SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number 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 ____
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Outstanding at June 12, 2000
------------------- ----------------------------
Common Stock - No Par 7,715,292
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STARTECH ENVIRONMENTAL CORPORATION
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Independent Auditors review letter 3
Balance sheets - April 30, 2000 and October 31, 1999 4
Statements of operations for the three months and six months
Ended April 30, 2000 and 1999 5
Statements of cash flows for the six months ended
April 30, 2000 and 1999 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-12
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 14
---------
2
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KOSTIN
RUFFKESS West Hartford o New London
& COMPANY, LLC
To the Board of Directors
Startech Environmental Corporation
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
We have reviewed the accompanying balance sheet, and the related statements of
operations, and cash flows of Startech Environmental Corporation as of April 30,
2000 and for the three-month and six months then ended. These financial
statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
/s/ Kostin Ruffkess & Company, LLC
----------------------------------
Kostin Ruffkess & Company, LLC
West Hartford, Connecticut
June 12, 2000
Leading Edge Alliance * Kreston International
American Institute of Certified Public Accountants
Private Companies Practice Section * SEC Practice Section
Connecticut Society of Certified Public Accountants
An Equal Opportunity Employer
3
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<CAPTION>
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STARTECH ENVIRONMENTAL CORPORATION
BALANCE SHEET
(unaudited) (audited)
April 30, October 31,
ASSETS 2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................... $ 6,013,967 $ 5,496,280
Accounts receivable ......................................... 835,066 512,066
Inventory ................................................... 423,706 --
Other current assets ........................................ 64,978 8,903
----------- -----------
Total current assets ............................... 7,337,717 6,017,249
Property & equipment, net ................................... 307,067 135,383
Other assets ................................................ 47,125 222,186
----------- -----------
Total assets ....................................... $ 7,691,909 $ 6,374,818
=========== ===========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable ............................................ $ 110,927 $ 245,574
Capital Lease ............................................... 16,454 8,057
Other accrued expenses ...................................... 452,287 98,109
----------- -----------
Total Current liabilities .......................... 579,668 351,740
Long-term liability:
Capital lease payable ....................................... 21,488 7,718
----------- -----------
Total liabilities .................................. 601,156 359,458
----------- -----------
Stockholders' (deficit) equity:
Preferred stock, no par value
10,000,000 shares authorized;
Shares issued and outstanding: 643,709 at April 30,
2000 and 696,978 (aggregate liquidation preference of
$6,437,090) at April 30, 2000; 696,978 (aggregate liquidation
preference of $6,969,780) at October 31, 1999 ............... 5,340,658 6,384,199
Common stock, no par value,
800,000,000 shares authorized;
Shares issued and outstanding:
7,587,689 at April 30, 2000 and
6,905,257 at October 31, 1999 ............................... 6,350,439 2,984,219
Additional paid-in capital .................................. 300 300
Accumulated deficit ......................................... (4,600,644) (3,353,358)
----------- -----------
Total stockholders' equity ........................... 7,090,753 6,015,360
----------- -----------
Total liabilities and stockholders' equity ........... $ 7,691,909 $ 6,374,818
=========== ===========
See notes to financial statements
4
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<CAPTION>
STARTECH ENVIRONMENTAL CORPORATION
STATEMENT OF OPERATIONS
(UNAUDITED)
Quarter Ended Quarter Ended Six Months Ended Six Months Ended
April 30, 2000 April 30, 1999 April 30, 2000 April 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenue .......................................... $ 250,000 $ 597,533 $ 848,000 $ 1,645,780
Cost of sales .................................... 169,879 528,057 408,886 1,313,626
----------- ----------- ----------- -----------
Gross profit ..................................... 80,121 69,476 439,114 332,154
----------- ----------- ----------- -----------
Operating expenses
Selling expense ............................. 218,463 18,662 341,577 58,247
General and administrative expense .......... 679,068 323,004 1,245,966 557,413
----------- ----------- ----------- -----------
Total operating expense .......................... 897,531 341,666 1,587,543 615,660
----------- ----------- ----------- -----------
Loss from operations ............................. (817,410) (272,190) (1,148,429) (283,506)
