10-Q 1 startech109.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended January 31, 2009 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________to __________ Commission file number 0-25312 STARTECH ENVIRONMENTAL CORPORATION ---------------------------------- (Exact name of registrant as specified in its charter) Colorado 84-1286576 -------- ---------- (State of incorporation) (I.R.S. Employer Identification Number) 88 Danbury Road, Suite 2A Wilton, Connecticut 06897 ------------------------- (Address of principal executive offices, including zip code) (203) 762-2499 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [ x ] NO [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ x ] Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES [ ] NO [ x ] As of March 13, 2009, 23,636,801 shares of common stock of the registrant were outstanding. STARTECH ENVIRONMENTAL CORPORATION TABLE OF CONTENTS Page Number ------ PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Controls and Procedures 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits 12 Signatures 13
PART 1- FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements STARTECH ENVIRONMENTAL CORPORATION Condensed Consolidated Balance Sheets January 31, 2009 (Unaudited) October 31, 2008 ------------ ---------------- ASSETS Current assets: Cash and cash equivalents $ 3,653,289 $ 4,658,169 Accounts receivable 3,373,250 3,373,250 Note receivable -- 385,000 Inventories 4,829,119 4,696,284 Prepaid expenses and other current assets 185,766 183,266 ------------ ------------ Total current assets 12,041,424 13,295,969 Equipment and leasehold improvements, net 2,024,108 2,066,802 Other assets 60,016 60,016 ------------ ------------ Total assets $ 14,125,548 $ 15,422,787 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable and accrued expenses $ 238,908 $ 493,656 Customer deposits and deferred revenue 15,451,156 15,586,156 ------------ ------------ Total liabilities 15,690,064 16,079,812 ------------ ------------ Commitments and contingencies Stockholders' equity: Preferred stock, no par value, 10,000,000 shares authorized; none issued and outstanding -- -- Common stock, no par value; 800,000,000 shares authorized; 23,618,236 issued and outstanding at January 31, 2009 and 23,340,207 issued and outstanding at October 31, 2008 34,327,981 34,232,892 Additional paid-in capital 5,668,397 5,668,397 Deferred leasing costs -- (19,726) Accumulated deficit (41,560,894) (40,538,588) ------------ ------------ Total stockholders' deficiency (1,564,516) (657,025) ------------ ------------ Total liabilities and stockholders' deficiency $ 14,125,548 $ 15,422,787 ============ ============ See notes to these condensed consolidated financial statements. 1 STARTECH ENVIRONMENTAL CORPORATION Condensed Consolidated Statements of Operations (unaudited) Three Months Ending ------------------------------- January 31, January 31, 2009 2008 ------------ ------------ Revenue $ -- $ 107,988 Cost of revenue -- 103,048 ------------ ------------ Gross profit -- 4,940 ------------ ------------ Operating expenses: Selling expenses 178,858 191,644 Research and development expenses 47,543 51,115 General and administrative expenses 746,512 1,214,733 Depreciation and amortization expenses 58,386 55,235 ------------ ------------ Total operating expenses 1,031,299 1,512,727 ------------ ------------ Loss from operations (1,031,299) (1,507,787) Interest income 8,993 107,352 ------------ ------------ Net loss $ (1,022,306) $ (1,400,435) ============ ============ Per share data: Net loss per share - basic and diluted $ (0.04) $ (0.06) ============ ============ Weighted average common shares outstanding - basic and diluted 23,412,121 23,077,598 ============ ============ See notes to these condensed consolidated financial statements. 2 STARTECH ENVIRONMENTAL CORPORATION Condensed Consolidated Statements of Cash Flows (unaudited) Three Months Ended ----------------------------------- January 31, 2009 January 31, 2008 ---------------- ---------------- Cash flows from operating activities: Net loss $ (1,022,306) $ (1,400,435) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation -- 84,300 401(k) match through issuance of common stock 95,089 26,399 Depreciation and amortization 58,386 55,235 Amortization of deferred leasing costs 19,726 59,175 Changes in operating assets and liabilities: Accounts receivable -- (557,000) Vendor deposits -- (646,000) Prepaid expenses and other current assets (2,500) (25,794) Inventories (132,835) (265,703) Other assets -- 26,902 Accounts payable and accrued expenses (254,748) 283,368 Customer deposits and deferred revenue 250,000 1,894,512 ------------ ------------ Net cash used in operating activites (989,188) (465,041) Cash flows used in investing activities: Purchase of equipment (15,692) (51,534) ------------ ------------ Net decrease in cash and cash equivalents (1,004,880) (516,575) Cash and cash equivalents, beginning 4,658,169 11,612,863 ------------ ------------ ------------ Cash and cash equivalents, ending $ 3,653,289 $ 11,096,288 ============ ============ See notes to these condensed consolidated financial statements. 3
