Item 1. Business.
This annual report on Form 10-K contains a number of "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Specifically, all statements other than statements of historical facts included in this annual report regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to management. When used in this annual report, the words "anticipate," "believe," "estimate," "expect," "may," "will," "hope," "continue" and "intend," and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements. These statements reflect our current view with respect to future events and are subject to risks, uncertainties and assumptions related to various factors including, without limitation, those described starting on page 36 of this annual report under the heading "Risk Factors" and in our registration statements and periodic reports filed with the Securities and Exchange Commission under the Securities Act and the Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure you that our expectations will prove to be correct. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in this annual report as anticipated, believed, estimated, expected, hoped or intended.
References in this annual report to "the Company," "Startech," "we," "us," and "our" refer to Startech Environmental Corporation and our wholly-owned subsidiary on a consolidated basis, unless otherwise stated.
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.
The Company's activities during the four fiscal years beginning November 1, 1992 and ending October 31, 1995 consisted primarily of the research and development of the Plasma Converter. On November 17, 1995 Kapalua Acquisitions, Inc., a Colorado corporation 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 Corporation.
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.
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 did not achieve the sales goals we anticipated would occur in the 2003, 2004, and 2005 fiscal years. However, we believe this new way of approaching the market over time will help achieve maximum penetration in the shortest timeframe.
We believe specific events are driving demand for our Plasma Converter. They include:
o Increases in waste, and in particular hazardous wastes, due to rising consumer/industrial consumption and population growth in most nations.
o Current waste disposal and remediation techniques such as landfills and incineration are becoming regulatory, socially and environmentally unacceptable.
o A need for critical resources such as power and water to sustain local economies; and
o The emphasis being placed upon the production of distributed power and the need to provide alternatives to fossil fuels.
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 our customers 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 approximately from $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.
Since 1995, we have been actively educating and promoting to our customers the benefits of the plasma converter over other forms of waste remediation technologies. Ongoing education of the public and government is continuing. Like most new technologies we have been met with varying degrees of resistance. A rising comfort level with our plasma converter technology resulting in part from our educational and informational efforts has created additional awareness in the marketplace. We have taken steps to transform our business model from being solely a seller of equipment to a total solutions provider, including facility ownership or management.
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.
Markets
We view the future of our business as divided into three key market segments; power/energy, waste remediation, and engineering services. Projects are generally categorized according to the specific or stated objective of the customer, waste remediation or power generation. A customer may have a need to remediate a particularly onerous waste such as PCBs but has no need to produce commodity products. The goal is to simply get rid of waste. That would be considered a waste remediation project. Conversely, a customer in an area with limited or high cost power may want to select a waste stream to give the greatest amount of Plasma Converted Gas (TM) with which to produce power to run his system or for other power uses. The production of power is the desired benefit and the feedstock (waste material) selected is chosen for the highest quality commodity product produced, in this case electric power. The market for our Plasma Converter System is for on-site use by industrial, institutional and government facilities, and also for commercial facilities that process waste under contract.
Our market for the sale of Plasma Converter Systems will be made up of sales to:
A) Generators of waste; and
B) Processors of waste
Startech's revenues and profits are produced by:
(1) the sale of its systems that may also include a continuing, revenue-producing "tolling fee" for each pound of material processed; and
(2) building and owning commercial Plasma Converter facilities operated separately by the Company or in partnership.
Power/Energy
This segment includes projects that incorporate equipment that create power/energy products to work in conjunction with our core Plasma Converter technology. Distributed power requirements and peak power demands have identified expanded opportunities. With energy prices reaching record levels during 2005, we believe our technology will become more attractive to energy companies producers and companies that require a great deal of energy.
Waste Remediation
This part of our business includes projects where the emphasis of the customer is to dispose of its waste material in an environmentally responsible, and cost effective, manner. Waste material disposal costs vary greatly depending on the composition of the waste. We are specifically targeting customers that will receive the most economic gain from using our technology. Examples of such waste streams are:
o Medical waste o Pharmaceutical waste o PCBs o Municipal solid wastes o Incinerator ash o Biological contaminants o Sewer and power-plant-scrubber sludge o Paints and solvents o Electronic industry waste o Contaminated soils o Asbestos and other hazardous waste streams
We further delineate these markets into the following categories:
o Onsite Treatment - Includes:
- Hospitals and medical centers. - Industrial hazardous waste generators such as petrochemical, chemical, refining, and metals companies. - Industrial hazardous waste processors. - Government agencies such as Department of Defense and the Department of Energy.
o Offsite Treatment (at an integrated waste management facility) - Includes waste management and/or transport companies.
o Mobile Treatment - Includes all of the above who value the ability to move quickly from site to site.
Sales Strategy
Central to our growth strategy is maximizing market penetration and reducing the barriers of entry while optimizing our revenue sources. To achieve that objective, we have identified three key marketing strategies that make up the overall model. They are:
1. Equipment Sales: We will continue to be a direct seller of our products to customers who prefer to purchase and operate our equipment. We will sell our Plasma Converter and associated equipment to a customer with no equity position in the project. However, we will offer Long Term Service Agreements to create residual or ongoing revenue in this area.
2. Build Own Operate/Transfer Of Ownership Projects: We are actively seeking to develop opportunities to own and operate Plasma Converter facilities in various markets. These projects are attractive where long-term agreements with guaranteed waste streams and high value processing and or disposal fees are contracted for and will significantly increase ongoing revenue streams. The revenue generated by these types of projects has been shown to be up to ten times that realized from a straight equipment sale over the life of the project.
3. Joint-Development Projects: In a joint development project we will assume an equity position in return for a reduced purchase price on our equipment and associated engineering and management services. An additional advantage is that we receive the certainty of revenue from a direct sale along with the ability to realize future ongoing revenue from the operations of the sole source joint development company.
An important part of our development of world markets is our sales network. We sell systems through independent representatives and distributors, which we believe helps keep sales costs variable and low. Representatives are paid a commission on sales. Distributors purchase systems, mark them up, and re-sell them to customers. Distributors are also responsible for supplying after sales parts and service.
Our senior management also sells directly to customers, in addition to seeking out projects for build, own, operate and build, own, transfer of ownership facilities. Such customers and projects might include large corporations with activities in many states or countries, or sovereign governments where the complexity of the bidding process on projects requires a large degree of company time and attention.
We manufacture modular, skid-mounted systems that are transportable in standard tri-modal containers for shipment globally.
The Company requires down payments and progress payments to be scheduled (for direct sales and co-venture projects) so that cash flow in the manufacturing process will be positive. Startech will obtain project financing against guaranteed waste streams/tipping fees for Build, Own & Operate (BOO) projects to fund manufacturing, shipping, and installation costs before facility startup. In addition, the Company will incorporate performance insurance for BOO projects to guarantee performance on the specific waste stream to be processed as well as obtaining necessary local permits to begin operation.
Revenues will occasionally be derived from engineering services and testing. We perform paid-for engineering services, where we believe those services may lead to equipment sales.
Primary Customer
For the fiscal year ended October 31, 2005, 63% of our revenue was derived from the amortization of distributorship agreements established in Australia, China and Caribbean, while for the fiscal year ended October 31, 2004, 91% of our revenue was derived from Mihama Inc.
Plasma Converter(TM) Demand
We believe that the primary factors that create the demand for our Plasma Converters include the need for customers to:
o Reduce the costs for hazardous and toxic waste disposal;
o Eliminate personal and organizational liability associated with hazardous and toxic waste disposal;
o Comply with present and anticipated environmental regulations in a cost-effective manner;
o Recover products for use or sale; and
o Destroy wastes completely, safely and irreversibly.
We believe our Plasma Converter will meet customers' needs because our system:
o Reduces the cost and risk associated with hazardous waste generation and disposal;
o Performs safer than prevailing environmental standards;
o Converts wastes into products for use or for sale;
o Destroys wastes safely and irreversibly; and
o Comes in small and large system capacities, in stationary and mobile configurations.
A device generally referred to as a plasma torch, although there is no fire involved in the device, produces the plasma lightening-like arc in the Plasma Converter vessel to produce a plume of radiant energy. The Plasma Converter therefore is an electrically driven system that produces an intense field of radiant energy within the plasma vessel that causes the dissociation of the molecular bonds of solid, liquid, and gaseous compounds for materials of both hazardous and non-hazardous wastes. We refer to this destruction process as "molecular dissociation."
Dissociation causes the molecules of the waste material to be separated into their elemental components (atoms), and reformed by the Plasma Converter System into special recoverable, commodity products. The process is not a combustion or burning process, and the system should not be confused with an incinerator or a vitrification process. It is the intense energy field produced by the plasma plume within the Plasma Converter vessel that drives the dissociation process.
The Plasma Converter vessel operates at normal atmospheric pressure quietly and safely. While the interior temperature of the plasma plume is about 30,000 degrees Fahrenheit, the temperature of the refractory walls inside the vessel is maintained at about 3,000 degrees Fahrenheit and is the lowest temperature experienced within the vessel. On the average most waste material will be dissociated or melted at temperatures exceeding 6,000 degrees Fahrenheit.
The Plasma Converter consists of many well-proven process components currently used in the metallurgical and chemical industries. Solid wastes being fed to our system are automatically fed through an air-locked infeed port, and the feeding is ordinarily on a continuous basis. Liquids, gases and sludges can also be fed or pumped directly into the vessel through a pipe port. Bulk solids, liquids, gases and sludge may be fed in and processed simultaneously.
The Plasma Converted Gas (PCG)(TM) a synthesis gas recovered from our system is drawn out of the vessel and put through our gas-polishing unit. The molten silicates, inorganics and metals, if any, are removed at the lower side of the Plasma Converter vessel through a melt discharge port and recovery procedure.
Recovered products can be used or sold as commodities for use in various manufacturing processes. It is expected that most of the Plasma Converted Gas will be used as a fuel gas and to a lesser degree, as a chemical feed stock; silicate materials recovered will be used in the ceramics, abrasives or the construction industries; the metallic components can be used or be readily available for sale with little or no additional processing. There is a newly developing interest in PCG(TM) to produce hydrogen by use of our patented StarCell(TM) system. The economic justification for the use of our systems in hazardous waste applications does not depend on any revenues from the use or sale of the recovered commodity products, but the emergence of StarCell(TM) Hydrogen may modify that attitude.
Recovered Commodity Products
The Plasma Converter processes the wastes (matter) in such a way that the elemental components of the feedstock can be recovered in from one to three distinct phases:
(1) synthesis gas (PCG(TM), Plasma Converted Gas) that exits the chamber;
(2) inorganic, glass-like (obsidian-like) silicates which form a separate layer above the liquid metal (if there is a sufficient quantity of metal in the feed stock, with small quantities of metal encapsulated in the silicate stone); and
(3) liquid metallic elements, if in sufficient quantities, which collect and are automatically discharged at the base of the vessel.
Depending on the composition of the feedstock, any one phase may be produced, any two phases may be produced, or all three may be produced. However, the Company's experience indicates that the most likely commodity-product recover-phase will be in two parts:
(1) the PCG(TM) GAS-PHASE; and
(2) the SOLID-PHASE in which the inorganic silicate, containing metals, will be produced.
Energy Produced and Volume Reduced
Carbon is abundantly present in the products and the wastes of the industrial world. Such materials are inherently rich in latent chemical energy such as one would find in fuel. When carbonaceous waste feedstocks of many industrial wastes, infectious hospital waste, municipal solid waste, shipboard waste, and such are processed, the Startech system will consume 1 unit of electrical energy while producing about 4 units of energy residing in the PCG(TM). With the improved efficiencies of electrical generating units, the 4 units of energy residing in the PCG(TM) can be used to create 2 units of electrical energy.
Materials such as scrap tires, for example, will produce recovered commodity products in two phases: the PCG(TM) gas phase and the metal phase, if metal exists. Because materials such as plastics, solvents, and tires are so rich in energy, they will produce a relatively large amount of PCG(TM) with a high-energy content that will result in approximately 6-8 units of recovered PCG(TM) energy for each unit of electrical energy used in the process.
In some applications, the Plasma Converter will produce enough energy for its own needs, and produce a surplus that can be sold to the local electrical grid, or used in the customer's facility to reduce the need for purchased power or purchased fuel. Not all wastes produce PCG(TM). For example, processing contaminated soil will produce no appreciable amount of PCG(TM).
The volume reduction of these solid wastes, when processed in the Plasma Converter, is approximately 300 to 1. Waste streams composed primarily of hazardous or non-hazardous paper, cloth, plastic, food, pharmaceutical, explosives, paints, solvents, PCBs, confiscated drugs, filters, oils, and so on will result in so few solids as to produce volume reductions approaching infinity. Materials such as this are also very rich in elements such as carbon, oxygen, and hydrogen and the processing results almost entirely in the PCG(TM) commodity synthesis gas. In addition to the volume reduction, none of the remaining materials, if any, are hazardous in nature.
Waste feedstocks that have a relatively high metal content will produce a separate liquid metal phase that can be recovered directly from the system for resale or reuse in the metallurgical industry.
Our system may also achieve volume reductions on low-level radioactive surrogate waste of approximately 300 to 1. Other present methods of volume reduction include compaction and incineration that produce overall volume reductions of about 8 to 1. Our system will not reduce the radioactivity of the low-level radioactive waste nor do we believe that can be done by any other system, but the volume of that waste may be significantly reduced. Industries that may benefit from this process are utilities, research laboratories and hospitals that store the reduced low-level radioactive waste material on-site until it can be shipped off site to a special repository. The cost for that method can be many thousands of dollars per ton. The continued availability of the few repository sites that exist, are problematic and uncertain. We believe our system can increase a site's storage capacity.
What is Plasma?
Plasma is simply a gas (air) that the Plasma Converter ionizes so it becomes an effective electrical conductor and produces a lightning-like arc of electricity that is the source of the intense energy transferred to the waste material as radiant energy. The arc in the plasma plume within the vessel can be as high as 30,000 degrees Fahrenheit ... three times hotter than the surface of the Sun. When waste materials are subjected to the intensity of the energy transfer within the vessel, the excitation of the wastes molecular bonds is so great that the waste-materials' molecules break apart into their elemental components (atoms). It is the absorption of this energy by the waste material that forces the waste destruction and elemental dissociation.
How The Process Works
The basic Plasma Converter system consists of the following:
o In-feed System o Plasma Vessel o Cooling Process o Filtration Process o Neutralization Process
Figure 1. Process Overview of PC ----------------------
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The feed mechanism can simultaneously accommodate any proportion or combination of solid, liquid and gaseous feedstocks. Solid wastes, depending upon their composition, can be pumped, screw fed, or ram fed into the plasma vessel. A shredder ahead of the feed system may be appropriate to achieve size reduction or object separation prior to direct system feed.
Liquid wastes, including sludges, can be pumped directly into the PCS through the wall of the plasma vessel through a special infeed nozzle. The liquid feed system is designed to also accommodate any entrained solids that may be present.
Similarly, gaseous feedstocks may also be introduced into the plasma vessel through a specially designed nozzle.
The plasma vessel is a cylindrical two-part container made of stainless steel with an opening in the roof through which the plasma torch is inserted. The vessel is lined with insulation and refractory to allow both maximum retention of internal energy and to protect the stainless steel container from the intense heat inside the vessel. The plasma vessel is equipped with inspection ports (including a video camera so the operator can see real time images inside the vessel to assist in PCS operation), openings for introduction of feedstocks, and an exit port for removal of excess molten material. The smaller vessels are designed to remove molten material periodically through an automated tipping mechanism during which time the vessel may or may not remain in continuous operation. A design enhancement incorporated into the most recently constructed system is a continuous melt extraction feature which maintains the level of molten material in the plasma vessel at or below a preset limit without interrupting the operation of the system. This melt extraction system can be deployed with all sizes of Plasma Converters.