----------- ----------- ----------- -----------
Other income (expense):
Interest income ......................... 109,402 7,698 160,537 24,654
----------- ----------- ----------- -----------
Loss before Income Taxes ......................... (708,008) (264,492) (987,892) (258,852)
----------- ----------- ----------- -----------
Income tax expense ............................... 5,020 0 6,770 250
----------- ----------- ----------- -----------
Net loss ......................................... $ (713,028) $ (264,492) $ (994,662) $ (259,102)
=========== =========== =========== ===========
Net loss per share ............................... $ (0.09) $ (0.04) $ (0.13) $ (0.04)
=========== =========== =========== ===========
Weighted average common
shares outstanding ............................... 7,560,655 6,881,760 7,341,373 6,881,760
=========== =========== =========== ===========
See notes to financial statements
5
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<CAPTION>
STARTECH ENVIRONMENTAL CORPORATION
STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended Six Months Ended
April 30, 2000 April 30, 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (Loss) ......................................... $ (994,662) $ (259,102)
Adjustments to reconcile net income to net cash provided
By operating activities:
Depreciation .............................................. 24,193 2,453
Expenses paid through the issuance of common stock ........ 90,530 0
(Increase) decrease in accts. receivable .................. (323,000) 294,312
(Increase) decrease in inventory .......................... (423,706) 424,166
(Increase) decrease in other current assets ............... (56,075) (73,662)
(Increase) decrease in other assets ....................... 175,061 0
Increase(decrease) in accounts payable .................... (134,647) (381,717)
Increase (decrease) in accrued expense .................... 354,178 (338,644)
----------- -----------
Net cash used in operating activities ..................... (1,288,128) (332,194)
----------- -----------
Cash flows used in investing activities:
Capital expenditures ...................................... (165,701) 0
Stock offering cost ....................................... 0 65,010
----------- -----------
Net cash used by investing activities ..................... (165,701) 65,010
----------- -----------
Cash flows from financing activities:
Decrease in capital leases ................................ (8,009) 0
Proceeds from notes payable-short term .................... 0 750,000
Proceeds from common stock issuance ....................... 1,979,525 0
----------- -----------
Net cash provided by financing activities ................. 1,971,516 750,000
----------- -----------
Net increase (decrease) in cash ........................... 517,687 482,816
Cash at beginning of period ............................... 5,496,280 156,467
----------- -----------
Cash and cash equivalents at end of period ................ $ 6,013,967 $ 639,283
=========== ===========
See notes to financial statements
6
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<PAGE>
STARTECH ENVIRONMENTAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
The consolidated financial statements of Startech Environmental Corporation
(collectively referred to herein as the "Company", unless the context indicates
otherwise) presented herein are unaudited. In the opinion of management, these
financial statements include all adjustments necessary for a fair presentation
of the financial position, results for the six month ended April 30, 2000 are
not necessarily indicative of results for the entire year. The accompanying
financial statements should be read in conjunction with the Company's financial
statements and related footnotes for the year ended October 31, 1999 which are
included in the Company's annual report on form 10-K for the period ended
October 31, 1999.
Note 1. Basis of Presentation
STARTECH Environmental Corporation (the "Company") is engaged in the
commercialization and continued development of an innovative processing
technology for the recovery, recycling, reduction and remediation of hazardous
and nonhazardous waste materials.
Net profit (loss) per share is determined by dividing net loss by the weighted
average number of common shares outstanding during the period. Common share
equivalents, which consist of stock which may be issuable upon exercise of
outstanding stock options and warrants, have been excluded from the weighted
average number of common shares since their effect is anti-dilutive.
Certain reclassifications have been made for consistent presentation. The
reclassifications have no effect on the net profit (loss) for the three month
and six month period ending April 30, 2000.
Note 2 - Capital Lease Obligation:
The Company has entered into capital lease obligations for computer and
telephone equipment. The term of the leases range from 36 to 39 months, with
principal and interest due in aggregate monthly installments of $2,943 at
interest rates ranging from 10.6% to 16.3%. The equipment was capitalized at
$47,178 and is being depreciated over five years. Depreciation expense for the
six months ended April 30, 2000 was $3,829 and accumulated depreciation for the
six months ended was $4,254.