STARTECH ENVIRONMENTAL CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation and Going Concern. ------------------------------------------------- Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Startech Environmental Corporation (the "Company" or "Startech") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. In the opinion of management, such statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. Pursuant to the requirements of the Securities and Exchange Commission (the "SEC") applicable to quarterly reports on Form 10-Q, the accompanying financial statements do not include all the disclosures required by GAAP for annual financial statements. While the Company believes that the disclosures presented are adequate to make the information not misleading, these unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2008, as filed with the SEC on February 13, 2009. Operating results for the three months ended January 31, 2009 are not necessarily indicative of the results that may be expected for the full fiscal year ending October 31, 2009, or any other interim period. 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, has 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 incurred a net loss of $1,022,306 during the three months ended January 31, 2009. For the three months ended January 31, 2009, net cash used by operating activities was $989,188. As of January 31, 2009, the Company had cash and cash equivalents of $3,653,289 and had negative working capital of $3,648,640. The Company has historically obtained funds to operate its business through the sale of equity and debt instruments, through the receipt of installment payments in respect of sales of its products and the receipt of payments in connection with entering into distributorship agreements. During the three months ended January 31, 2009 the Company received a payment of $250,000 in connection with a Distribution Agreement from an entity. The Company has been and continues to be dependent upon the deposits and installment payments from the execution of distributorship agreements, sales of its products and sales of its securities. The Company's ability to continue to operate as a going concern depends on its ability to generate sufficient revenue from the sale of its products, payments in connection with entering into distributorship agreements and/or the receipt of additional capital from one or more financing sources. Due to the fact that the Company has been unsuccessful in consummating additional sales of its products or otherwise raising additional capital, it has relied on a portion of the funds the Company received as non-refundable customer deposits in connection with the two sales agreements for products (see Note 6) to cover operating expenses. Management is continuing its efforts to sell the Company's products and to secure additional funds through the receipt of additional capital. However, there can be no assurance that the Company will be able to sell its products or that the Company will be able to raise additional capital on terms acceptable to it or at all. If the Company is unable to sell its products or raise additional capital, the Company will be forced to utilize the remaining balance of its non-refundable customer deposits to remain a viable entity and accordingly, the Company might need to significantly restrict or discontinue its operations. Note 2 - Summary of Certain Significant Accounting Policies. ------------------------------------------------------------ Stock-Based Compensation The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123R. Stock-based compensation expense for all share-based payment awards is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. The Company recognizes these compensation costs over the requisite service period of the award, which is generally the option vesting term. 4 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 holders of shares of common stock by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities or other instruments to issue shares of common stock were exercised or converted into shares of common stock. Potentially dilutive securities realizable from the exercise of options and warrants aggregating 8,855,966 and 11,163,121 at January 31, 2009 and 2008, respectively, are excluded from the computation of diluted loss per share as their inclusion would be anti-dilutive. Note 3 -- Note Receivable. -------------------------- On October 25, 2006, the Company received a promissory note from Global Tech in the principal amount of $385,000 in conjunction with a sales agreement. As part of the agreement, the Company was scheduled to receive payment on or before September 15, 2007, but the payment was never received. Global Tech has since requested multiple extensions, each of which has been granted by the Company, the latest of which called for monthly installment payments of $50,000 beginning November 1, 2008, and concluding with a final payment of $135,000 on April 30, 2009. On January 31, 2009, the Company notified Global Tech they were in violation of the note receivable agreement and wrote off the note with a corresponding reduction of Customer Deposits and Deferred Revenue. Note 4 - Inventories. --------------------- Inventories consist of raw materials and work-in-process and are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Inventories consist of the following: January 31, October 31, 2009 2008 ---------- ---------- Raw materials $ 98,125 $ 112,841 Work-in-process 4,730,994 4,583,443 ---------- ---------- $4,829,119 $4,696,284 ========== ========== Note 5 -- Stockholders' Equity. ------------------------------- Common Stock The Company sponsors an employee savings plan designed to qualify under Section 401(k) of the Internal Revenue Code. This plan is for all full-time employees who have completed 30 days of service. Contributions by the Company are made in the form of shares of common stock at the prevailing current market price and vest equally over an employee's initial three-year service period. The Company matches the first ten percent of an employee's contributions on a dollar-for-dollar basis, up to the maximum contribution allowed under the Internal Revenue Code. Contributions for the three months ended January 31, 2009 and 2008 were $29,089, and $26,399, respectively. These contributions were, or will be, made through the issuance of 78,029 and 15,900 shares of common stock, respectively. On January 20, 2009, the Company issued 200,000 shares of its common stock, valued at $66,000, to its 401(k) plan as a non-discretionary contribution to the 401(k) plan participants. Stock Options For the three months ended January 31, 2009 and 2008, the Company incurred aggregate stock-based compensation expense of $0 and $84,300, respectively. As of January 31, 2009, the total unrecognized compensation costs on non-vested options are $0. 5 Note 5 -- Stockholders' Equity, continued ----------------------------------------- A summary of option activity for the three months ended January 31, 2009 are as follows: Weighted- Average Aggregate Exercise Intrinsic Shares Price Value ---------- -------- --------- Outstanding at November 1, 2008 1,776,000 $ 4.69 Granted -- -- Exercised -- -- Forfeited (108,000) 2.48 Expired -- -- ---------- -------- Outstanding at January 31, 2009 1,668,000 $ 4.99 $ -- ========== ======== ========= Exercisable at January 31, 2009 1,668,000 $ 4.99 $ -- ========== ======== ========= Note 6 - Commitments and Contingencies. --------------------------------------- Sales Agreements On May 10, 2007, the Company entered into a purchase agreement with EnviroSafe Industrial Services Corporation ("EnviroSafe") whereby the Company sold to EnviroSafe two 10 ton-per-day (rated capacity), or TPD, and one 5 TPD (rated capacity) Plasma Converter Systems to process various solid, liquid and gaseous feeds, including hazardous waste for a total purchase price of $19,275,000. On May 23, 2007, the Company received a down payment in the amount of $1,927,500, or 10% of the purchase price. The remainder of the purchase price was scheduled to be paid in installments, the last of which is scheduled to be paid upon the issuance of a certificate of completion following installation of the Plasma Converter Systems. The Company received aggregate payments under this sales agreement of $9,155,500 through January 31, 2009. As of January 31, 2009, payments aggregating $3,373,250 were past due. There can be no assurance that these payments or other payments contemplated by this contract will be made or that the Company will deliver the Plasma Converter Systems covered by this purchase agreement. Management of the Company has indicated that the delays in payment have been the result of a combination of factors, including the relocation of the installation site for the Plasma Converter Systems (as described below), changes to EnviroSafe's business plans in connection with the relocation and the impact of the global economic crisis on EnviroSafe's resources. Management of the Company has indicated that EnviroSafe elected to relocate the site of installation, which has resulted in delays in fabricating and assembling the Plasma Converter Systems. The Company is completing those items in the fabrication and assembly process that can be completed within the requirements of imposed reduced resources. On December 9, 2008, the Company announced that EnviroSafe acquired the new site where it plans to install the Plasma Converter Systems for its new Recycling and Energy-recovery, Environmental Center. The Company has visited the new site and have been in discussions with EnviroSafe about revising the contract to change the final delivery date and payment schedule; however, the terms have not been finalized. Management of the Company has indicated it currently expects the EnviroSafe project to continue forward with a delivery date targeted for late 2009. On August 10, 2007, the Company entered into a purchase agreement with a customer for the purchase of a Plasma Converter System for an aggregate sales price of $5,400,000. Through January 31, 2009, the Company received $1,350,000 in payments relating to this agreement. The balance of the purchase price is scheduled to be paid in installments. On March 5, 2008, the Company agreed to a revised payment schedule with the customer to extend the $540,000 payment originally due on May 15, 2008. The Company has not yet received this payment nor has this revised payment schedule been implemented There can be no assurance that these payments or other payments contemplated by this contract will be made or that the Company will deliver the Plasma Converter Systems covered by this purchase agreement. Management has indicated that the Company is currently in discussion with the customer with respect to a revised delivery schedule related to past due payments. For both agreements referred to above, the down payment and installment payments received and accrued have been