The plasma vessel is specially designed to ensure that no feedstock material is able to reach the exit port without first passing through the plasma energy field and undergoing complete molecular dissociation. The method by which this is accomplished forms a part of Startech's intellectual property. In addition, the plasma vessel is maintained at a slight negative pressure to ensure that no gases can escape to atmosphere.
The plasma torch system is a commercially available product that Startech can purchase from any number of reputable vendors. Comparable plasma systems have been used extensively in the metallurgical industry for decades. The most maintenance-intensive aspect of the PCS is the need to periodically replace electrodes, which occurs approximately every 300 to 500 hours of operation. Electrode replacement can be accomplished in approximately 30 minutes thus ensuring minimum downtime of the PCS.
The PCS is also equipped with a torch positioner system that allows the operator to aim the torch at different points within the plasma vessel. This aspect of the PCS allows the operator to quickly and efficiently treat feedstocks as they enter the vessel and move around inside the vessel to avoid any build-up of solidified melt that may occur on the vessel walls.
Our Plasma Converter that is being used for our demonstration and training unit in our Bristol, Connecticut facility continues to be a very active marketing tool in showcasing our technology to potential customers, investors, and governmental agencies. We have been proactive in utilizing this facility for training such as Eico Systems Corp. and also running some surrogate testing for specific customers. We expect testing activity to increase in 2006 as more and more companies and governmental agencies look to validate our technology for their specific applications, and also we expect to have the Mihama system up and running in 2006 which will also be available for demonstration and showcasing.
StarCell(TM) development and technology -
StarCell(TM) is the Company's patented hydrogen selective membrane device that separates hydrogen from Plasma Converted Gas (PCG(TM)). PCG(TM) is a synthesis-fuel gas mixture produced from processing material through the Plasma Converter. In Startech's Plasma Converter System (PCS), organic wastes and other feedstocks are dissociated and reformed to create a synthesis gas predominantly hydrogen and carbon monoxide. The synthesis gas produced in the dissociation process of these materials, particularly the hydrogen component, has an expanding commercial demand. Single step gasification and reforming of feedstocks, utilizing the PCS is one potential answer to both distributed and large scale hydrogen production. The economics of the gasification process are especially favorable when gasifying organic waste including pesticides, tires, medical waste and municipal solid waste into high purity hydrogen fuel.
To enhance the fuel production capability of the Plasma Converter System, Startech has built upon current and past research to develop StarCell a ceramic membrane technology for the isolation and purification of Hydrogen from a mixed gas stream. This technology has far reaching applications in the emerging hydrogen economy for virtually any hydrogen purification application.
During 2005 Startech has continued the capability of our StarCell product with DOE projects in the development and testing of varied waste streams to define and establish baseline information in the performance and yield of the StarCell membrane. We have completed the first phase of testing and have issued the technical report to DOE. During 2006 we will continue the performance evaluation of the ceramic membrane with equipment modifications and providing additional testing and independent analysis of alternative feedstocks for DOE..
StarCell(TM) is the Company's patented hydrogen selective membrane device that separates hydrogen from Plasma Converted Gas (PCG(TM)). PCG(TM) is a synthesis-fuel gas mixture produced from processing material through the Plasma Converter. The increasing importance of the need for alternative energy sources and the emergence of the "Hydrogen Economy" drove our development of StarCell(TM).
There are essentially two principal uses of energy:
1. first, stationary energy for electrical power generation and heating;
2. second, mobile energy such as that used for transportation propulsion systems ... the energy you can put in a fuel tank and take with you.
Any discussion on energy-related issues, such as air pollution, dependable energy supplies, and global climate change, further illuminates the need for alternative fuels. Hydrogen offers very large benefits by eliminating polluting emissions and greenhouse gases, and, with the StarCell(TM) technology, hydrogen can become a more readily and cheaply available alternate primary energy fuel. Hydrogen, like electricity, is a premium-quality energy carrier. It can be used with high efficiency, and with zero tailpipe and zero stack emissions.
Besides producing the Plasma Converter, we are also developing equipment that can recover hydrogen from a variety of feedstocks including coal and the wastes of the world. This capability will help make it possible to have a large-scale dependable energy system with essentially no pollutants and with no climate-changing gases.
Hydrogen is clearly recognized as a very real alternative to our always-depleting reservoir of fossil fuel. But more than that, hydrogen is the pristine fuel. When used as a fuel, it produces only water vapor (fresh water) as the by-product. Although energy production is not our main objective, the ability to separate this highly sought after gas from an already valuable synthesis gas will be another step forward in our mission to achieve broad market acceptance of our primary product, the Plasma Converter.
StarCell(TM) is not a fuel cell; it is a ceramic membrane filtration system that extracts hydrogen from PCG(TM). Because hydrogen is such a small molecule, smaller than all the others in the PCG(TM) gas mixture, it can be pushed through the filtering membrane to allow the hydrogen to be separated from the PCG(TM).
PCG(TM) is produced from wastes; it is a gas mixture containing a large quantity of hydrogen. Hydrogen is a valuable commodity with many commercial uses. It also is a pristine fuel that produces no carbon by-products. Pound-for-pound, hydrogen contains more energy punch than all the other fuels; and, when used in fuel cells or engines produces only clean water vapor.
StarCell(TM) Hydrogen can feed fuel cells and hydrogen engines. StarCell(TM) Hydrogen is a fuel that can produce clean electricity and clean propulsion systems. The combination of the Plasma Converter with StarCell(TM) can produce hydrogen on a large scale from the wastes of the world, and at a very low cost. Our customers who use a Plasma Converter with a StarCell(TM) will get paid for processing the incoming waste at the front end, and will be paid for the hydrogen at the back end. People sometimes forget that waste, even hazardous waste, is an ever-present, and much overlooked, valuable and renewable resource.
Hydrogen is a very valuable commercial gas that is produced by various thermo-chemical industrial methods. Hydrogen gas is used in many industrial processes to make products that we use every day. These products include cooking oils, peanut butter, soap, insulation, metals, drugs, vitamins, adhesives, cosmetics, ammonia, fuels, and plastics and so on. Hydrogen is also used extensively to propel spacecraft because it is very light and has very high energy content. Hydrogen is used as a fuel to produce pollution-free electricity in fuel cells.
The paradox is, that while hydrogen is the most abundant material in the universe, it is not readily accessible. Expensive and sophisticated chemical-industry processes must extract it. Nearly all of the hydrogen produced today is made from fossil fuels. These fuels consist primarily of molecules made up of carbon and hydrogen. To produce hydrogen from these fossil fuel molecules, they must be "reformed" with steam and/or oxygen in a complex thermo-chemical process consisting of many steps. The products of reformation are hydrogen gas and carbon-gas species. The traditional industrial process further purifies and separates the hydrogen from the rest of the stream by various methods. This expensive reformation process is exactly what our Plasma Converter does in the process of destroying most feedstock. In other words, we get the reformation process from the Plasma Converter for no additional costs.
Competition
We believe we are the industry leader in the use of plasma technology to rid the world of its waste problem and/or create valuable alternative power sources and industrial products. There are other plasma-based technologies in various stages of development that claim to achieve some, but not all, of the benefits achieved by our system. However, the fact that the commercial use of plasma for waste destruction resulting in power and product creation is in its early stages makes competitive comparisons difficult. We welcome the presence of other plasma technologies. The market for plasma technology is huge and the existence of competing technologies provides credibility to the industry.
We believe we are positioned to take advantage of the recognition of plasma technology as an alternative to conventional forms of waste disposal. We have spent substantial money, time and effort educating the public and private sectors on the benefits of our technology and believe we will reap the rewards of that effort.
We believe the following are a few of our competitive advantages:
o Low total system cost that allows our customers to make money with our system o Operating performance far safer than prevailing environmental standards o The ability to process solids, liquids, and gases simultaneously o Versatile feed systems and vessel openings that allow a wide variety of feed streams o Advanced stage of power producing peripheral equipment o Unmatched advanced design and operating performance of our complete system o Management's experience with plasma and its commercial application o Depth and breadth of manufacturing knowledge and experience o Greater access to capital markets as a public company over private companies o Fully trained distributors and representatives o Multiple modes of operations
We believe the following are our competitive disadvantages;
o Our cash position relative to other multi-national companies who may enter this field as it grows o Market place resistance to new technologies when dealing with the public health and safety
We believe many potentially competitive technologies are limited to a narrow number of waste feed-streams. In some of those technologies, if the system does not receive exactly what it expects, even something as benign as water or metals, the process may be ineffective and possibly dangerous. In the waste industry, it is difficult to specify the exact composition of a waste stream in a real world application. By their very nature, waste streams are sometimes made up of unknown and unpredictable materials. For any processing system to be commercially successful it must be able to safely and effectively process unpredictable waste streams without system upsets. Our Plasma Converter can handle great deviations in the waste stream content. We believe many of the potentially competitive technologies have yet to demonstrate capabilities beyond small laboratory or bench scale devices that use precisely controlled waste streams under precisely controlled conditions. They may also produce undesirable and hazardous by-products.
We believe the following companies are potential competitors in the plasma industry:
1) Integrated Environmental Technologies (IET); and
2) MSE Technology Applications, Inc. (MSE)
IET offers a very different system from our technology. IET uses a carbon rod plasma arc system whereas we use a plasma torch based system. MSE, like Startech, is a plasma torch based system.
There are difficulties present in comparing technologies in our industry that are not present in established industries. The commercial nature of any plasma-based system is based upon the performance data received and the versatility of the material feedstock that can be processed. Further, in addition to the performance data and versatility of feedstock, the commercial uses for the system can be greatly enhanced by the number of peripheral devices that can be added to the system to make use of the saleable gas, silicate and metals that the system produces to create a total solution. Because this industry is just beginning to develop, there is very little empirical evidence in the public domain regarding the performance data of each competing technology. Therefore, performance comparisons are not available. However, some of our competitive advantages are not data related, but are the direct result of the versatility in the feedstock variations we can accommodate and in the advanced level of our system design. Additionally, we know of no competitor who is offering the variety of uses for the gas and silicates that Startech can offer.
Besides those companies mentioned specifically, there are a number of other companies that advertise a capability using plasma technology. We have no way of knowing the status of these companies or if they are even ongoing concerns. Since many of them are small, private companies it is very difficult to know what, if any, capabilities are ready for the commercial market. We are not aware of any competitive company that has a commercial site up and operating other than those we have named above.
In addition, we believe that other waste disposal methods may be considered as competition. These methods are summarized as follows:
o Landfill Dumping: the least expensive in the short term and one of the most environmentally dangerous of all waste disposal methods.
o Incineration: even though the permitting of new incinerator installations is being dramatically reduced, and the method has fallen into great disfavor both in the U.S. and internationally, this rather primitive method of disposal is still presently accepted by many although the emissions produced are regarded as pollutants, and large quantities of toxic bottom ash and fly ash are produced which are eventually deposited into landfills in the community.
Intellectual Property
We have developed and acquired proprietary technology. Our technologies are comprised of a variety of overall coordinated system and subsystem concepts, detailed mechanical engineering calculations, detailed engineering design features, data compilations and analyses, complex chemical engineering calculations, business methods and market information. Since our formation, a substantial amount of intellectual property has been developed.
On or about June 4, 2002, we submitted an application for a patent to the United States Patent and Trademark Office. The patent involves a torch positioning apparatus designed and developed by our engineers. This is the only patent we have applied for to date. We have designed and developed other proprietary intellectual property that will be protected as trade secrets. We may in the future file US and foreign applications for these patents. We plan to continue our development and protection of our intellectual property. We have not authorized or licensed the use of our proprietary information to any third parties and have no plans to do so. We retain the exclusive worldwide rights for development and commercialization of our technologies.
We are the licensee on one patent. The inventions and related know how could enhance the commercial capability of our core plasma system for certain applications. The patent relates to a Hydrogen-Selective Ceramic Membrane that was developed by Media and Process Technology, Inc., and its predecessor, ALCOA Corporation. This technology provides for the high temperature dehydrogenation of our Plasma Converted Gas and forms the basis for our StarCell(TM) system.
Our success depends, in part, on our ability to maintain trade secrecy for our proprietary information that is not patented, obtain patents for new inventions and operate without infringing on the proprietary rights of third parties. There can be no assurance that the patents of others will not have an adverse effect on our ability to conduct business or that we will develop additional proprietary technology which is patentable or that any patents issued to us will provide competitive advantages or will not be challenged by third parties. We also protect our trade secrets and proprietary know-how and technology by non-disclosure agreements and non-compete agreements with our collaborators, employees and consultants. However, there can be no assurance that these agreements will not be breached, that we would have adequate remedies for any breach, and that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others.
Government Regulation
Our customers are required to comply with a number of federal, state and local laws and regulations in the areas of safety, health and environmental controls, including without limitation, the Resource Conservation and Recovery Act, as amended and the Occupational Safety and Health Act of 1970, which may require us, our prospective working partners or its customers to obtain permits or approvals to utilize the Plasma Converter system and related equipment on job sites. In addition, because we are marketing the Plasma Converter system internationally and expect those sales to represent a significant portion of our revenues, our customers will be required to comply with laws and regulations and, when applicable, obtain permits or approvals in those other countries. There is no assurance that these required permits and approvals would be obtained. Furthermore, particularly in the environmental remediation market, we may be required to conduct performance and operating studies to assure government agencies that the Plasma Converter system and its by-products do not prove to be environmental risks. There is no assurance that these studies, if successful, will not be more costly or time-consuming than anticipated. Further, if new environmental legislation or regulations are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, our prospective working partners and/or its customers may be required to meet stricter standards of operation and/or obtain additional operating permits or approvals. There can be no assurance that our system's performance will satisfy all of the applicable regulatory requirements.
Environmental Matters
Our customers' operations are subject to numerous federal, state and local regulations relating to the storage, handling and transportation of regulated materials. Although our role is generally limited to the sale or leasing of its specialized technical equipment for use by our customers, there is always the risk that equipment failures could result in significant claims against us. Any claims against us could materially adversely affect our business, financial condition and results of operations as well as the price of our common stock.
Manufacturing Operations
Our products and systems are presently being manufactured by third party vendors who build specific component parts to our specifications. Some of the manufacturing components are constructed at our 30,000 square foot manufacturing facility located in Bristol, Connecticut. We also assemble, ship and test our systems there.
Research and Development
While the principal research and development to produce commercial Plasma Converters has been completed, we will continue to perform research and development activities with respect to product improvement and new product development, utilizing internal technical staff as well as independent consultants. These activities have to date been entirely paid for and sponsored by the Company. We will continue to develop and design operational improvements that will be primarily in the area of the use of the Plasma Converted Gas produced by the Plasma Converter also used by StarCell. Expenditures for research and development will be geared to achieving lower costs designs and higher efficiencies consistent with our business model of offering complete systems solutions. In the year ended October 31, 2005, we expensed $337,898 for research and development compared to $353,099 in development during the year ended October 31, 2004. As we expand our research and development focus in fiscal year 2006, our efforts are expected to be devoted to the development of patentable proprietary inventions in the field of high temperature thermo-chemistry and the production of low cost hydrogen. In addition we will continue conducting ongoing tests, demonstrations and enhancements of the Plasma Converter for potential customers and governmental agencies.
Employees
As of January 25, 2006, the Company had 18 full-time employees. Of these full-time employees, five are in engineering, one in research and development, one in manufacturing and production, four in sales and marketing and seven are in management or administrative positions. We believe that we have been successful in attracting experienced and capable personnel. All officers and directors have entered into agreements requiring them not to disclose any proprietary information, assigning all rights to inventions made during their employment, and prohibiting them from competing with us. Our employees are not represented by any labor union or collective bargaining agreement, and we believe that our relations with our employees are good.