7
<PAGE>
Note 3. Equity Transactions
For the three months ended April 30, 2000, a consultant for the Company
exercised 10,000 options at $5.00 per share. The company received $50,000 in
cash and the consultant has 10,000 options remaining to exercise at $5.00 per
share these options are set to expire on March 9, 2001.
For the three months ended April 30, 2000, the Company issued 12,543 additional
common stock shares relating to warrants being exercised at $9.00 per share.
Total proceeds received were $112,887. These warrants are related to a previous
private placement dated June 30, 1997. These warrants are set to expire on June
30, 2000.
For the three months ended April 30, 2000 the Company declared and paid a stock
dividend on its Series A convertible preferred in the amount of $104,519 which
represented 10,451 preferred shares. For the six months ended April 30, 2000 the
Company declared and paid a stock dividend on its Series A convertible preferred
in the amount of $252,624 which represented 25,261 preferred shares.
Note 4. Cash Flow
During the six months ended April 30, 2000 the Company had non-cash
transactions. The following is a listing of these transactions and the dollar
value of the stock associated with these transactions.
Six months ended April 30, 2000 and 1999
----------------------------------------
April 30, April 30,
2000 1999
--------- ---------
Common shares for services rendered $ 90,530 0
Preferred stock dividend 252,624 0
Fixed assets financed through capital leases 30,176 0
Series A convertible preferred shares converted
to common shares 1,043,542 0
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Result of Operations
--------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our financial
statements and the related notes appearing at the end of this prospectus. Our
discussion contains forward-looking statements our based upon current
expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions.
For the six months ended April 30, 2000, approximately 100% of our revenue was
generated by sales to customers located outside the United States. We believe
that international sales will continue to account for a significant portion of
our sales for the foreseeable future. Current sales are denominated in U.S.
dollars and foreign exchange rate fluctuations have not had an impact on our
results of operations.
Substantially all of our revenue and costs from government contracts are subject
to audit under various federal statutes. In December 1999 an audit was conducted
with the DCAA (Greater Connecticut branch office) in conjunction with the US
Army Chemical and Biological Defense Command. With the successful completion of
this audit we are currently awaiting final payment from our prime contractor
Burns & Roe for two invoices totaling $483,189 and we expect to be receiving
payment from Burns and Roe in the near future.
Comparison of three months ended April 30, 1999 and 2000
Revenues. Our total revenues were $250,000 for the three months ended April 30,
2000, as compared to $597,533 for the same period in 1999, a decrease of
$347,533 or 58.2%. Our decrease in revenue was due to the fact that in the 1999
period we were completing an Army contract, which represented 98% of our revenue
in that period, whereas we had no Army contract revenue for the three months,
ended April 30, 2000.
Gross Profit. Our gross profit was $80,121 for the three months ended April 30,
2000 an increase of $10,645 or 15.3% from the same period in 1999. Our gross
margins on revenue were 32% for the three months ended April 30, 2000. In the
similar period for 1999 the gross margins on revenues was 11.6%. The improved
gross profit margins for the period ended April 30, 2000 were attributable to
revenues earned and associated costs from distributorship fees and consulting
agreements, while for the period ended April 30, 1999 lower gross profit margins
resulted mainly from the higher than expected actual costs relating to the
Assemble Chemical Weapons Assessment Army (ACWA) project.
9
<PAGE>
General and administrative expenses. Our general and administrative expenses for
the three months ended April 30, 2000 were $703,261, up $380,257, or 117%, from
the same period in 1999. The increase is due to a higher level of salaries as a
result of hiring additional personnel to support our growth, occupancy expenses,
professional services fees and insurance expenses.
Selling Expenses. Our selling expenses for the three months ended April 30, 2000
were $218,463, an increase of $199,801, or 1,070%, from the similar period 1999.
The increase is due to higher consulting services, travel costs, printing and
material costs relating to marketing of the product, plus customer
demonstrations and marketing relating to efforts at the Aberdeen Proving
Grounds.
