ (.13) $ (.23)
----------- ----------- ----------- -----------
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 JULY 31,
2004 2003
---- ----
Risk-free interest rate 4.60% 4.00%
Expected life of options - years 10.00 10.00
Expected stock price volatility 123% 80%
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 nine months ended July 31, 2004 and 2003, the Company had non-cash
transactions. The following is a listing of these transactions and the dollar
value of these transactions.
Nine months ended: July 31, 2004 July 31, 2003
- ------------------- ------------- -------------
Stock issued for subscription receivable $ 0 $150,000
401k plan match 43,416 54,974
Property & Equipment acquired under capital lease 0 3,612
Common Stock issued for services 42,000 0
Series A convertible preferred shares converted
to common shares 26,453 330,100
Note 4. Interim Financial Information (Unaudited).
- --------------------------------------------------
The interim financial statements of the Company for the three and nine months
ended July 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. For distributorship agreements
revenue is recognized for services and training upon completion and the
distribution rights are amortized over the expected life of the agreement.
8
Note 6. Employee Benefits Plan.
- -------------------------------
Contributions for the three months ended July 31, 2004 were $19,071, which
represents the issuance of approximately 4,384 shares of our common stock.
Contributions for the nine months ended July 31, 2004 were $49,731, which
represents the issuance of approximately 11,623 shares of our common stock.
Note 7. Stockholders Equity.
- ----------------------------
Common Stock
For the three months ended July 31, 2004, 72,000 options were exercised, for a
gross proceeds of $146,160. For the nine months ended July 31, 2004, 137,000
options were exercised, for a gross proceeds of $245,110.
Stock Options
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 July 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 & July 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 July 31, 2004, 96,668 options have been granted
under the 2000 Plan at an average exercise price of $4.20 per share, and 72,000
options were exercised during the three months ended July 31, 2004 at an average
9
exercise price of $2.03 per share. During the nine months ended July 31, 2004
130,000 options were granted at an average price of 3.98 per share and 137,000
options were exercised at an average exercise price of $1.79 per share and. A
total of 507,000 options under the 2000 Plan have been granted at an average
exercise price of $3.55 per share. On the issuance dates, the market value was
the same as the exercise price; therefore, no compensation expense was recorded.
As of July 31, 2004, 493,000 options are available to be granted under the 2000
Plan.
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 (137,000)
--------
Options granted in 2004 130,000
--------
Options cancelled in 2004 0
========
Options outstanding July 31, 2004 350,000
========
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 which replaced the 1995
Stock Compensation Plan.
The 2000 Compensation 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 Compensation Plan originally was 1,000,000 shares
which may be issued as incentive stock options.
At July 31, 2004, there were 501,089 shares of common stock reserved for
issuance upon the exercise of outstanding options under all plans and 493,000
shares available for grant of options under the 2000 Compensation Plan.
10
For the nine months ended July 31, 2004 we granted 130,000 options,
respectively, to its directors and one executive officer. These options were
granted under the 2000 Compensation 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.
The 2000 Compensation 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 Compensation
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 Compensation 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.
11
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
Startech is an environmental technology company commercializing its proprietary
plasma processing technology known as the Plasma Converter(TM) that achieves
closed-loop elemental recycling that irreversibly destroys hazardous and
non-hazardous waste and industrial by-products while converting them into useful
commercial products. These products include a rich synthesis gas called PCG
(Plasma Converted Gas)(TM) surplus energy for power, hydrogen, metals and
silicates for use and for sale.
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.
The Company's activities during the four fiscal years, November 1, 1992 to
October 31, 1995 consisted primarily of the research and development of the
Plasma Converter. On November 17, 1995, a company known as Kapalua Acquisitions,
Inc., completed the acquisition of all of the issued and outstanding shares of
the common stock of Startech Corporation, a Connecticut corporation, and then
changed its name to Startech Environmental Corp.
On November 18, 1995, the Board of Directors of the Company unanimously approved
a change of the business purpose of Kapalua Acquisitions Inc. from one seeking
an acquisition candidate to one engaged in the business of manufacturing and
selling the Plasma Converter system to recover, recycle, reduce and remediate
hazardous and nonhazardous waste materials. From that time to the date of this
filing, the Company has maintained this as its principal focus.
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
12
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, 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.
Background
Startech is an environmental technology corporation that manufactures, markets
and sells a recycling system called the Plasma Converter for the global
marketplace. Until January 2002, we were solely engaged in the manufacture and
sale of equipment for use by others. Thereafter, we have attempted to broaden
the scope of our available revenue opportunities. This change was brought about
by management's decision to expand its market penetration strategies and
opportunities. Rather than only market and sell our products for use by others,
we are now seeking opportunities to become directly involved in the operation
and use of our products. We reconsidered our stated philosophy of not engaging
in the processing of feedstock materials and/or waste and decided that it was
timely to seek out and include all possible market penetration strategies,
including build own operate, build own transfer of ownership, and joint
development projects.