Item 2.
Item 2. Properties.
Our corporate headquarters is located at 15 Old Danbury Road, Suite 203, Wilton, Connecticut 06897-2525 where we lease 5,800 square feet of office space from CD Station, LLC as landlord. The lease and taxes provides for monthly payments of $18,038 to December 2006, when the lease expires.
Our Product Showroom is located at 190 Century Drive, Bristol, Connecticut, 06010, where we lease 10,800 square feet of office space from Tunxis Management as landlord. The lease provides for monthly payments of $8,166 to June 2008, when the lease expires.
Our Manufacturing facility is located at 545 Broad Street, Bristol, Connecticut, 06010, where we lease 30,000 square feet of manufacturing space from Gaski Leasing as landlord. The lease provides for monthly payments of $5,775. This lease arrangement is on a month to month basis.
The following table lists the future lease commitments for the corporate headquarters at Wilton, Connecticut, and the Product showroom in Bristol, Connecticut, and the Manufacturing facility in Bristol, Connecticut:
Year Annual Rent ---- -----------
2006 $373,753 2007 $175,100 2008 $122,300
Item 3.
Item 3. Legal Proceedings.
There are no legal proceedings at this time.
Item 4.
Item 4. Submission of Matters to a Vote of Securityholders.
No matters were submitted to a vote of security holders during the fourth quarter of the year or covered by this report.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholders' Matters.
(a) Market Information
Our common stock is traded on the Over-the-Counter-Bulletin Board (OTCBB) under the symbol STHK.OB. The table below shows the high and low closing price of our Common Stock during the quarters indicated.
Recent Sales of Unregistered Securities
During fiscal year 2005, the Company issued a total of 5,560,682 shares of common stock. 642,944 common shares were issued for several private placements for cash proceeds of $1,589,580.
In connection with the Cornell Capital Private Placement, the Company and its President agreed to pledge 3,580,000 shares and 900,000 shares, respectively, to secure payment of all the obligations due under the convertible notes. Such shares are to be held in escrow until all amounts due under the convertible notes are paid in full. The Company issued 900,000 shares to its President in consideration for the 900,000 shares pledged. In the event that the convertible notes are paid in full, the 900,000 shares will be returned to the Company. The Company also issued 391,304 shares of common stock valued at $990,000 as fees in connection with the Cornell Securities Purchase Agreement.
During fiscal year 2005, the Company received cash proceeds from the exercise of stock options to purchase 15,000 shares of common stock in the amount of $22,050 and cash proceeds from the exercise of warrants to purchase 10,577 shares of common stock in the amount of $35,327.
During fiscal year 2005, the Company issued 20,857 shares of common stock to its 401(k) plan as a matching contribution.
Item 6.
Item 6. Selected Financial Data.
The selected financial data set forth below for the five years ended October 31, 2005 is derived from the Company's audited financial statements. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Critical Accounting Policies
Startech's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, accounts receivable reserves, marketable securities, valuation of long-lived and intangible assets accounting for joint ventures and software development. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The following accounting policies are deemed critical to the understanding of the consolidated financial statements included under Item 8 - -Financial Statements and Supplementary Data.
Going Concern -- The financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern. The Company has suffered significant recurring operating losses and needs to raise additional capital in order to be able to accomplish its business plan objectives.
The Company has historically satisfied its capital needs primarily by the sale of equity securities. On September 16, 2005, the Company entered into a Securities Purchase Agreement and a Standby Equity Distribution Agreement with Cornell Capital Partners and its affiliates ("Cornell"). The Securities Purchase Agreement provides for Cornell to purchase up to $2,300,000 of Secured Convertible Debentures. This entire amount was funded during September and October 2005. The Standby Equity Distribution Agreement requires Cornell, at the Company's option, to purchase up to an aggregate of $20,000,000 of the Company's common stock over a two-year period commencing on the effective date of a registration statement filed with the Securities and Exchange Commission ("SEC").
On November 22, 2005, the Company entered into a stock purchase agreement with Mercatus & Partners, Limited ("Mercatus"). Pursuant to the Purchase Agreement, the Company will sell to Mercatus an aggregate of 2,816,900 shares of common stock (the "Shares"), no par value per share ("Common Stock"), for an aggregate purchase price of $5,000,000. Mercatus will have up to thirty days from the date of the delivery of the Shares to Brown Brothers Herriman, the custodial bank, to tender the purchase price to the Company. The Company has not yet received any proceeds pursuant to this agreement. In connection with the Purchase Agreements, the Company will pay to e3 Energy Company a one-time finder's fee consisting of the following: (a) five year warrants to purchase shares of Common Stock for cash in an amount equal to 5% of the number of Shares issued to Mercatus pursuant to the Purchase Agreements at an exercise price per share of $3.00, which warrants shall not be exercisable for a period of one year following the date of issuance, (b) a cash fee equal to 5% of the gross proceeds raised pursuant to the Purchase Agreements, and (c) restricted shares of Common Stock in an amount equal to 5% of the number of Shares issued to Mercatus pursuant to the Purchase Agreements.
During December 2005 the Company received $703,000 to commence manufacturing a 10 ton-per-day Plasma Converter System. The Company expects to begin manufacturing in February 2006 with the delivery scheduled for a date later in the year. The contract calls for a fixed schedule of payments to be made to the Company during the manufacturing cycle.
If the Company is unable to raise sufficient additional capital, it will have to develop and implement a plan to extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. These factors continue to raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Inventories--Inventories, which are stated at the lower of cost or net realizable value, consist of inventory held for resale to customers. Cost is determined on the first-in, first-out basis and includes freight and other incidental costs incurred. Judgment is involved in evaluating backlog and in assessing the recoverability of inventory held at the balance sheet date. Startech provides inventory allowances based on the determination of excess and obsolete inventories as determined through the evaluation of future sales and changes in technology.
Research and Development Costs--Research and development costs are expensed as incurred.
Derivative Financial Instruments - Warrants and embedded conversion options are accounted for under EITF issue No. 00-19 "Accounting for Derivative Financial Instruments Index to and Potentially Settled in a Company's Own Stock" and EITF 05-4, View A "The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument". Due to certain factors and the liquidated damage provision in the registration rights agreement, the Company determined that the embedded conversion option and the warrants are derivative liabilities. Accordingly the warrants and the embedded conversion option will be marked to market through earnings at the end of each reporting period. The warrants and the conversion option are valued using the Black-Scholes valuation model. Actual period closing common stock prices, applicable volatility rates and period close risk-free interest rates for the contractual remaining life of the contracts are key components used in the Black-Scholes valuation model.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of--Startech reviews the valuation of long-lived assets, including property and equipment and capitalized equipment, under the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Startech is required to assess the recoverability of long-lived assets and capitalized equipment costs whenever events and circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:
o significant underperformance relative to expected historical or projected future operating results;
o significant changes in the manner of our use of the acquired assets or the strategy of our overall business;
o significant negative industry or economic trends; and
o significant decline in our stock price for a sustained period.
In accordance with SFAS No. 144, when we determine that the carrying value of applicable long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we evaluate whether the carrying amount of the asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of that asset. If such a circumstance exists, we would measure an impairment loss to the extent the carrying amount of the particular long-lived asset or group exceeds its fair value. We would determine the fair value based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. In accordance with SFAS No. 144, when we determine that the carrying value of certain other types of long-lived assets may not be recoverable we evaluate whether the unamortized cost exceeds the expected future net realizable value of the products. If the unamortized costs exceed the expected future net realizable value of the products, the excess amount is written off.
Off-Balance Sheet Arrangements
As of February 10, 2006, we did not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial conditions, changes in financial conditions, result of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.
Results of Operations
Comparison of Fiscal Years Ended 2005 and 2004
Revenues. Our total revenues were $ 290,087 for the fiscal year ended October 31, 2005, as compared to $1,708,768 for the same period in 2004, a decrease of $ 1,418,681, or 83.0%. In Fiscal 2005, our revenues were derived
primarily from the amortization of distributorships agreements established in Australia, China and the Caribbean. Additional revenues were received from Mihama for the reinstallation of our plasma system in Kobe, Japan. In fiscal 2004, we delivered to Mihama components and system modifications, as well as contracted spare parts. Additional revenue resulted from distributor agreements located in Australia and Puerto Rico.
Gross profit. Our gross profit was $221,369, as compared to a gross profit of $1,080,012 for the fiscal year ended October 31, 2004, a decrease of $858,643, or 79.5%. The gross margins for 2005 were amortization of distributorships agreements established in Australia, China and the Caribbean. Additional revenues were received from Mihama for the reinstallation of our plasma system in Kobe, Japan. The gross margin for the fiscal year ended October 31, 2004 was a result of higher than expected margins on the components as well as the spare parts for the Mihama Project. Our margins were also positively impacted from the amortization of our distributorships.
General and administrative expenses. Our general and administrative expenses for the fiscal year ended October 31, 2005 were $2,672,781 compared to $2,460,013 for the same period in 2004, an increase of $212,768, or 8.7%. The Company incurred increased expenses related to a financing arrangement (+35,944), higher utility expenses (+11,327), increased rents (+38,254), office expenses (+40,981), and higher stockholder relations expenses (+66,129).
Research and development expenses. Our research and development expenses for the fiscal year ended October 31, 2005 were $337,898, compared to $353,099 for fiscal 2004, a decrease of $15,201, or 4.3%, from the same period in 2004. These decreased expenditures are a result of lower allocation expenses.
Selling expenses. Our selling expenses for fiscal year ended October 31, 2005 were $871,246, compared to $928,619 for the same period in 2004, a decrease of $57,373, or 6.2%, for the similar period in 2004. The decreased costs in 2005 were related to lower marketing expenses and a reduction in selling expense allocation.
Interest income. Our interest income for the fiscal year ended October 31, 2005 was $26,071, as compared to $29,491 in the same period in 2004, a decrease of $3,420, or 11.6%. The decrease is due to lower average cash balances.
Other income. Our other income for the year ended October 31, 2005 was $454,035, as compared to $0 in the same period in 2004. The increase was a direct result of our grant proceeds received from the Department of Energy.
Income taxes. Income taxes for the fiscal year ended October 31, 2005 were $22,189, as compared with to $12,473 in the similar period 2004. The taxes paid in 2005 and 2004 resulted from state taxes on equity requirements. We have minimal tax obligations due to the fact that we have not had profitability to this point. We have loss carryforwards of approximately $22 million to offset against future profits.
Comparison of Fiscal Years Ended 2004 and 2003
Revenues. Our total revenues were $ 1,708,768 for the fiscal year ended October 31, 2004, as compared to $70,000 for the same period in 2003, an increase of $ 1,638,768, or 2,341.1%. In fiscal 2004, we delivered to Mihama components and system modifications, as well as contracted spare parts. Additional revenue resulted from distributor agreements located in Australia and Puerto Rico. There were no Plasma Converter Systems shipped in fiscal year 2003 and revenues were limited to testing for Concurrent Technologies Corporation ("CTC").
Gross profit. Our gross profit was $1,080,012 for the fiscal year ended October 31, 2004, as compared to a gross profit of $21,324 for the same period in 2003, an increase of $1,058,688, or 4,964.7%. The gross margin increase for fiscal year 2004 was a result of higher than expected margins on the components as well as the spare parts for the Mihama Project. Our margins were also positively impacted from the amortization of our distributorships. The gross margin increase for fiscal year 2003 was a result of the completion of the CTC demonstration program.
General and administrative expenses. Our general and administrative expenses for the fiscal year ended October 31, 2004 were $2,460,013, compared to $1,998,893 for the same period in 2003, an increase of $461,120, or 23.1%. This increase resulted from the higher legal fees, public relations, consulting fees, office expenses, and higher insurance costs.
Research and development expenses. Our research and development expenses for the fiscal year ended October 31, 2004 were $353,099, compared to $310,219 in fiscal 2003, an increase of $42,880, or 13.8%, from the same period in 2003. These increased expenditures are a result of costs incurred for the preparation for the Department of Energy program as well as other internal projects.
Selling expenses. Our selling expenses for the fiscal year ended October 31, 2004 were $928,619, compared to $789,133 for the same period in 2003, an increase of $139,486, or 17.7%, for the similar period in 2003. The increased costs in 2004 were related to the hiring of additional sales and marketing personnel, as well as travel and associated expenses relating to various marketing projects.
Interest income. Our interest income for the fiscal year ended October 31, 2004 was $29,491, as compared to $9,220 in the similar period 2003, an increase of $20,271, or 219.8%. The increase is due to higher cash balances and higher interest rates earned on our investments resulting from the Federal Reserve raising short-term interest rates.
Income taxes. Income taxes for the fiscal year ended October 31, 2004 were $12,473, as compared with a credit balance of $143 in the similar period 2003. The taxes paid in 2004 resulted from state taxes on equity requirements. The tax credit balance for fiscal year 2003 was a result of refunds received. We have minimal tax obligations due to the fact that we have not had profitability to this point. As of October 31, 2004, we had loss carryforwards of approximately $18.5 million to offset against future profits.
Project Update
The Mihama Plasma Converter in Japan
The system, now owned by Mihama, has been installed in the Kobe, Japan facility and has been systemized. Startech over the past few months has dispatched our field technical teams to ensure full system operations. Mihama, Inc is presently acquiring the appropriate PCB (polychlorinated byphenyls) to initiate the testing program. 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.
Poland
The initial contracts signed in Poland are still pending project funding and remain in the financial development stage, however two of the contracts previously announced are being modified to increase their size and designated waste streams.
- The Eko Plasma project is expanding beyond a 10 TPD into a Plasma Converter Processing Facility that will now incorporate various waste streams including both Municipal Solid Waste (MSW) and various hazardous wastes including Medical and Industrial waste from surrounding municipalities.
- The Ekologia project previously announced will be increased from 10 TPD to 100 TPD Plasma Processing Facility that will process animal meal and hazardous waste. This Plasma Converter System will be operated to increase the selected output gas which will be sold to the neighboring chemical plant.
The Chempol project previously announced is continuing with the initial 10 TPD Plasma Converter.
The two 300 TPD Plasma Converter Processing Facilities contracts signed with Eco Group of America, Inc. are undergoing financing and the structuring of waste and power contracts within Poland. The contracted business entities have
changed project ownership and we currently are in discussion with Eco-Group of America for contract scope modification and assignment. The project sites have been approved as initially announced and remain the same.
Multiple new projects are being developed in Poland to process wastes ranging from MSW to Pesticides.
DOE Contract
The DOE testing Phase I has been completed and the final technical report is being finalized for issue to DOE. Phase II testing has been approved and this effort has been initiated. This new scope will extend the project test program through 2006 and further develop the quality of the StarCell ceramic membrane technology.
Australian Contracts
A new distributor has been established in Australia to service the markets in both New Zealand and Australia. The Distributor has initiated down-payments for their 10 TPD Plasma Converter System and has acquired a permitted facility.
In addition, the Agreement also requires PlasmaTech to make annual purchases of Startech Plasma Converter Systems to maintain the Distributorship.
Recent Developments
Mihama Japan -
The system in Kobe, Japan is operational and Mihama is in the final stage to initiate PCB testing. Startech will support this testing by sending our field technicians to Kobe, Japan upon notification from Mihama that the testing will be initiated. A significant part of this effort on the part of Startech will be re-certification of the Mahama, Inc system operators.