Interest income. Our interest income for the three months ended April 30, 2000
was $109,402, as compared to $7,698 in the similar period 1999 an increase of
1,321%. The increase is due to higher cash balances as a result of the recently
completed preferred private placement dated October 20, 1999, and higher
interest rates earned on the investments.
Income taxes. Income taxes for the three months ended April 30, 2000 were $5,020
as compared with $0 in the similar period 1999. We have minimal tax obligations
due to the fact that we have not had meaningful profitability to this point. We
have tax loss carry forwards of $4.2 million to offset against future profits.
Liquidity and Capital Resource
------------------------------
As of April 30, 2000, we had cash of $6,013,967 and working capital of
$6,758,049. During the quarter ended April 30, 2000, our cash decreased by
$395,204. This was primarily due to the issuance of additional common stock and
proceeds from warrants and options, offset by purchases of fixed assets and cash
utilized in operating activities of the Company which was approximately
$567,733.
Our investing activities have consisted primarily of short-term high quality
liquid investments, with maturities with three months or less when purchased,
which are considered cash equivalents. The primary investments are high quality
commercial paper, U.S. treasury notes and Treasury-bills.
For the three months ended April 30, 2000 the Company declared and paid a stock
dividend on its Series A convertible preferred in the amount of $104,519 which
represented 10,451 preferred shares. For the six months ended April 30, 2000 the
Company declared and paid a stock dividend on its Series A convertible preferred
in the amount of $252,624 which represented 25,261 preferred shares.
We believe that cash generated from operations, our current cash balances, and
other sources of capital, will be sufficient to satisfy our projected working
capital and planned capital expenditures for at least 24 months.
10
<PAGE>
Background
----------
The Registrant's activities during the four fiscal years, November 1, 1992 to
October 31, 1995, consisted primarily of investigating possible business
opportunities. On November 17, 1995, the Company completed the acquisition of
all of the issued and outstanding shares of the common stock of Startech
Incorporated ("Startech"), a corporation incorporated and organized under the
laws of the State of Connecticut. Startech designs and manufactures machinery to
recover, recycle, reduce and remediate hazardous and nonhazardous waste
materials.
General
-------
Startech is an environmental technology corporation engaged in the
commercialization and continued development of its Plasma Waste Converter TM
(PWC) systems for the recycling, resource recovery, reduction and remediation of
hazardous and nonhazardous organic and inorganic materials and wastes including
radioactive wastes.
The Startech Plasma Waste Converter is a closed-loop recycling system that
converts materials formerly regarded as hazardous wastes into useful commodity
products. The hazardous waste can be organic and inorganic, in the form of a
gas, liquid, and solids or any combination thereof. Waste volume reductions
higher than 300 to 1 have been demonstrated. Depending on the waste processed,
the principal commodities produced by the system are a synthetic gas called PCG
(Plasma Converted Gas) TM, metals, and an obsidian-like inert silicate stone.
The PCG can be used as a chemical feedstock to produce polymers and other common
industrial products, as a fuel to produce electricity, as a fuel source for fuel
cells, as a heating plant fuel to reduce the cost and reliance on fossil fuels,
and in desalinization applications to produce fresh water for irrigation and
drinking. The metals can be employed in the metallurgical industry. The stone
silicates can be employed in the abrasives industry, and as an aggregate
material for construction industry applications.
11
<PAGE>
Recent Developments
-------------------
On April 27, 2000 The Company filed a S-1 for the registration of 50% of the
Series A Convertible Preferred Stock, and to register the underlying common
shares related to the Series A preferred stock, warrants, and Class A warrants.
The Company has filed a registration statement with the Securities and Exchange
Commission and has received its first comments from the SEC. The Company is
preparing to respond to the comments, and will file an amended S-1 registration
statement shortly.
On April 27, 2000 the Company announced the appointment of Forest W. Liang Ph.D.
as the Director of Research and Development. His principal efforts will be
focused on the Company's product development and in its domestic and
international marketing activities.