By concentrating on re-positioning our company for long-term growth, we have not
achieved the sales goals we had anticipated would occur in the 2003 fiscal year.
We believe this new way of approaching the market over time will help achieve
maximum penetration in the shortest timeframe.
We believe significant events are driving demand for our Plasma Converter. They
include:
Increases in waste, and in particular hazardous wastes, due to rising
consumer/industrial consumption and population growth in most nations.
Current waste disposal and remediation techniques such as landfills and
incineration are becoming regulatory, socially and environmentally unacceptable.
A need for critical resources such as power and water to sustain local
economies.
The emphasis being placed upon the production of distributed power and the need
to provide alternatives to fossil fuels.
13
Our core plasma technology addresses these waste and resource issues by offering
remediation solutions that are integrated with a range of equipment solutions
and services. We believe these products will add value to our customers'
business' so they can now realize revenue streams from disposal or processing
fees, a reduction in material disposal costs, as well as from the sale of
resulting commodity products and services. Alternatively, this will allow them
to generate a valuable product while at the same time using a zero cost basis,
or revenue generating source of raw material (waste). The costs of hazardous
waste treatment and disposal methods continue to rise, and now range from
approximately $900 to more than $2,000 per ton. This does not include the
additional processing, handling, packaging, insurance and management costs
sustained by the hazardous waste generator within its facility prior to final
disposal.
Our business model and its market development strategies arise from our mission,
which is to change the way the world views and employs discarded materials; what
many would now call waste we view as a feedstock. We expect to achieve this
objective by strategically marketing a series of products and services emanating
from the core Plasma Converter (TM) technology, resulting in saleable fossil
fuel alternatives while providing a safer and healthier environment. This
strategy will be implemented through Plasma Converter sales with after sales
support and service, build own operate/build own transfer of ownership
facilities, joint development projects and engineering services.
Recent Developments
The Mihama Plasma Converter(TM) in Japan
The system, now owned by Mihama, has been moved and reassembled at Mihama's new
facility near Kobe, Japan where it will be used to safely and irreversibly
destroy PCBs (polychlorinated byphenyls) commercially. Currently Mihama is
constructing a new showroom and demonstration facility to house and operate the
Plasma Converter(TM). Mihama is a Startech distributor for the territory of
Japan and 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.
The Customer will be employing lease financing for this program. FP Immobiliare
has been in discussions with leasing companies on securing the financing for the
project. These activities have taken longer than expected, however FP
Immobiliare remains confident that the funding will be completed. 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. The customer has asked that a
20 TPD system be inserted in the contract and those contractual arrangements are
in process now.
14
Poland
Considerable progress has been made on the financing arrangements for these
three projects over the past two months. Each of the contracts intends to
complete the financing by way of the leasing program. The company continues to
regard these contracts as viable.
Rhode Island
A private waste processing entity has been formed to buy and manage the 50 TPD
Plasma Converter System for a prime location. Significant state and local
cooperation has been assured and the formal processing of permits is underway.
There has been significant state and local cooperation supporting the facility
and its operation.
Vitech
Site selection has been underway during the past few months and has been
expanded to specific locations in New Jersey, Texas, and North Carolina, as well
as, South Carolina. Financing has been assured and the project will proceed upon
final 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 project 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. Final contract stipulations are currently
in progress.
DOE Contracts
Performance demonstration preparations and equipment acquisition has been
initiated. Performance demonstrations are scheduled during the last quarter of
the calendar year. Performance demonstrations have to do with the production of
hydrogen from waste processed through the Startech Plasma Converter System
located in Bristol, Connecticut.
New Polish Contracts
Two $140 million dollar contracts have been signed with Eco Group of America,
Inc. of Princeton, New Jersey to provide 300 tons per day of processing at each
of two identified sites. Financing activity has been initiated. These turnkey
projects will process principally municipal solid waste with additional
processing lines for tires, medical waste and various hazardous wastes. These
facilities will be located in Karlino and Skierbreszow, Poland.
New Distributorship Agreement
Plastech Solutions , Ltd. of New South Wales, Australia has been announced as
the exclusive distributor for the territories of Australia and New Zealand. The
Company has received a $250,000 irrevocable payment from Plastech for the
distributorship.