DOE StarCell Test Program -
During this reporting period Startech has completed the operational testing and analysis for the coal and surrogate Municipal Solid Waste (MSW) feedstocks. Detailed analysis has been conducted and reported by independent laboratories and the StarCell membrane has been performance baselined. Startech is preparing the final technical report for DOE and will be issued shortly. As indicated previously the 2nd Phase of StarCell performance testing has been approved and funded by DOE for effort in 2006. Startech has initiated this effort .
Vitech -
The customer will be processing 20,000 pounds per day of Reverse Logistic Pharmaceuticals. Reverse Logistic Pharmaceuticals are items such as expired drugs and medications from retailers and manufacturers that must be destroyed. Vitech expects to break ground on construction and place an order for their first 10 ton per day system within six months.
GlobalTech -
On October 3, 2005, the Company entered into an agreement with GlobalTech Environmental Incorporated ("GlobalTech") of Central, Hong Kong, with offices in Shanghai, Beijing and Changzhou in China as its exclusive distributor for the Peoples Republic of China. The Company has received $250,000 as the cash fee cash for that Distributorship. The Distributorship Agreement requires GlobalTech to purchase its first 25 ton-per-day Plasma Converter System (PCS), or larger, by June 30, 2006. The Agreement also requires GlobalTech to purchase $40 million
worth of Startech Plasma Converter Systems by March 27, 2007 and also $150 million worth of Plasma Converter Systems each year for the ten years following as a minimum to maintain the Distributorship.
GlobalTech will be managing the Distributorship with its principal operating partner the Jingu Group. Jingu is a company with diversified businesses in urban infrastructure development and planning, construction and also environmental engineering. The Jingu world headquarters is located in Changzhou, Jiangsu on the east coast of China near Shanghai.
Stock Purchase Agreement -
On November 22, 2005, the Company entered into the SICAV ONE Stock Purchase Agreement and SICAV TWO Stock Purchase Agreement (collectively, the "Purchase Agreements") with Mercatus & Partners, Limited ("Mercatus"). Pursuant to the Purchase Agreements, the Company will sell to Mercatus an aggregate of 2,816,900 shares of common stock (the "Shares"), no par value per share ("Common Stock"), for an aggregate purchase price of $5,000,000. Mercatus will have up to thirty days from the date of the delivery of the Shares to Brown Brothers Herriman, the custodial bank, to tender the purchase price to the Company. The shares have been placed in escrow. The Company has not yet received any proceeds pursuant to this agreement.
In connection with the Purchase Agreements, the Company will pay to e3 Energy Company a one-time finder's fee consisting of the following: (a) five year warrants to purchase shares of Common Stock for cash in an amount equal to 5% of the number of Shares issued to Mercatus pursuant to the Purchase Agreements at an exercise price per share of $3.00, which warrants shall not be exercisable for a period of one year following the date of issuance, (b) a cash fee equal to 5% of the gross proceeds raised pursuant to the Purchase Agreements, and (c) restricted shares of Common Stock in an amount equal to 5% of the number of Shares issued to Mercatus pursuant to the Purchase Agreements.
These issuances are exempt from registration by virtue of Regulation S of the Securities Act of 1933, as amended, because Mercatus is not a U.S. Person (as defined under Regulation S), not purchasing the Shares for the account or benefit of a U.S. Person, the purchase was made in an "offshore transaction" and there were no "directed selling efforts" in the United States.
AEN-
On December 5, 2005, the Company announced that it has formed a Strategic Alliance Agreement with Ansaldo Energia S.p.A. ("AEN"), having its principal place of business at Genova, Via Nicola Lorenzi 8, Italy, to mutually obtain commercial contracts that utilize Startech's and AEN's, resources, equipment, expertise, know-how and experience to produce sales that include their mutual capabilities.
AEN and Startech have agreed that it is in their mutual interest to work together to produce the joint development of initiatives, both technical and commercial, for the sales of Startech's Plasma Converter Systems and/or turnkey plants incorporating Startech's proprietary technology for waste destruction and remediation, the production of energy by use of the fuel produced by Startech's technology, the development of joint R&D programs to enhance the potential of Startech's technology and the employment of AEN's financial resources.
AEN is an energy and power generation company providing an entire power generation spectrum including, financing, manufacturing, plant engineering, full-turnkey project planning and development, engineering construction, plant operations, field service and maintenance.
With more than a hundred years of power generation experience and an installed capacity exceeding 160,000 MW in over 90 countries, its major strengths are its global reach, a full service organization and a flexible approach to project developments. AEN is a subsidiary of the Finmecannica Group, an engineering and aerospace/defense group based in Italy.
PlasTech Solutions
On January 3, 2006, the Company announced that Plastech Solutions, Ltd. paid $703,000 to commence manufacturing for Plastech's purchase of a 10 ton-per-day Plasma Converter System. Startech will begin manufacturing the System on February 6, 2006 with the delivery scheduled for a date later in the year. The contract calls for a fixed schedule of payments to be made to the Company during the manufacturing cycle.
PlasTech Solutions, Ltd. of New South Wales, Australia is Startech's exclusive distributor for Australia, New Zealand and Oceana. Its $703,000 payment does not include the $250,000 that Plastech paid to the Company for the Distributorship. The Startech 10 TPD Plasma Converter in the PlasTech territory will be processing an assortment of industrial and institutional wastes.
On February 2, 2006, the Company announced that the 10 ton-per-day Plasma Converter System for Plastech Solutions, Ltd. has been put into production. Delivery is scheduled for a date later in the year.
Effects of Inflation
Due to the low rate of inflation there has been very little effect on the Company's net revenues for fiscal 2005.
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.
The Company had a net working capital deficiency of $1,069,350 as of October 31, 2005 and had cash and cash equivalents of $2,489,529 as of October 31, 2005.
The Company has historically satisfied its capital needs primarily by the sale of equity securities. On September 16, 2005, the Company entered into a Securities Purchase Agreement and a Standby Equity Distribution Agreement with Cornell Capital Partners and its affiliates ("Cornell"). The Securities Purchase Agreement provides for Cornell to purchase up to $2,300,000 of Secured Convertible Debentures. This entire amount was funded during September and October 2005. The Standby Equity Distribution Agreement requires Cornell, at the Company's option, to purchase up to an aggregate of $20,000,000 of the Company's common stock, subject to certain limitations, over a two-year period commencing on the effective date of a registration statement filed with the Securities and Exchange Commission ("SEC").
Working capital was provided primarily from private placements, the Cornell debenture, security deposits and other income that were completed in 2005, from which we raised net proceeds of $ 4,146,819 after expenses. We have and will continue to be dependent upon the deposits and progress payments from the sale of equipment and the private sale of securities. It is anticipated that our capital requirements for future periods will increase and our future working capital needs will be obtained from the above sources as well as additional private placements, demonstration and testing programs, joint development programs, build own and operate facilities, and from cash generated from the operations of our business.
On November 22, 2005, the Company entered into a stock purchase agreement with Mercatus & Partners, Limited ("Mercatus"). Pursuant to the Purchase Agreement, the Company will sell to Mercatus an aggregate of 2,816,900 shares of common stock (the "Shares"), no par value per share ("Common Stock"), for an aggregate purchase price of $5,000,000. Mercatus will have up to thirty days from the date of the delivery of the Shares to Brown Brothers Herriman, the custodial bank, to tender the purchase price to the Company. The Company has not yet received any proceeds pursuant to this agreement. In connection with the Purchase Agreements, the Company will pay to e3 Energy Company a one-time finder's fee consisting of the following: (a) five year warrants to purchase shares of Common Stock for cash in an amount equal to 5% of the number of Shares issued to Mercatus pursuant to the Purchase Agreements at an exercise price per share of $3.00, which warrants shall not be exercisable for a period of one year following the date of issuance, (b) a cash fee equal to 5% of the gross proceeds raised pursuant to the Purchase Agreements, and (c) restricted shares of Common Stock in an amount equal to 5% of the number of Shares issued to Mercatus pursuant to the Purchase Agreements.
The Company believes that continuing operations for the longer term will be supported primarily through anticipated growth in revenues and, if necessary, through additional sales of the Company's securities. Management of the Company is continuing its efforts to secure additional funds through equity and/or debt instruments. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 U.S. Treasury bills.
RISK FACTORS
This annual report on Form 10-K contains a number of "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Specifically, all statements other than statements of historical facts included in this annual report regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to management. When used in this annual report, the words "anticipate," "believe," "estimate," "expect," "may," "will," "hope," "continue" and "intend," and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements. These statements reflect our current view with respect to future events and are subject to risks, uncertainties and assumptions related to various factors including, without limitation, those described below under this heading "Risk Factors" and in our registration statements and periodic reports filed with the Securities and Exchange Commission under the Securities Act and the Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure you that our expectations will prove to be correct. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in this annual report as anticipated, believed, estimated, expected or intended.
Risks Related to Our Business
We have limited operating history upon which to evaluate our potential for future success.
We were formed in May 1991. To date, we have generated limited revenues from the sale of our products and do not expect to generate significant revenues until we sell a larger number of our products. Accordingly, we only have a limited operating history upon which to base an evaluation of our business and prospects. The likelihood of our success must be considered in light of the risks and uncertainties frequently encountered by early stage companies like ours in an evolving market, such as unforeseen capital requirements, failure of market acceptance, failure to establish business relationships and competitive
disadvantages as against larger and more established companies. If we are unsuccessful in addressing these risks and uncertainties, our business will be materially harmed. We were considered a development stage company for accounting purposes until 1998 because we had not generated any material revenues to that date. Revenues from shipments and services began to be recognized in 1999.
We have incurred substantial operating losses and may not achieve or sustain profitability in the future.
We have incurred substantial net losses in each year since we commenced operations. We must overcome significant manufacturing and marketing hurdles to sell large quantities of our products. As we strive to grow our business, we expect to spend significant funds for general corporate purposes, including working capital and marketing, and for research and development. To the extent that our revenues do not increase as quickly as these costs and expenditures, our results of operations and liquidity will be materially adversely affected. If we experience slower than anticipated revenue growth or if our operating expenses exceed our expectations, we may not achieve profitability. Even if we are profitable in the future, we may not be able to sustain profitability.
To date we have delivered and installed two Plasma Converters(TM), one for the demonstration phase of a U. S. Army program in 1999, and one for commercial use in Japan that was delivered in August 2001 and installed in April 2002. We had revenues of $70,000, $1,708,768 and $290,087 for each of the fiscal years ended October 31, 2003, 2004 and 2005, respectively, and our net loss for each of these periods was $3,421,714, $2,646,406 and $3,678,788, respectively. We do not expect to generate any material revenues until after we successfully complete the manufacture and installation of a significant number of Plasma Converters(TM). We expect losses to increase as a result of "business as usual" expenses over the next 6 months, as we expand our marketing efforts and demonstrate our results of operations and liquidity will be materially adversely affected and our technology to potential customers. If we are unable to increase revenues and we continue to operate at a loss, our results of operations and liquidity will be materially adversely affected and the market price of our common stock will likely decline.
We have not yet sold the Plasma Converter(TM) on a large - scale commercial basis which may limit our sales and revenue.
We have never utilized the Plasma Converter(TM) under the conditions and in the volumes that will be required to achieve profitability nor has the Plasma Converter(TM) been utilized on a large-scale commercial basis. While we have demonstrated the Plasma Converter(TM)'s ability to process and dissociate waste feedstocks and recover resources in pilot scale and industrial-sized Plasma Converters(TM), there is no guarantee that the same or similar results could be obtained on a large-scale continuing commercial basis or on any specific project. Our success will depend, in part, on our ability to design and build systems that handle many tons of material per day and operate continuously. Our data and research to date support the fact that we will achieve results in the larger systems similar to those we have had in the smaller system we have manufactured. If the larger systems do not operate as we expect, it will significantly limit our sales and revenue, our results of operation and liquidity will be materially, adversely affected and the market price of our common stock will likely decline in value.
We are dependent on third parties for manufacturing key components which may cause delays in manufacturing and increased costs to the Company.
We currently have our own manufacturing facility where we assemble and test systems. We also rely upon third parties for the manufacture of key components. Delays and difficulties in the manufacturing of our products could substantially harm our product development efforts.
There are limited sources of supply for some Plasma Converter(TM) components. Business disruptions, financial difficulties of the manufacturers or suppliers, or raw material shortages could increase the cost of goods sold or reduce the availability of these components. In our development to date, we have been able to obtain adequate supplies of these key components. If sales accelerate, we may experience a rapid and substantial increase in our need for components. If we are unable to obtain a sufficient supply of required components, we could experience significant delays in manufacturing, which could result in the loss of orders and customers, and could affect our business, financial condition and results of operations. Although we plan to purchase inventories of these strategic components, we may still require alternative sources if we experience delays in obtaining them. If the cost of finished components increases, we may not be able to pass on price increases to our customers if we are to remain competitively priced. This would reduce profit, which in turn would reduce the value of your investment.
Our failure to achieve market acceptance of the Plasma Converter(TM) within our expanded business model would adversely affect our business.
The failure to achieve market acceptance of the Plasma Converter(TM) within our expanded business model would affect our profitability, future revenues, the market price of our common stock, and the success of our business. Many prospective users of the Plasma Converter(TM) have committed substantial resources to other forms of material processing treatments or technologies. Our growth and future financial performance will depend on our ability to demonstrate to prospective customers the technical and economic advantages of the Plasma Converter(TM) over these alternatives. We may not be successful in this effort. Furthermore, it is possible that competing alternatives may actually have advantages over the Plasma Converter(TM) for certain industries or applications.
We have expanded our business to include market penetration strategies in which we have no previous experience. These strategies include build own and operate facilities; build own and transfer of ownership facilities; and joint development projects. Although certain of our executives have individual experience in these areas we have not, as a company, developed projects of this type in the past.
Our failure to obtain additional financing, if needed, would adversely affect our business results.
We believe our cash reserves, anticipated cash generated from operations and other existing sources of capital will be adequate to fund our operations for up to one year. However, we may require additional financing to fund ongoing operations if our sales and revenue growth are insufficient to meet our operating costs. Our inability to obtain necessary capital or financing will adversely affect our ability to fund operations and continue as a going concern. Financing for all of our activities to date has been provided by private sales of our securities. Additional financing may not be available when needed or may not be available on terms acceptable to us. If additional funds are raised by issuing equity securities, shareholders may incur dilution. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our development programs or otherwise limit the development, manufacture or sale of Plasma Converters (TM), which may materially affect our business, results of operations and financial condition and reduce the value of your investment.
We face numerous risks associated with our plans to market and distribute the Plasma Converter(TM) domestically.
We are currently marketing the Plasma Converter(TM) principally in international markets, including both industrialized and developing countries, and expect a significant portion of our future revenues to come from foreign sales. If we are unable to expand our domestic marketing efforts beyond current levels our future expected profitability will be substantially reduced. Substantial risks still remain for us to market our product effectively in domestic markets. These risks include:
o Political and economic instability. Many of our domestic initiatives involve local government support or funding. Sales to governments may have a long sales cycle. Any change in the political or economic climate during this sales cycle may prevent us from making an anticipated sale.
o Difficulties in collecting accounts receivable. We are a small company with limited cash resources. It may be difficult for us to recover monies owed from a domestic customer if we are forced to take legal action.
o Protection of intellectual property. The domestic and foreign laws governing intellectual property may afford little or no effective protection of our intellectual property. Even if protected, litigation may result in substantial costs or a diversion of resources.
Any of these risks will reduce expected revenues and may prevent us from achieving or sustaining profitability. An inability to increase revenues or become profitable may reduce the market price of our common stock.
We may acquire other companies, product lines or technology and our failure to integrate any of them may have an adverse effect on our business.