On March 23, 2000 the Company signed a strategic alliance agreement with
Skidmore, Owings and Merrill LLP (SOM) that calls for SOM participation with the
Company in the design and construction of urban Plasma Waste Converter Resource
Recovery Centers. In addition to the agreement SOM will play a role in selling
PWC systems and securing PWC-based contracts.
On March 16, 2000 the Company entered into a contract with Unistar Energy, LLC
to produce and demonstrate its first full-scale commercial new product called
StarCell. This membrane will be used to separate the hydrogen from the Plasma
Converted Gas.
The Company announced on February 23, 2000 that it has begun manufacturing 5
industrial-size Plasma Waste Converters. Three of these units will be 5-tons per
day systems, while two of these units will be 10-ton per day systems.
12
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
Startech, Joseph Longo, John Watts (former Startech CFO) and Kevin Black,
both in their capacity as officers and personally, are defendants in litigation
currently pending in the U.S. District Court for the District of Connecticut.
The claims against Mr. Black, personally, have been dismissed by the court and
are no longer pending. The lawsuit was filed by John Easton of Canada. The
complaint demands payment of 475,000 shares of our common stock, for commissions
and/or fees for services rendered to us to acquire the funds needed to
consummate the reverse acquisition, that occurred on November 17, 1995, of
Startech Corporation by Kapalua Acquisitions, Incorporated (since renamed to
Startech Environmental Corporation). Shortly after the above action was filed,
Mr. Easton's two sons, Dexter Easton and Spencer Easton, commenced an additional
action against us for our refusal to lift a restrictive legend on stock issued
to them at the time of the reverse acquisition. They demand that we remove the
restrictive legend from 27,508 shares. The two actions were joined as they arise
from the same fact pattern and transaction. An oral settlement in principal
between the parties was reached at a mandatory settlement conference that took
place on May 26, 2000 before the Honorable Holly Fitzsimmons, Magistrate-Judge
at the U.S. District Court in Bridgeport, CT. The principal terms of the
settlement call for the removal of the restrictive legend from 27,508 shares of
Startech common stock held by Spencer and Dexter Easton and the issuance of
172,492 shares of Startech common stock that had previously been fully paid for
by John Easton. John Easton will also receive 25,000 unregistered stock options
priced at $10.00 per share exercisable after three years from the date the
Agreement is executed. The sale of all of the 200,000 shares subject to this
agreement, excluding the stock options, will be controlled by a restrictive
liquidation clause limiting the number of shares that may be sold during
specific time periods. It will take a minimum of 20 months for all the shares to
be sold assuming they are sold at the maximum allowable rate. While the
principal terms of the settlement have been agreed upon, the parties must still
negotiate and agree upon the remaining details and execute a complete settlement
agreement.
On December 19, 1997 we brought suit in Federal Court, District of
Connecticut, seeking a preliminary injunction to enforce a Non-disclosure and
Non-compete provisions with respect to four Distributorship Agreements executed
by David Ivey in his personal capacity and in his capacity as a corporate
officer for these four companies. This lawsuit is no longer pending against
Startech as the Federal District Court entered a Stipulation of Judgment of
Dismissal with Prejudice in this suit on March 15, 2000. The Stipulation was
entered into without costs to either party.
13
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ITEM 2. CHANGE IN SECURITIES.
No constituent instruments defining the rights of the holders of any class of
registered securities of the Registrant have been materially modified. No rights
evidenced by any class of registered securities have been materially limited or
qualified by the issuance or modification of any other class of securities.
There are no working capital restrictions or other limitations upon the payment
of dividends except as reported in the Registrant's FORM 10 and 10K dated
October 31, 1999.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
There have been no defaults in the payment of principal interest, a sinking or
purchase fund installments, or any other default no cured within thirty days,
with respect to any indebtedness of the Registrant or any of its significant
subsidiaries exceeding five percent (5%) of the total assets of the Registrant
and its consolidated subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the first quarter of the fiscal year covered by
this report to a vote of security holders.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
None were filed for the quarter ended April 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARTECH ENVIRONMENTAL CORPORATION
Date: June 13, 2000 By: /S/ Joseph F. Longo
------------- -----------------------
Joseph F. Longo
Chief Executive Officer, President,
Chief Financial Officer
14