15
Results of Operations
- ---------------------
Comparison of three months ended July 31, 2004 and 2003
Revenues. Total revenues were $68,576 for the three months ended July 31, 2004,
as compared to $70,000 for the same period in 2003, a decrease of $1,424. For
the three month ending July 31, 2004 a portion of the distributorship agreement
was allowed to be recognized as revenue. This distributorship agreement for
Australia and New Zealand was signed with Plasteck Solutions Limited, who is
located in Australia. The revenue for the three months ending July 31, 2003 was
related to spare parts that were shipped to Mihama, located in Japan.
Gross Profit. Gross profit was $37,326 for the three months ended July 31, 2004
compared to a gross profit of $38,470 in the same period in 2003, or a decrease
of $1,144 from the same period in 2003 or 2.9%. Gross margins were directly
impacted due to the signing of the distributorship agreement with Plasteck
Solutions Limited.
Selling Expenses. Selling expenses for the three months ended July 31, 2004 were
$234,070 a increase of $62,279, or 36.3%, for the same period in 2003. Selling
expenses increased as a result of the hiring of additional personnel, higher
outside sales consultant expenses and increased customer activities.
Research and Development Expenses. Research and development expenses for the
three months ended July 31, 2004 were $82,372, an increase $4,239 or 5.4%, for
the same period in 2003. This increase was related to preparing for our test
programs related to the Department of Energy and other strategic projects.
General and Administrative Expenses. General and administrative expenses for the
three months ended July 31, 2004 were $736,062, compared to $675, 469 for the
same period in 2003, an increase of $60, 593 or 8.9%, from the same period in
2003. This increase was related to higher outside legal expenses, increased
office expenses, and expenses related to public relations activities.
Interest Income. Interest income for the three months ended July 31, 2004 was
$8,077, compared to $929 in the same period in 2003, an increase of 769%. 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 July 31, 2004, corporate income
taxes were $3,633 as compared to $(259) 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.
Comparison of nine months ended July 31, 2004 and 2003
Revenues. Total revenues were $1,629,196 for the nine months ended July 31,
2004, as compared to $70,000 for the same period in 2003, an increase of
$1,599,196. The increase is related to the distributorship agreement, the
delivery of the component equipment for the Mihama project in Japan, as well as
spare parts ordered during the project.
16
Gross Profit. Gross profit was $1,024,690 for the nine months ended July 31,
2004 or 62.8% gross margins, compared to a gross loss of $43,537 in the same
period in 2003, or an increase of $1,068,227 from the same period in 2003.
Margins were positively impacted as a result of the shipment of the goods to
Mihama and the distributorship agreements with Plasteck Solutions Limited and
Mihama.
Selling Expenses. Selling expenses for the nine months ended July 31, 2004 were
$673,703 a increase of $99,275, or 17.3%, for the same period in 2003. Selling
expenses increased as a result of higher marketing and consulting expenses.
Research and Development Expenses. Research and development expenses for the
nine months ended July 31, 2004 were $241,838, an increase $18,559 or 8.3%, from
the same period in 2003. This increase was related to preparing for our test
programs related to the Department of Energy and other strategic projects.
General and Administrative Expenses. General and administrative expenses for the
nine months ended July 31, 2004 were $1,893,285, compared to $1,604,347 for the
same period in 2003, a increase of $288,938 or 18.0%, from the same period in
2003. These increases in expenses were directly attributable to outside legal
expenses, public relations fees, board of director expenses, office expenses,
and Director and Officers insurance premiums.
Interest Income. Interest income for the nine months ended July 31, 2004 was
$22,599, compared to $2,603 in the same period in 2003, an increase of 768%. 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 nine months ended July 31, 2004, corporate income taxes
were $6,411, as compared to $6,171 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.
17
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 July 31, 2004, we had cash and cash equivalents of $2,984,615 and working
capital of $2,533,475. During the three months ended July 31, 2004, our cash
decreased by $612,722. The decrease in cash resulted primarily from the
operations of the company.
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 nine months of fiscal year 2004 and
2003. No realized gains or losses were recorded during the three months ended
July 31, 2004 or 2003.
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, Connecticut 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. A
hearing for the permanent injunction was held on March 22, 2004, the court found
that Startech was not entitled to a permanent injunction and issued an order
compelling arbitration. The issue of whether the claim is subject to arbitration
is still an issue for the arbitrator. That issue was to be decided along with
all other issues at arbitration that was scheduled for July 27, 28, 29 and 30,
2004. We are currently awaiting a decision from the arbitrator. Both parties
have submitted their arbitration briefs and the arbitrator has until September
23, 2004 to render his decision.
ITEM 2 - CHANGES IN SECURITES AND USE OF PROCEEDS
None.
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 or are
incorporated by reference herein.
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
---- ----------- --------------
None
19
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 14th day of
September 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)
20