As part of our growth strategy, we may pursue acquisitions and investments that could provide complementary and competitive new technologies, products, or businesses. Future acquisitions or investments would involve the use of significant amounts of cash, which may cause us to incur a significant amount of debt. In addition, acquisitions involve numerous risks, including the diversion of management's attention from other business concerns and risks of entering markets in which we have limited or no prior experience.
We currently have no commitments with respect to any acquisition or investment. If an acquisition or investment does occur and we cannot successfully integrate the business, product, technology, or personnel that we acquire, it would have a material adverse affect on our business, results of operations and financial condition.
We may be unable to find appropriate strategic alliances, which would adversely affect market penetration of the Plasma Converter(TM).
Future strategic alliances may include cooperative agreements for the sharing of information, cooperative marketing agreements, or other business relationships such as equity investments or joint ventures. We may be unable to find appropriate strategic alliances in markets in which we have little or no experience, which could prevent us from bringing our products to these markets in a timely manner, if at all. This may lower the demand for and reduce market acceptance of the Plasma Converter(TM), reducing our revenues and profitability.
We have made several strategic alliances for the purpose of commercializing the Plasma Converter(TM). These alliances are intended to facilitate our entry into the marketplace and accelerate the development and commercialization of our products; however, to date none of our alliances have resulted in any product sales.
The terms our alliances may require us and our alliance partners to share revenues and expenses from joint activities, or for us to grant to our partners licenses to manufacture market and sell our products. While the leveraging of our resources through these alliances may have a favorable effect on our financial condition, the sharing of revenues may negatively affect our results of operations.
Contracts with federal and state governments subject us to possible contract terminations and audits.
We participate in selective research and sales opportunities involving federal and state governments. Contracts with the United States government are subject to various risks, including the risk of termination at the convenience of the government. This type of contractual clause is included in all government contracts and allows the government to cancel a contract at any time during the performance of the contract without penalty. If cancelled for "convenience" the government must pay the costs of the contract up until that date and other reasonable costs related to its termination. Additionally, revenues from these potential relationships are subject to time-consuming audit procedures under various federal statutes.
There may be claims made against us for personal injury and business losses which may subject us to litigation and related costs.
We anticipate that the Plasma Converter(TM) system will be utilized in a variety of industrial and other settings, and will be used to handle materials resulting from the generation of hazardous waste. The equipment will therefore be subject to risks of breakdowns and malfunctions, and it is possible that claims for personal injury and business losses arising out of these breakdowns and malfunctions will be made against us. Our insurance may be insufficient to provide coverage against all claims, or for claims made for amounts substantially in excess of applicable policy limits. Such an event could have a material adverse effect on our business, financial condition and results of operations.
Product liability claims could result in losses and could divert our management's time and resources.
The manufacture and sale of our products create a risk of product liability claims. Any product liability claims, with or without merit, could result in costly litigation and reduced sales, cause us to incur significant liabilities and divert our management's time, attention and resources. We do have product liability insurance; however, there is no assurance that such insurance is adequate to cover all potential claims. The successful assertion of any such large claim against us could materially harm our liquidity and operating results.
Our failure to properly control the use of hazardous materials could result in substantial financial liabilities to us.
We use, generate and discharge toxic, volatile or otherwise hazardous chemicals and wastes in our research, development and manufacturing activities. Therefore, we are subject to a variety of federal, state and local government regulations related to the storage, use and disposal of such materials. Failure to comply with present or future regulations could result in an imposition of fines on us, suspension of production or a cessation of operations. We are not aware of any environmental investigation, proceeding or action by federal or state agencies involving any of our facilities. However, under federal and state statutes and regulations, a government agency may seek recovery and response costs from both operators and owners of property where releases of hazardous substances were committed by previous occupants of the property or have occurred or are ongoing. If we fail to control the use of, or to restrict adequately the discharge of, hazardous substances, we could be subject to substantial financial liabilities. Our business, financial condition and operating results could suffer a material adverse effect if costs resulting from these liabilities are not covered by insurance or exceed our coverage.
Failure to comply with government regulations will severely limit our sales opportunities and future revenues.
We and our customers may be required to comply with a number of federal, state and local laws and regulations in the areas of safety, health and environmental controls, including without limitation, the Resource Conservation and Recovery Act and the Occupational Safety and Health Act of 1970, which may require our prospective working partners or our customers to obtain permits or approvals to utilize the Plasma Converter(TM) and related equipment on job sites. In as much as we intend to market the Plasma Converter(TM) internationally, we will be required to comply with laws and regulations and, when applicable, obtain permits in those other countries. We cannot be certain that required permits and approvals will be obtained or that new environmental regulations will not be enacted or that if they are, we and our customers can meet stricter standards of operation or obtain additional operating permits or approvals. Failure to obtain operating permits, or otherwise to comply with federal and state regulatory requirements, could affect our ability to market and sell the Plasma Converter(TM) and could substantially reduce the market price of our common stock.
Failure to protect our intellectual property could adversely affect our brand and business.
The success and competitiveness of our product depends in part upon our ability to protect our current and future technology, manufacturing processes, and brand name through a combination of patent, trademark, trade secret and unfair competition laws, and our failure to do so could seriously harm our business, financial condition and results of operations.
Patent applications in the United States are maintained in secrecy until patents are issued, and the publication of discoveries in the scientific literature tends to lag behind actual discoveries. Therefore, we cannot guarantee that we will be the first creator of future inventions for which we seek patents or the first to file patent applications for any of our inventions.
Patent applications filed in foreign countries are subject to laws, rules and procedures which differ from those of the United States. We cannot be certain that:
o patents will be issued from future applications;
o any future patents will be sufficient in scope or strength to provide meaningful; protection or any commercial advantage to us;
o foreign intellectual property laws will protect our intellectual property; or
o others will not independently develop similar products, duplicate our products or design around any patents which may be issued to us.
We enter into confidentiality and non-disclosure of intellectual property agreements with our employees, consultants and many of our vendors, and generally control access to and distribution of our proprietary information. Notwithstanding these precautions, it may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar information independently.
Policing unauthorized use of intellectual property is difficult. The laws of other countries may afford little or no effective protection of our technology. We cannot assure you that the steps taken by us will prevent misappropriation of our technology, which may cause us to lose customers and revenue opportunities. In addition, pursuing persons who might misappropriate our intellectual property could be costly and divert the attention of management from the operation of our business.
Our failure to keep pace with our competitors and technological changes may result in the loss of customers and revenue opportunities.
Other manufacturers of systems used to process and dispose of materials and wastes in both the private and public sectors include several large domestic and international companies and numerous small companies, many of whom have substantially greater financial and other resources and more manufacturing, marketing and sales experience than we do. As other technologies evolve, the Plasma Converter(TM) may be rendered obsolete. To the extent that our competitors are able to offer more cost-effective technological alternatives, our ability to compete and sell the Plasma Converter(TM) could be materially and adversely affected.
We are dependent on key personnel and our business would be disrupted if we are unable to retain and expand our management team
Due to the nature of our business, we are highly dependent on the continued service of, and on the ability to attract and retain, qualified engineering, technical, manufacturing, sales, marketing and senior management personnel. The loss of any key employees or principal members of management could have a material adverse effect on our business and operating results. Further, if we are unable to hire additional qualified personnel as needed, we may not be able to adequately manage and implement plans for our expansion and growth. Joseph F. Longo, our Chairman, Chief Executive Officer and President, has an employment agreement with us; however, any other officer or employee of the Company may terminate his or her relationship with us at any time. Our employment agreement with Mr. Longo and our employment arrangements with other executive officers and significant employees impose customary confidentiality and non-compete obligations and provide for the assignment to us of all rights to any technology developed by such person during the time of his or her employment.
Due to the lengthy sales cycles of our products and services, the timing of our sales is difficult to predict and may cause us to miss our revenue expectations.
Our products and services are typically intended for use in applications that may be critical to a customer's business. In certain instances, the purchase of our products and services involves a significant commitment of resources by prospective customers. As a result, our sales process is often subject to delays associated with lengthy approval processes. For these and other reasons, the sales cycle associated with the selling of our products and services typically ranges between six and eighteen months and is subject to a number of significant delays over which we have little or no control. While our customers are evaluating whether our products and services suit their needs, we may incur substantial sales and marketing expenses and expend significant management effort. We may not realize forecasted revenues from a specific customer in the quarter in which we expend these significant resources, or at all, because of the lengthy sales cycle for our products and services.
Our common stock has been delisted from the Nasdaq Stock Market.
As of July 17, 2003, our common stock was delisted from the Nasdaq SmallCap Market and began trading on the NASD Over-the-Counter Bulletin Board. Since our shares are not listed for trading on the Nasdaq SmallCap Market or other national securities exchange, the trading our shares is more difficult for investors, potentially leading to further declines in the price of our common stock. It may also make it more difficult for us to raise additional capital. Further, we may also incur additional costs under state blue-sky laws in connection with any sales of our securities.
As a result of our trading on the NASD Over-the-Counter Bulletin Board, investors may find it more difficult to dispose of or obtain accurate quotations as to the market value of the securities. In addition, we are subject to a Rule promulgated by the Securities and Exchange Commission that, if we fail to meet criteria set forth in such Rule, various practice requirements are imposed on broker-dealers who sell securities governed by the Rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser's written consent to the transactions prior to sale. Consequently, the Rule may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock.
Terrorist attacks and other attacks or acts of war may adversely affect the markets on which our common stock trades our financial condition and our results of operations.
On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scope. In March 2003, the United States and allied nations commenced a war in Iraq. These attacks and the war in Iraq have caused global instability in the financial markets. There could be further acts of terrorism in the United States or elsewhere that could have a similar impact. Armed hostilities or further acts of terrorism could cause further instability in financial markets and could directly impact our financial condition, our results of operations and the price of our common stock.
Our future operating results are likely to fluctuate which may cause volatility in our stock price.
Our quarterly and annual operating revenues, expenses, and operating results may fluctuate. They have varied widely in the past, and we expect they will continue to fluctuate in the future. Fluctuations in quarterly and annual results will also adversely impact management's ability to accurately project the available revenue necessary for growing our business through internal funding. Because we have a limited operating history and our future operating results may be below the expectations of securities analysts and investors, the market price of our common stock may decline.
Our stock price fluctuates. You could lose all or part of the value of your shares of our common stock.
The market price of our common stock has fluctuated and may continue to fluctuate significantly due to a number of factors, some of which may be beyond our control, including:
o sales of our common stock by shareholders because our business profile does not fit their investment objectives;
o actual or anticipated fluctuations in our operating results;
o the operating and stock price performance of other comparable companies;
o developments and publicity regarding our industry; and
o general economic conditions.
In addition, the stock market in general has experienced volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect the trading price of our common stock, regardless of our actual performance, and could enhance the effect of any fluctuations that do relate to our operating results.
Item 7A.
Item 7A. Qualitative and Quantitative Disclosure about Market Risk.
Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this Item 7A.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The response to this item is submitted in a separate section of this annual report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On January 21, 2005 our Board of Directors voted to approve the replacement of Kostin, Ruffkess and Co., LLC and to retain Marcum & Kliegman LLP as our independent registered public accounting firm. We have not had any disagreements with our former accounting firm on accounting and financial disclosures, nor have we had any other changes in our accountants during our three most recent fiscal years or any later interim period.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures - ----------------------------------
The Company maintains controls and procedures designed to ensure that it is able to collect the information that is required to be disclosed in the reports filed with the SEC, and to process, summarize and disclose this information within the time period specified in the rules of the SEC. The Company's Chief Executive and Chief Financial Officers are responsible for establishing, maintaining and enhancing these procedures. They are also responsible, as required by the rules established by the SEC, for the evaluation of the effectiveness of these procedures.
Based on their evaluation of the Company's disclosure controls and procedures which took place as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls and procedures were not effective at the "reasonable assurance" level. These controls ensure that the Company is able to collect, process and disclose the information required in the reports that the Company files with the SEC within the required time period.
Internal Controls
The Company maintains a system of internal controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to (1) permit preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, and (2) maintain accountability for assets. Access to assets is permitted only in accordance with management's general or specific authorization.
It is the responsibility of the Company's management to establish and maintain adequate internal control over financial reporting. However, due to its small size and limited financial resources the Company's Chief Financial Officer, a member of management, has been the only full time employee principally involved in accounting and financial reporting. The Board of Directors has recognized that as a result, there is no formal segregation of duties within the accounting function, leaving management of all aspects of financial reporting and physical control of cash and equivalents in the hands of the CFO. Based on the integrity and trustworthiness of the Company's Chief Financial Officer, the Board of Directors has had confidence that there have been no irregularities in the Company's financial reporting or in the protection of its assets.
Our independent auditors have reported to our Board of Directors certain matters involving internal controls that our independent auditors considered to be a reportable conditions and material weaknesses, under standards established by the American Institute of Certified Public Accountants. The first material weakness we identified relates to our limited segregation of duties. Segregation of duties within our company is limited due to the small number of employees that are assigned to positions that involve the processing of financial information. Although we are aware that segregation of duties within our company is limited, we believe (based on our current roster of employees and certain control mechanisms we have in place), that the risks associated with having limited segregation of duties are currently insignificant. The second material weakness we identified is in our ability to ensure that the accounting for our debt and equity-based transactions is accurate and complete. During the year ended October 31, 2005, we consummated a series of complex debt and equity transactions involving the application of highly specialized accounting principles. Although we believe that these events are unique, we are evaluating certain corrective measures we may take including the possibility of hiring an outside consultant to provide us with the guidance we need at such times that we may engage in these complex transactions.
Given these reportable conditions and material weaknesses, management devoted additional resources to resolving questions that arose during our year-end audit and this Form 10-K for the period ended October 31, 2005. As a result, we are confident that our financial statements for the year ended October 31, 2005 fairly present, in all material respects, our financial condition and results of operations. Management does not believe that the above reportable conditions and material weaknesses affected the results for the year ended October 31, 2005 or any prior period.
Item 9B.
Item 9B. Other Information.
None.
PART III
The information required to be filed by Part III (Items 10, 11, 12, 13 and 14) is hereby incorporated by reference from the Company's definitive proxy statement (to be filed with the Securities and Exchange Commission pursuant to Regulation 14A), which proxy statement will be filed no later than 120 days after October 31, 2005.
STARTECH ENVIRONMENTAL CORPORATION
Consolidated Financial Statements
October 31, 2005, 2004 and 2003
STARTECH ENVIRONMENTAL CORPORATION
For The Years Ended October 31, 2005, 2004 and 2003
Page ---- Report of Independent Registered Public Accounting Firm Independent Auditors' Report Consolidated balance sheets Consolidated statements of operations Consolidated statements of changes in stockholders' equity Consolidated statements of cash flows Supplemental Disclosure of Cash Flow Information Notes to consolidated financial statements -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------
To the Audit Committee of the Board of Directors Startech Environmental Corporation
We have audited the accompanying consolidated balance sheet of Startech Environmental Corporation as of October 31, 2005, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Startech Environmental Corporation as of October 31, 2005, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has no significant revenues and has incurred significant losses since inception. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Marcum & Kliegman LLP
New York, NY January 13, 2006
[GRAPHIC OMITTED]
Pond View Corporate Center 76 Batterson Park Road Farmington, CT 06032
Main Line: (860) 678-6000 Toll Free: 800-286- KRCO Fax: (860) 678-6110 Web: www.kostin.com
Farmington - New London
Business Advisors and Certified Public Accountants
To the Board of Directors Startech Environmental Corporation
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Startech Environmental Corporation as of October 31, 2004 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended October 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Startech Environmental Corporation as of October 31, 2004, and the results of its operations, changes in stockholders' equity and its cash flows for each of the two years in the period ended October 31, 2004, in conformity with U.S. generally accepted accounting principals.
Farmington, Connecticut December 15, 2004
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
Note 1 - Organization and Basis of Presentation: - ------------------------------------------------
Company's Activities
Startech Environmental Corporation (the "Company") is an environmental technology corporation dedicated to the development, production and marketing of low cost waste minimization, resource recovery, and pollution prevention systems that convert waste into valuable commodities.
Basis of Presentation - ---------------------
On November 17, 1995, Startech Environmental Corporation, formerly Kapalua Acquisitions, Inc., was acquired in a reverse acquisition, in which all the then issued and outstanding shares of common stock of Startech Corporation were exchanged for 4,000,000 shares of Kapalua Acquisitions, Inc.'s common stock. After the acquisition and exchange of stock, the former shareholders of Startech Corporation owned 80.5% of the common stock of Kapalua Acquisitions, Inc. Subsequent to November 17, 1995, Kapalua Acquisitions, Inc. filed registration statements with the Securities and Exchange Commission to register certain securities. On January 2, 1996, Kapalua Acquisitions, Inc. changed its name to Startech Environmental Corporation.
Note 2 - Summary of Significant Accounting Policies: - ----------------------------------------------------
Going Concern - -------------
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the financial statements do not purport to represent realizable or settlement values. The Company has no significant revenue, suffered significant recurring operating losses and needs to raise additional capital in order to be able to accomplish its business plan objectives. These conditions raise substantial doubt about the Company's ability to continue as a going concern..
The Company has historically satisfied its capital needs primarily by the sale of equity securities. On September 16, 2005, the Company entered into a Securities Purchase Agreement and a Standby Equity Distribution Agreement with Cornell Capital Partners and its affiliates ("Cornell"). The Securities Purchase Agreement provides for Cornell to purchase up to $2,300,000 of Secured Convertible Debentures. This entire amount was funded during September and October 2005. The Standby Equity Distribution Agreement requires Cornell, at the Company's option, to purchase up to an aggregate of $20,000,000 of the Company's common stock, subject to certain limitations as discussed in Note 6, over a two-year period commencing on the effective date of a registration statement filed with the Securities and Exchange Commission ("SEC").
Management of the Company is continuing its efforts to secure additional funds (see Note 15) through equity and/or debt instruments. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Principles of Consolidation - ---------------------------
The consolidated financial statements of Startech Environmental Corporation include the accounts of Startech Corporation, its wholly-owned subsidiary. All intercompany transactions have been eliminated in consolidation.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
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 a three year period. For the years ended October 31, 2005, 2004 and 2003 revenue consisted of the following:
2005 2004 2003 ---------- ---------- ----------
Manufactured parts $ 56,106 $1,310,620 $ 70,000 Services and training 52,083 131,655 -- Distributorships 181,898 266,493 -- ---------- ---------- ---------- Total $ 290,087 $1,708,768 $ 70,000 ========== ========== ==========
Use of Estimates - ----------------
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include useful life of equipment and leasehold improvement and valuation of derivative instruments. These estimates and assumptions are based on management's judgment and available information, and consequently, actual results could differ from these estimates.
Reclassifications - -----------------
Certain reclassifications have been made to the fiscal 2004 and 2003 financial statements to conform to the presentation used in the fiscal 2005 financial statements. The reclassifications had no effect on stockholders' equity or net losses as previously reported.
Cash and Cash Equivalents - -------------------------
The Company considers all highly liquid instruments, with a maturity of three months or less when purchased, to be cash equivalents.
Accounts Receivable - -------------------
Accounts receivable are carried at their estimated collectible amounts. Accounts receivable are periodically evaluated for collectibility and an allowance for doubtful accounts is recorded accordingly. Management determines collectibility based on their experience and knowledge of the customers.
Inventory - ---------
Inventory consists of raw materials and is stated at lower of cost or market. Cost is determined by the first-in, first-out method.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
Equipment and Leasehold Improvements - ------------------------------------
Equipment and leasehold improvements are stated at cost, less accumulated depreciation. Depreciation of equipment is provided using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 15 years. Expenditures for major additions and betterments which extend the useful lives of the equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Deferred Financing Costs - ------------------------
Costs incurred in conjunction with the convertible notes payable have been capitalized and will be amortized over the term of the notes.
Deferred Offering Costs - -----------------------
Costs were incurred in conjunction with the Standby Equity Distribution Agreement (Note 6). Such costs will be applied to proceeds received under the agreement. In the event that the Company determines that they do not expect to receive any proceeds under the agreement, such costs will be expensed.
Research and Development - ------------------------
The Company charges all costs incurred to establish the feasibility of a product or enhancements to research and development expense in the period incurred. During the years ended October 31, 2005, 2004 and 2003, the Company incurred research and development expenses of $337,898, $353,099 and $310,219, respectively.
Income Taxes - ------------
In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," the Company uses an asset and liability approach for financial accounting and reporting for income taxes. The basic principles of accounting for income taxes are: (a) a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year; (b) a deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards; (c) the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law and the effects of future changes in tax laws or rates are not anticipated; and (d) the measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. The Company has had recurring net losses and the resulting deferred tax asset is offset by a corresponding valuation allowance.
Stock Based Compensation - ------------------------
Stock options issued under stock-based compensation plans are accounted for under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in the net loss, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock, as determined by the board of directors, on the date of grant. Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure - an Amendment of FASB Statement No. 123, requires the disclosure of the effect on net loss and loss per share had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
The fair value of each option granted is estimated as of the grant date using the Black-Scholes option pricing model with the following assumptions:
2005 2004 2003 ---- ---- ---- Risk-free interest rate range 2.89%-4.57% 4.21% 4.24% Expected life of options -- years 5.63 6.84 10.00 Expected stock price volatility 81% 98% 76% Expected dividend yield N/A N/A N/A
The estimated fair value of options granted is amortized to expense over the option vesting periods.
The following table illustrates the pro forma effects on net loss and net loss per common share for the years ended October 31, 2005, October 31, 2004 and October 31, 2003 as if the Company had applied the fair value recognition provisions of FASB Statement No. 123 to stock-based compensation issued to employees.
Net Loss Per Share of Common Stock - ----------------------------------
Basic net loss per share excludes dilution for potentially dilutive securities and is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock. Potentially dilutive securities realizable from the exercise of options, warrants and convertible notes of 6,315,464, 4,597,991 and 3,754,286 at October 31, 2005, October 31, 2004 and October 31, 2003, respectively, are excluded from the computation of diluted net loss per share as their inclusion would be anti-dilutive.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
Recently Issued Accounting Pronouncements - -----------------------------------------
In September 2005, the FASB ratified the following consensus reached in EITF Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"): a) the issuance of convertible debt with a beneficial conversion feature results in a basis difference in applying FASB Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income Taxes. Recognition of such a feature effectively creates a debt instrument and a separate equity instrument for book purposes, whereas the convertible debt is treated entirely as a debt instrument for income tax purposes. b) the resulting basis difference should be deemed a temporary difference because it will result in a taxable amount when the recorded amount of the liability is recovered or settled. c) recognition of deferred taxes for the temporary difference should be reported as an adjustment to additional paid-in capital. This consensus is effective in the first interim or annual reporting period commencing after December 15, 2005, with early application permitted. The effect of applying the consensus should be accounted for retroactively to all debt instruments containing a beneficial conversion feature that are subject to EITF Issue 00-27,,"Application of Issue No. 98-5 to Certain Convertible Debt Instruments" (and thus is applicable to debt instruments converted or extinguished in prior periods but which are still presented in the financial statements). The adoption of this pronouncement is not expected to have a material impact on the Company's financial statements.
In May 2005, SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB Statement No. 3" was issued which, among other things, changes the accounting and reporting requirements for a change in accounting principle and provides guidance on error corrections. SFAS No. 154 requires retrospective application to prior period financial statements of a voluntary change in accounting principle unless impracticable to determine the period-specific effects or cumulative effect of the change, and restatement with respect to the reporting of error corrections. SFAS No. 154 applies to all voluntary changes in accounting principles, and to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 also requires that a change in method of depreciation or amortization for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. At this time, adoption of SFAS No. 154 is not expected to significantly impact the Company's financial statements or future results of operations.
The Emerging Issues Task Force ("EITF") reached a tentative conclusion on EITF Issue No. 05-1, "Accounting for the Conversion of an Instrument that Becomes Convertible upon the Issuer's Exercise of a Call Option" that no gain or loss should be recognized upon the conversion of an instrument that becomes convertible as a result of an issuer's exercise of a call option pursuant to the original terms of the instrument. The application of this pronouncement is not expected to have an impact on the Company's consolidated financial position, results of operations, or cash flows.
In June 2005, the FASB ratified EITF Issue No. 05-2, "The Meaning of `Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, `Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock" ("EITF No. 05-2"), which addresses when a convertible debt instrument should be considered `conventional' for the purpose of applying the guidance in EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF No. 00-19 for conventional convertible debt instruments and indicated that convertible preferred stock having a mandatory redemption date may qualify for the exemption provided under EITF No. 00-19 for conventional convertible debt if the instrument's economic characteristics are more similar to debt than equity. EITF No. 05-2 is effective for new instruments entered into and instruments modified in periods beginning after June 29, 2005. The Company has applied the requirements of EITF No. 05-2 since the required implementation date. See Note 5 with respect to the impact of this pronouncement on the Company's consolidated financial statements.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
In September 2005, the FASB ratified EITF Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues" ("EITF No. 05-7"), which addresses whether a modification to a conversion option that changes its fair value affects the recognition of interest expense for the associated debt instrument after the modification and whether a borrower should recognize a beneficial conversion feature, not a debt extinguishment, if a debt modification increases the intrinsic value of the debt (for example, the modification reduces the conversion price of the debt). EITF No. 05-7 is effective for the first interim or annual reporting period beginning after December 15, 2005. The Company will adopt EITF No. 05-7 as of the beginning of the Company's interim reporting period that begins on February 1, 2006. The Company is currently in the process of evaluating the effect that the adoption of this pronouncement will have on its financial statements.
In January 2003, Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). This interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," provides guidance for identifying a controlling interest in a variable interest entity ("VIE") established by means other than voting interest. FIN 46 also required consolidation of a VIE by an enterprise that holds such controlling interest. In December 2003, the FASB completed its deliberations regarding the proposed modifications to FIN 46 and issued Interpretation Number 46R, "Consolidation of Variable Interest Entities - an Interpretation of ARB 51" ("FIN 46 R"). The decisions reached included a deferral of the effective date and provisions for additional scope exceptions for certain types of variable interests. Application of FIN 46R is required in financial statements of public entities that have interests in VIEs or potential VIEs commonly referred to as special-purpose entities for periods ending after March 2004. Adoption of this pronouncement did not impact on the Company's consolidated financial statements.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4," which adopts wording from the IASB IAS No. 2 "Inventories" in an effort to improve the comparability of cross-border financial reporting. The FASB and IASB both believe the standards have the same intent; however, an amendment to the wording was adopted to avoid inconsistent application. The new standard indicates that abnormal freight, handling costs, and wasted materials (spoilage) are required to be treated as current period charges rather than as a portion of inventory cost. Additionally, the standard clarifies that fixed production overhead should be allocated based on the normal capacity of a production facility. The statement is effective for the Company beginning in fiscal year 2007. Adoption of this pronouncement is not expected to have a material impact on the Company's consolidated earnings.
In December 2004, the FASB issued SFAS No. 123R "Share Based Payment". This statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R addresses all forms of share based payment ("SBP") awards including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest. This statement is effective for public entities as of the beginning of the Company's interim reporting period of the first fiscal year that begins on or after June 15, 2005. The transitional provisions of SFAS No. 123R will not have a material effect on the Company's consolidated financial position or results of operations as substantially all outstanding equity instruments vest on or prior to October 31, 2005. The Company will utilize the fair value method for any future instruments after the implementation date.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
Note 3 - Equipment and Leasehold Improvements: - ----------------------------------------------
Equipment and leasehold improvements consist of the following:
Useful Life (In years) 2005 2004 ---------- ---- ----
Computer equipment 3-5 $ 236,851 $ 190,981 Equipment 7-15 2,043,725 1,908,639 Furniture and fixtures 3-7 144,383 144,383 Leasehold improvements 4-7 108,096 108,096 Other 4-7 23,625 23,625 ----------- ----------- 2,556,680 2,375,724 Less: accumulated depreciation (1,010,926) (797,160) ----------- ----------- 1,545,754 1,578,564 Construction in progress 596,001 305,948 ----------- ----------- Total equipment and leasehold improvements $ 2,141,755 $ 1,884,512 =========== ===========
Construction in progress includes the costs of constructing the Company's proprietary ceramic filtration system. Costs may include materials, labor, overhead and permits. When construction is completed, the asset will be reclassified as equipment and will be amortized when placed in service.
Depreciation expense totaled $213,767, $208,132, and $196,733 for the years ended October 31, 2005, 2004 and 2003, respectively.
Note 4 - Other Assets: - ----------------------
Other assets consist of the following:
2005 2004 -------- --------
Security deposit $ 69,569 $ 69,569 Project costs 19,697 206,851 -------- -------- $ 89,266 $276,420 ======== ========
During September 2005, the Company abandoned its project in South Africa due to political pressures and wrote off costs in the amount of $187,154.
Note 5 - Convertible Note: - --------------------------
On September 15, 2005, the Company entered into a Securities Purchase Agreement and a Standby Equity Distribution Agreement with Cornell Capital Partners. The Securities Purchase Agreement provides for Cornell Capital Partners to purchase up to $2,300,000 of secured convertible debentures of which $1,150,000 was funded within five business days of the date of the Securities Purchase Agreement and the balance was funded on October 19, 2005. The Debentures, mature September 2006, require monthly interest payments at a rate of 10% per annum and monthly principal payments commencing March 2006. The Company can prepay the debentures at anytime upon three days written notice. If the Company's common stock is trading above the conversion price at the time of the prepayment the Company must pay a 20% premium on the amount of the prepayment. The debentures are secured by substantially all of the Company's assets and shares of common stock as discussed below.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
The Securities Purchase Agreement requires the Company to file a registration statement within 30 days of the date of the agreement and to use its best efforts to have the registration statement declared effective by the Securities and Exchange Commission within 120 days of the date of the agreement (extended to April 15, 2006). In the event the registration statement is not filed or declared effective within the prescribed time periods, the Company will be required to pay liquidated damages as defined under the agreement.
The debentures are convertible by Cornell Capital Partners at any time at a conversion price of $1.84 per share of common stock.
In connection with the issuance of the debentures, the Company issued to Cornell Capital Partners a warrant to purchase 650,000 shares of the Company's common stock for a period of three years with an exercise price per share of $2.53.
The gross proceeds of $2,300,000 were recorded net of a discount of $2,168,995. The debt discount consisted of a $897,121 value related to the warrants and $1,271,874 value related to the embedded conversion option. The warrants and the embedded conversion option was accounted for under EITF issue No. 00-19 "Accounting for Derivative Financial Instruments Index to and Potentially Settled in a Company's Own Stock" and EITF 05-4, view A "The effect of a Liquidated Damages Clause on a Freestanding Financial Instrument". Due to certain factors and the liquidated damage provision in the registration rights agreement, the Company determined that the embedded conversion option and the warrants are derivative liabilities. Accordingly the warrants and the embedded conversion option will be marked to market through earnings at the end of each reporting period. The warrants and the conversion option are valued using the Black-Scholes valuation model. For the year ended October 31, 2005, the Company reflected a gain of $250,353 representing a change in the value of the warrants and conversion option. The debt discount of $2,168,995 is being accreted over a period of one year. Accordingly, the Company recorded a charge $271,124 for the year ended October 31, 2005.
The Company paid a fee of $230,000 (10% of the purchase price), structuring fees equal to $30,000 and other fees of $27,554 in connection with the convertible note. These fees have been recorded as deferred financing costs and charged to interest expense through the maturity date of the debentures. Amortization expense for the year ended October 31, 2005 amounted to $35,944.
In connection with the Securities Purchase Agreement, the Company and its President agreed to pledge 3,580,000 shares and 900,000 shares, respectively, to secure payment of all the obligations due under the convertible notes. Such shares are to be held in escrow until all amounts due under the convertible notes are paid in full. The Company has issued 900,000 shares of restricted common stock to its President in place of the shares of common stock being pledged pursuant to the Escrow Agreement. These shares will be held in escrow and will only be released to the President in the event any of the pledged shares are forfeited or released pursuant to the terms of the Escrow Agreement.
Note 6 - Stockholders' Equity: - ------------------------------
Preferred Stock - ---------------
During the fiscal year ended October 31, 2003, 33,010 preferred shares were converted to 177,702 common shares.
During the fiscal year ended October 31, 2004, 2,645 preferred shares were converted to 12,853 common shares.
Common Stock - ------------
During the fiscal year ended October 31, 2003, the Company completed several private placements of its securities pursuant to which the Company issued an aggregate of 5,593,180 shares of its unregistered common stock at average price of $0.79 per share, resulting in aggregate net proceeds of $4,341,256 after commissions of $44,600 and expenses of $16,625.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
During the fiscal year ended October 31, 2003, the Company, in accordance its 401(k) plan, issued 69,848 common shares valued at $74,268 to its employees as a matching contribution.
During the fiscal year ended October 31, 2004, the Company completed two private placements of its securities totaling an aggregate of 1,232,080 shares of its unregistered common stock at average price of $2.10 per share, resulting in aggregate net proceeds of $2,506,461 after expenses of $85,000.
During the fiscal year ended October 31, 2004, the Company, in accordance its 401(k) plan, issued 16,060 common shares valued at $62,932 to its employees as a matching contribution.
During the fiscal year ended October 31, 2004, the Company issued 13,772 common shares valued at $45,000 to a public relations consultant for services rendered.
During the fiscal year ended October 31, 2004, employees exercised options to purchase 152,000 common shares, resulting in net proceeds of $275,560.
On November 4, 2004, the Company issued 204,778 shares of the Company's common stock to one institutional investor at a price per share of $2.93 for gross proceeds of $600,000.
On December 8, 2004, the Company issued 70,930 shares of the Company's common stock to one accredited investor at a price per share of $3.44 for gross proceeds of $244,000.
On May 26, 2005, the Company issued 101,010 shares of the Company's common stock to one institutional investor at a price per share of $1.93 per share for gross proceeds of $200,000.
On June 7, 2005, the Company completed a private placement with one accredited investor and issued 25,000 shares of common stock at a price per share of $2.30.
On June 10, 2005, the Company completed a private placement with one accredited investor and issued 15,000 shares of common stock at a price per share of $1.85.
On June 29, 2005, the Company completed a private placement with one accredited investor and issued 96,153 shares of common stock at a price per share of $2.08.
On August 11, 2005, the Company completed a private placement with one accredited investor and issued 92,572 shares of common stock at a price per share of $2.03.
On September 16, 2005 the Company entered into a Securities Purchase Agreement and a Standby Equity Distribution Agreement with Cornell Capital Partners and its affiliates (collectively referred to as "Cornell"). The Standby Equity Distribution Agreement ("Agreement") requires Cornell, at the Company's option, to purchase, from time to time, up to an aggregate of $20,000,000 of the Company's common stock over a two-year period commencing on the effective date of a registration statement filed with the SEC. The purchase price for each share of common stock under the Agreement is equal to 96% of the market price as defined. Each request by the Company is limited to $2 million. The Company issued to Cornell 386,956 shares of the Company's common stock a valued at $979,000 as a fee for entering into the Agreement and issued 4,348 shares valued at $11,000 to the placement agent. In addition the Company incurred legal and various other costs of $239,595 in connection with this transaction. These costs have been charged to deferred offering costs. Cornell is to receive a fee equal to 5% of each advance and structuring and due diligence fess aggregating $25,000. The amount of capital available under the equity line of credit is not dependent on the price or volume of the Company's common stock. Cornell may not own more than 9.9% of the outstanding common stock at any time.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
On September 20, 2005, the Company completed a private placement with one accredited investor and issued 37,500 shares of common stock at a price per share of $1.88.
Warrants - --------
As it relates to the private placement that took place January 2003, 882,353 warrants were issued at a price of $1.80 per share. These warrants will expire in January 2006.
In connection with the private placement transaction dated November 4, 2004, the Company issued warrants to purchase 204,778 shares of common stock at three equally different tranches. Pursuant to the first tranche the Company issued an aggregate of 68,259 warrants to purchase shares of common stock at a price of $5.71 per share. Pursuant to the second tranche the Company issued an aggregate 68,259 warrants to purchase shares of common stock at a price of $7.71 per share. Pursuant to the third tranche, the Company issued an aggregate of 68,259 warrants to purchase shares of common stock at a price of $9.91 per share. Each tranche is scheduled to expire on November 1, 2007. None of these warrants have been exercised.
In connection with the private placement transaction dated December 8, 2004, the Company issued warrants to purchase 70,930 shares of common stock at three equally different tranches. Pursuant to the first tranche the Company issued an aggregate of 23,643 warrants to purchase shares of common stock at a price of $5.95 per share. Pursuant to the second tranche the Company issued an aggregate 23,643 warrants to purchase shares of common stock at a price of $7.95 per share. Pursuant to the third tranche, the Company issued an aggregate of 23,543 warrants to purchase shares of common stock at a price of $9.95 per share. Each tranche is scheduled to expire on December 8, 2007. None of these warrants have been exercised.
In connection with the private placement transaction dated May 26, 2005, the Company issued warrants to purchase 101,010 shares of common stock at three equally different tranches. Pursuant to the first tranche the Company issued an aggregate of 33,670 warrants to purchase shares of common stock at a price of $4.50 per share. Pursuant to the second tranche the Company issued an aggregate 33,670 warrants to purchase shares of common stock at a price of $6.50 per share. Pursuant to the third tranche, the Company issued an aggregate of 33,670 warrants to purchase shares of common stock at a price of $8.50 per share. Each tranche is scheduled to expire on May 26, 2008. None of these warrants have been exercised.
In connection with the private placement transaction dated June 7, 2005, the Company issued warrants to purchase 37,500 shares of common stock. at a price of $3.20 per share. These warrants are set to expire on June 7, 2008. None of these warrants have been exercised.
In connection with the private placement transaction dated June 10, 2005, the Company issued warrants to purchase 15,000 shares of common stock. Pursuant to the agreement the Company issued an aggregate of 15,000 warrants to purchase shares of common stock at a price of $3.31 per share. These warrants are set to expire on June 10, 2008. None of these warrants have been exercised.
In connection with the private placement transaction dated June 29, 2005, the Company issued warrants to purchase 96,153 shares of common stock at three equally different tranches. Pursuant to the first tranche the Company issued an aggregate of 32,051 warrants to purchase shares of common stock at a price of $4.63 per share. Pursuant to the second tranche the Company issued an aggregate 32,051 warrants to purchase shares of common stock at a price of $6.63 per share. Pursuant to the third tranche, the Company issued an aggregate of 32,051 warrants to purchase shares of common stock at a price of $8.63 per share. Each tranche is scheduled to expire on June 29, 2008. None of these warrants have been exercised.
In connection with the private placement transaction dated August 11, 2005, the Company issued warrants to purchase 92,572 shares of common stock at three equally different tranches. Pursuant to the first tranche the Company issued an aggregate of 30,857 warrants to purchase shares of common stock at a price of $4.57 per share. Pursuant to the second tranche the Company issued an aggregate of 30,857 warrants to purchase shares of common stock at a price of $6.57 per share. Pursuant to the third tranche the Company issued an aggregate
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
of 30,858 warrants to purchase shares of common stock at a price of $8.57 per share. Each tranche is scheduled to expire on September 6, 2008. None of these warrants have been exercised.
In connection with the private placement transaction dated September 15, 2005, the Company issued warrants to purchase 650,000 shares of common stock at a price of $2.53 per share. These warrants are scheduled to expire on September 15, 2008. None of these warrants have been exercised as of this time.
In connection with the private placement transaction dated September 20, 2005, the Company issued warrants to purchase 37,500 shares of common stock at three equally different tranches. Pursuant to the first tranche the Company issued an aggregate of 12,500 warrants to purchase shares of common stock at a price of $4.38 per share. Pursuant to the second tranche the Company issued an aggregate 12,500 warrants to purchase shares of common stock at a price of $6.38 per share. Pursuant to the third tranche, the Company issued an aggregate of 12,500 warrants to purchase shares of common stock at a price of $8.38 per share. Each tranche is scheduled to expire on September 20, 2008. None of these warrants have been exercised as of this time. The average warrant price of all warrants outstanding is $4.29 per share.
A summary of warrant activity is as follows:
Number of Weighted Average Warrants Exercise Price --------- --------------
Outstanding, October 31, 2002 1,324,433 $ 6.83 Granted 882,353 $ 1.80 Exercised -- $ -- Forfeited -- $ -- ---------- ---------
Outstanding, October 31, 2003 2,206,786 $ 4.82 Granted 1,058,169 $ 5.89 Exercised -- $ -- Forfeited (396,464) $ 15.00 ---------- ---------
Outstanding, October 31, 2004 2,868,491 $ 3.81 Granted 1,305,442 $ 4.68 Exercised (10,577) $ 3.34 Forfeited (917,392) $ 3.34 ---------- ---------
Outstanding, October 31, 2005 3,245,964 $ 4.29 ========== =========
Exercisable, October 31, 2005 3,245,964 $ 4.29 ========== =========
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
The following table summarizes warrant information as of October 31, 2005:
Warrants Outstanding -------------------------------------------------------------------- Number Weighted Average Number Exercise Outstanding Remaining Exercisable Prices At October 31, 2005 Contractual Life (years) At October 31, 2005 ------ ------------------- ------------------------ ------------------- $ 1.80 882,353 0.03 882,353 $ 2.53 650,000 2.83 650,000 $ 3.20 37,500 2.75 37,500 $ 3.31 15,000 2.75 15,000 $ 4.38 12,500 4.80 12,500 $ 4.50 33,670 2.50 33,670 $ 4.57 30,858 2.83 30,858 $ 4.63 32,051 2.50 32,051 $ 4.89 352,723 2.85 352,723 $ 5.71 68,259 2.00 68,259 $ 5.89 352,723 2.65 352,723 $ 5.95 23,643 2.20 23,643 $ 6.38 12,500 3.00 12,500 $ 6.50 33,670 2.50 33,670 $ 6.57 30,857 2.83 30,857 $ 6.63 32,051 2.50 32,051 $ 6.89 352,723 2.85 352,723 $ 7.71 68,259 2.00 68,259 $ 8.05 23,643 2.20 23,643 $ 8.38 12,500 3.00 12,500 $ 8.50 33,670 2.50 33,670 $ 8.57 30,857 2.83 30,857 $ 8.63 32,052 2.50 32,052 $ 9.71 68,259 2.00 68,259 $ 10.05 23,643 2.20 23,643 --------- --------- 3,245,964 3,245,964 ========= =========
Note 7 - Stock Option Plans: - ----------------------------
1995 Stock Option Plan - ----------------------
In November 1995, the Company registered 2,000,000 common shares, issuable upon exercise of stock options issued by the Company under its 1995 Non-qualifying Stock Option Plan (the 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 ending October 31, 2005, 2004 and 2003, there were no options granted under the 1995 plan. As of October 31, 2005, 8,089 options were available to be granted and 1,212,500 options were outstanding, all of which were exercisable and vested.
2000 Stock Option Plan - ----------------------
The Company's 2000 Stock Option Plan (the "2000 Plan") was adopted by the Company's board of directors in January 2000 and was approved by the Company's stockholders in February 2000. The 2000 Plan authorizes the issuance of up to 1,000,000 shares of the Company's common stock.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
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. The Company's officers, directors, employees and consultants, and employees and consultants of the Company's 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 the Company's 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 the Company's common stock on the relevant date.
The 2000 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. Fifty percent of these options vest at the time of the grant and the other 50% will vest six months after the date of grant and expire not more than ten years from the date of grant.
The 2000 plan is administered by the Company's compensation committee. The committee has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the 2000 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 2000 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 2000 plan, except the option price.
All options automatically become exercisable in full in the event of a change in control, as defined in the 2000 plan, death or disability of the option holder or as decided by the compensation committee. Upon retirement, options held at least one year become exercisable in full. If an option holder's employment with the Company is terminated for any reason, except 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.
A summary of activity under the stock option plans is as follows:
Number of Weighted Average Options Exercise Price --------- --------------
Outstanding, October 31, 2002 1,479,500 $ 5.29 Granted 100,000 $ 1.10 Exercised -- -- Forfeited (15,000) $ 2.03 ---------
Outstanding, October 31, 2003 1,564,500 $ 5.07 Granted 130,000 $ 3.98 Exercised 152,000 $ 1.81 Forfeited -- -- ---------
Outstanding, October 31, 2004 1,542,500 $ 2.14 Granted 402,000 $ 2.52 Exercised 15,000 $ 1.47 Forfeited (110,000) $ 2.85 ---------
Outstanding, October 31, 2005 1,819,500 $ 3.47 ========= ========
Exercisable, October 31, 2005 1,686,000 $ 3.47 ========= ========
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
The following table summarizes stock option information as of October 31, 2005:
Options Outstanding ------------------------------------------------------------ Exercise Number Weighted Average Number Prices Outstanding Remaining Exercisable At October 31, 2005 Contractual Life At October 31, 2005 ------------------- ---------------- ------------------- $.93 20,000 6.90 20,000 $1.37 1,666 8.10 1,666 $2.03 127,000 5.90 127,000 $2.30 30,000 9.40 30,000 $2.40 267,000 9.75 133,500 $2.70 75,000 9.20 75,000 $3.00 3,000 6.10 3,000 $3.10 10,000 7.90 10,000 $3.30 15,000 9.45 15,000 $3.50 5,000 9.00 5,000 $4.15 5,000 9.30 5,000 $4.20 48,334 9.25 48,334 $5.00 10,000 3.80 10,000 $5.63 307,500 4.90 307,500 $6.00 835,000 3.80 835,000 $6.88 20,000 4.00 20,000 $7.13 15,000 4.50 15,000 $9.00 25,000 4.54 25,000 --------- ---- ---------
Total 1,819,500 5.63 1,686,000 ========= ==== =========
Note 8 - Sales Concentrations: - ------------------------------
During the year ended October 31, 2005, the majority of the Company's revenues were derived from three major customers. Revenues from these customers were approximately $66,000 (23%), $66,000 (23%), and $91,000 (31%) respectively. As of October 31, 2005 the Company had no accounts receivable due from these customers.
During the year ended October 31, 2004, the majority of the Company's revenues were derived from three major customers. Revenues from these customers were approximately $1,543,379 (90%), $82,694 (5%), and $82,694 (5%) respectively.
During the year ended October 31, 2003, all the Company's revenues were derived from one customer. Revenues from this customer were $70,000.
Note 9 - Income Taxes: - ----------------------
The reconciliation of the statutory U.S. Federal income tax rate to the Company's effective income tax rate is as follows:
Year Ended October 31, -------------------------- 2005 2004 2003 ---- ---- ---- Statutory federal income tax rate (benefit) (34.00)% (34.00)% (34.00)% Nondeductible expenses: Depreciation (1.70) (2.70) (5.70) Increase in valuation allowance 35.70 36.70 39.70 ----- ----- ----- Effective tax rate 0.00% 0.00% 0.00% ===== ===== =====
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets for financial reporting purposes and the amount used for income tax purposes. The Company's deferred tax assets are as follows:
Year Ended October 31, -------------------------------------- Deferred tax asset: 2005 2004 2003 ---------- ---------- ---------- Depreciation (366,000) (345,000) (297,000) Net operating loss carryforward 7,586,000 6,321,000 5,400,000 ---------- ---------- ---------- Net deferred tax asset 7,220,000 5,976,000 5,103,000 Less: valuation allowance (7,220,000) (5,976,000) (5,103,000) ---------- ---------- ---------- Net deferred tax asset -- -- -- Increase in valuation allowance 1,244,000 873,000 101,000 ========== ========== ==========
Due to the uncertainty surrounding the realization of the benefits of the net operating loss carryforwards, the Company provided a valuation allowance for the entire amount of the deferred tax asset at October 31, 2005, 2004 and 2003. At October 31, 2005, the Company had net operating loss carryforwards of approximately $22,000,000 which expire at various dates through 2025.
Note 10 - Capital Lease Payable: - --------------------------------
The Company has various capital leases for computer equipment. The term of the leases range from 36 to 48 months, with principal and interest due in aggregate monthly installments of $860, at interest rates ranging from 13.75% to 16.98%. The equipment was capitalized at $19,503 and is being depreciated over five years. At October 31, 2005 one lease remained open for $3,612 of computer equipment, with accumulated depreciation of $2,047. Depreciation expense for the year ended October 31, 2005 was $3,900. The lease, which matures in February 2006 has remaining payments of $242.
Note 11 - Operating Leases: - ---------------------------
The Company leases office space, equipment, computers and vehicles under non-cancelable operating leases expiring between 2005 and 2008.
The Company's corporate headquarters is located at 15 Old Danbury Road, Suite 203, Wilton, Connecticut 06897 where the Company leases 5,800 square feet of office space from CD Station, LLC as landlord. The lease and taxes provides for monthly payments of $18,038 to December 2006, when the lease expires. The Company's Product Showroom is located at 190 Century Drive, Bristol, Connecticut, 06010, where the Company leases 10,800 square feet of office space from Tunxis Management as landlord. The lease provides for monthly payments of $8,166 to June 2008, when the lease expires.
The Company's Manufacturing facility is located at 545 Broad Street, Bristol, Connecticut, 06010, where the Company leases 30,000 square feet of manufacturing space from Gaski Leasing as landlord. The lease provides for monthly payments of $5,750. This lease arrangement is on a month to month basis.
Rent expenses for the years ended October 31, 2005, 2004 and 2003, were $358,199, $356,804, and $342,974, respectively. The following table shows the future lease committments for the corporate headquarters at Wilton, Connecticut, the Product showroom in Bristol, Connecticut, and the Manufacturing facility in Bristol, Connecticut:
Year Annual Rent ---- ----------- 2006 $373,753 2007 175,100 2008 122,300
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
Note 12 - Commitments: - ----------------------
Employment Agreements - ---------------------
On September 30, 2004 the Board of Directors approved the terms of an employment agreement between Joseph F. Longo and the Company. Mr. Longo will serve as the Chief Executive Officer and President and will be paid an annual salary of $185,000. The term of the Employment Agreement is three years, effective as of January 1, 2004, unless extended by the Company.
On December 1, 2005, the Company reached an agreement with Ralph Dechiaro, its Vice President of Business Operations, pursuant to which the Company agreed to award Mr. Dechiaro options to purchase 25,000 shares of common stock at an exercise price to the closing price of the Company's common stock on December 14, 2005. One half of these options vest on January 1, 2006 and the other half vest on June 30, 2006. This vesting is in line with all the other options previously awarded and the stock option program plan. In addition, the Company agreed to grant Mr. Dechiaro a one-time bonus/incentive award of $20,000, payable in cash, less applicable taxes, which was paid on December 23, 2005. The Company also agreed to provide Mr. Dechiaro with a severance package, as defined. Should Mr. Dechiaro voluntarily resign, severance pay would not apply.
On December 13, 2005, the Company reached an agreement with its chief financial officer ("CFO") Peter Scanlon that provides for additional compensation equal to $6,000 per month through May 2006 and a severance package based on years of service.
License Agreement - -----------------
Startech has a licensing agreement for the development, hardware manufacture and technology exploitation within the waste and non-waste industry application for Hydrogen Selective Membranes. This agreement provides for the exclusive right to utilize this Hydrogen Selective Membrane technology for all applications in the principles of plasma arc technology. This agreement was effective 7/8/01 and extends for a period of 20 years.
DOE Grant - ---------
Startech has received a grant from the Department of Energy ("DOE") for the development of a Startech Hydrogen Production Project which includes the evaluation of the viability of integrated hydrogen production from waste materials. This program was initiated in October 2004 and was completed by September 2005. The grant is a reimbursement of expenses incurred in connection with the project and is recorded as other income in the statement of operations when received. For the fiscal year ended October 31, 2005 the Company received $454,035. The Company has received approval to further develop the hydrogen project. Such development should extend through 2006.
Concentration of Credit Risk - ----------------------------
The Company maintains cash balances in two financial institutions. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000 per institution. From time to time, the Company's balances may exceed these limits. At October 31, 2005 and 2004, uninsured cash balances were approximately $2,160,000 and $2,200,000 respectively. The Company believes it is not exposed to any significant credit risk for cash. Startech has a licensing agreement for the development, hardware manufacture and technology exploitation within the waste and non-waste industry application for Hydrogen Selective Membranes.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
Note 13 - Employee Benefit Plan: - --------------------------------
The Company sponsors an employee savings plan designed to qualify under Section 401K of the Internal Revenue Code. This plan is for all full-time employees who have completed 30 days of service. Company contributions are made in the form of common stock at the prevailing current market price and vest equally over a three-year period. The Company will match the first 6 percent of the employee contribution on a dollar for dollar basis up to the maximum contribution allowed under Internal Revenue Code. Contributions for the year ended October 31, 2005, 2004, 2003 were $63,073, $62,932, and $74,268 respectively. These contributions were paid through the issuance of 20,857, 16,060 and 69,848 shares of common stock respectively.
Note 14 - Quarterly Financial Data (unaudited): - -----------------------------------------------
Note 15 - Subsequent Events: - ----------------------------
On November 3, 2005, the Company entered into an agreement with Stonebridge Advisors LLC ("Stonebridge"). Under the terms of the agreement, Stonebridge will serve as the Company's Investment Manager. During November 2005 and December 2005, the Company transferred funds, aggregating $1,500,000, to an account managed by Stonebridge. An officer of Stonebridge is the former Chief Financial Officer of the Company.
On November 22, 2005, the Company entered into a stock purchase agreement with Mercatus & Partners, Limited ("Mercatus"). Pursuant to the Purchase Agreement, the Company will sell to Mercatus an aggregate of 2,816,900 shares of common stock (the "Shares"), no par value per share ("Common Stock"), for an aggregate purchase price of $5,000,000. Mercatus will have up to thirty days from the date of the delivery of the Shares to Brown Brothers Herriman, the custodial bank, to tender the purchase price to the Company. The Company has not yet received any proceeds pursuant to this agreement. In connection with the Purchase Agreements, the Company will pay to e3 Energy Company a one-time finder's fee consisting of the following: (a) five year warrants to purchase shares of Common Stock for cash in an amount equal to 5% of the number of Shares issued to Mercatus pursuant to the Purchase Agreements at an exercise price per share of $3.00, which warrants shall not be exercisable for a period of one year following the date of issuance, (b) a cash fee equal to 5% of the gross proceeds raised pursuant to the Purchase Agreements, and (c) restricted shares of Common Stock in an amount equal to 5% of the number of Shares issued to Mercatus pursuant to the Purchase Agreements.
STARTECH ENVIRONMENTAL CORPORATION Notes to the Consolidated Financial Statements For The Years Ended October 31, 2005, 2004 and 2003
During December 2005 the Company received $703,000 to commence manufacturing a 10 ton-per-day Plasma Converter System. The Company expects to begin manufacturing in February 2006 with the delivery scheduled for a date later in the year. The contract calls for a fixed schedule of payments to be made to the Company during the manufacturing cycle.
During January 2006 the Company received proceeds of $216,000 from the exercise of warrants.
PART IV
Item 15.
Item 15. Financial Statements, Financial Schedules, Exhibits and Reports on Form 8-K
(a) List of documents filed as part of the report:
1. Consolidated Financial Statements
See index to Consolidated Financial Statements
2. Financial Statement Schedule
See index to Consolidated Financial Statements
3. Exhibits
The following documents are filed as exhibits to this Form 10-K, including those exhibits incorporated in this Form 10-K by reference to a prior filing of the Company under the Securities Act or the Exchange Act as indicated in parenthesis:
(a) Exhibits
Exhibit No. Description - ----------- --------------------------------------------------------------
2 Agreement and Plan of Reorganization between the Company and Kapalua Acquisitions, Inc. dated November 17, 1995 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, as filed with the Securities and Exchange Commission on November 29, 1995).
3(i).1 Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form 10, as filed with the Securities and Exchange Commission on February 19, 1995).
3(i).2 Articles of Amendment to the Articles of Incorporation. (1)
3(ii).1 Amended and Restated Bylaws of the Company. (10)
4.1 Form of Common Stock Certificate. (2)
4.2 Form of Convertible Preferred Stock Certificate. (1)
4.3 Form of Warrant Agreement. (1)
4.4 Stock Subscription Warrant dated December 29, 1998 (the "CDA Warrant") between the Company and the Connecticut Development Authority ("CDA"). (2)
4.5 Amendment to the CDA Warrant dated March 31, 1999 between the Company and CDA. (2)
4.6 Second Amendment to the CDA Warrant dated June 15, 2000 between the Company and CDA. (2)
4.7 Form of Warrant Agreement dated March 25, 2001. (3)
4.8 Form of Warrant Agreement dated January 14, 2003 (10)
4.9 Form of Warrant Agreement dated February 20, 2004 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated February 20, 2004, as filed with the Securities and Exchange Commission on February 27, 2004).
4.10 Form of 2000 Stock Option Plan (4)
10.1 2000 Stock Option Plan (1)
10.2 1995 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8, filed in November, 1995, Commission File No. 33-99790)
10.3 Loan Agreement dated December 29, 1998 between the Company and CDA(2)
10.4 Term Sheet for Preferred Stock dated August 17, 1999 between the Company and Paradigm Group, LLC(2)
10.5 Strategic Alliance Agreement dated July 22, 1996 between the Company and Bauer Howden, Inc.(2)
10.6 Strategic Alliance Agreement dated October 25, 1996 between the Company and Calumet Coach Company(2)
10.7 Strategic Alliance Agreement dated November 10, 1997 between the Company and Chase Environmental Group, Inc.(2)
10.8 Strategic Alliance Agreement dated April 17, 1998 between the Company and the Ensign - Bickford Company(2)
10.9 Strategic Alliance Agreement dated September 30, 1999 between the Company and UXB International Inc.(2)
10.10 Strategic Alliance Partner Agreement dated March 14, 2000 between the Company and Skidmore, Owings & Merrill LLP(2)
10.11 Lease Agreement dated September 16, 1999 between the Company and the CD Station, LLC (2)
10.12 Form of Distributor Agreement (2)
10.13 Patent License Agreement dated November 9, 1998 between the Company and Rollan C. Swanson M.D. and Eleonora Swanson (2)
10.14 License of Technology Agreement dated November 29, 1999 between the Company and Media and Process Technology Inc.(2)
10.16 Employment Agreement dated November 1, 2000 between the Company and Kevin M. Black(5)
10.17 Employment Agreement dated November 1, 2000 between the Company and Robert L. DeRochie (5)
10.18 Lease Agreement dated September 30, 2000 between the Company and the Century Drive, LLC(6)
10.19 Lease Agreement dated July 16, 2001 between the Company and the Gaski Leasing Company (6)
10.20 Strategic Alliance Agreement dated June 30, 2001 between the Company and Hydro-Chem Company (3)
10.21 Lease Agreement dated July 20, 2001 between the Company and the Gaski Leasing Company, LLC (3)
10.22 Joint Development Agreement dated December 19, 2001 between the Company and ViTech Enterprises Inc.(3)
10.23 Separation Agreement dated as of August 27, 2003 between the Company and Kevin M. Black (7)
10.24 Stock Purchase and Registration Rights Agreement dated as of July 18, 2003 between the Company and Northshore Asset Management, LLC (7)
10.25 Stock Purchase Agreement dated as of July 22, 2003 between the Company and Northshore Asset Management, LLC (7)
10.26 First Amendment to Stock Purchase Agreement dated as of July 30, 2003 between the Company and Northshore Asset Management, LLC (7)
10.27 Form of Stock Purchase and Registration Rights Agreement dated as of January 22, 2004 between the Company and the Purchasers identified therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 20, 2004, as filed with the Securities and Exchange Commission on February 27, 2004).
10.28 Employment Agreement dated as of January 1, 2004 between the Company and Joseph F. Longo (9)
21 Subsidiaries as of October 31, 2005 (5)
23.1 Consent of Kostin, Ruffkess & Company, LLC*
23.2 Consent of Marcum & Kliegman LLP*
24 Power of Attorney (see signature page) of this Annual Report on Form 10-K and incorporated herein by reference. - ----------
* Filed herewith
(1) Incorporated by reference to the Company's Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on April 27, 2000, File No. 333-35786.
(2) Incorporated by reference to Amendment No 1. to the Company's Registration Statement on Form S-1 filed on July 7, 2000, Commission File No. 333-35786.
(3) Incorporated by reference to the Company's Registration Statement on Form S-1 filed on July 17, 2002, Commission File No. 333-96885.
(4) Incorporated by reference to the Company's Registration Statement on Form S-8 on October 31, 2002, Commission File No. 333- 100909.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for 2000, filed on January 25, 2001.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for 2001, filed on January 25, 2002.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 2003.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2003, as filed on January 29, 2004.
(9) Incorporated by reference to the Company's Current Report on Form 8-K dated August 13, 2004, as filed on October 1, 2004.
(b) Exhibits
See index to exhibits on page 44.
(c) Financial Statement Schedule
See index to Consolidated Financial Statements
SIGNATURES
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 February, 2006.
STARTECH ENVIRONMENTAL CORPORATION (Registrant)
BY: /S/ Joseph F. Longo ---------------------------------------- Joseph F. Longo Chairman, Chief Executive Officer, President and Director
BY: /S/ Peter J. Scanlon --------------------------------------- Peter J. Scanlon Chief Financial Officer, Secretary, Vice President, and Principal Financial Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Joseph F. Longo and Peter J. Scanlon, or either of them, his or her attorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Company and in the capacities and on this 14th day of February 2006.
SIGNATURES TITLE - ---------- -----
/s/ Joseph F. Longo Chairman, Chief Executive Officer, - ------------------- Joseph F. Longo President & Director /s/ John J. Fitzpatrick * Director - ------------------------- John J. Fitzpatrick /s/ Joseph A. Equale * Director - ---------------------- Joseph A. Equale /s/ Nicholas S. Perna * Director - ----------------------- Nicholas S. Perna /s/ L Scott Bernard * Director - --------------------- L Scott Bernard
* By Peter J. Scanlon, as attorney-in-fact.