included as part of customer deposits and deferred revenue in the consolidated balance sheet. Final installments will be made upon the issuance of a certificate of completion if and when the installation of the PCSs has been completed. All amounts, other than the down payment, not paid by the customer within 30 days after such amounts become due and payable to the Company, shall bear interest as stated, not to exceed the maximum rate of interest allowed by applicable law. On January 23, 2009 the Company entered into an agreement with an entity, as its exclusive distributor for the Republic of Slovenia, the Republic of Croatia, the Federation of Bosnia-Herzegovina, the Republic of Serbia, the Republic of Macedonia, the Republic of Montenegro and also the Republic of Austria. The Company received a cash payment of $250,000 on January 23, 2009 in connection 6 with this agreement, which also requires the entity to purchase certain Plasma Converter Systems during the following years as a minimum requirement to maintain the possession of the distributorship rights. Operating Leases The Company leases office space, equipment, computers and vehicles under non-cancelable operating leases through 2009. The Company's corporate headquarters is located at 88 Danbury Road, Wilton, Connecticut 06897-2525 where the Company leases 5,612 square feet of office space. The lease provides for monthly base rent payments of $11,224 through December 2011, when the lease expires, subject to the Company's option to extend it for another three years on substantially the same terms. On December 4, 2006, in connection with the execution of the lease agreement, the Company issued a warrant to the landlord to purchase 200,000 shares of common stock at an exercise price of $3.00 per share, valued at approximately $473,000 using the Black-Scholes model. These deferred leasing costs are being amortized over the life of the lease. These warrants are scheduled to expire on December 4, 2011. During the three months ended January 31, 2009 and 2008, the Company recognized $19,726 and $59,175 respectively, as amortization of deferred leasing costs. The Company's product showroom is located in Bristol, Connecticut, where the Company currently leases 16,291 square feet of office space. On July 13, 2007, the Company signed an amendment to the original lease agreement whereby the Company increased the rented space and extended the lease such that the expiration is now June 15, 2009. The current lease provides for monthly base rent payments of $8,145. The Company's manufacturing facility is located in Bristol, Connecticut, where the Company leases 30,000 square feet of manufacturing space. The lease provided for monthly base rent payments of $5,775 through the December 31, 2007 expiration date. The lease arrangement is currently on a month-to-month basis for a rent payment of $4,775 per month. The following table shows the Company's future lease commitments under its operating leases: For the fiscal years ended October 31, Annual Rent ------------------------------------------------ 2009 $ 137,669 2010 134,688 2011 134,688 2012 22,448 ----------- Total $ 429,493 =========== Concentration of Credit Risk The Company's cash and cash equivalents consist of cash balances at one financial institution and short-term liquid investments including commercial paper, U.S. Treasury notes and U.S. Treasury bills with maturities of less than 30 days. From time to time, the Company's balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limits. The Company does not believe it is exposed to any significant credit risk for cash. Note 7 - Subsequent Event. -------------------------- Common Stock Issuances Subsequent to January 31, 2009 the Company issued 18,565 shares of its common stock valued at $7,055 to its 401(k) plan as a matching contribution. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This Quarterly Report on Form 10-Q contains a number of "forward-looking statements". Specifically, all statements other than statements of historical facts included in this Quarterly Report on Form 10-Q 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 quarterly report, the words "anticipate," "believe," "estimate," "expect," "may," "will," "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 management's 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 the heading "Overview" and in our registration statements and periodic reports filed with the SEC under the Securities Act of 1933, as amended (the "Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Although management believes that its expectations are reasonable, we cannot assure you that such 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 Quarterly Report on Form 10-Q as anticipated, believed, estimated, expected or intended. In this Item 2, references to the "Company," "Startech", "we," or "us" means Startech Environmental Corporation and its wholly-owned subsidiary. Overview We are an environmental technology company that fabricates and sells a recycling system for the global marketplace using components manufactured by third parties. We believe that our plasma processing technology, known as the Plasma Converter System ("PCS"), achieves closed-loop elemental recycling that destroys hazardous and non-hazardous waste and industrial by-products and is capable of converting them into useful commercial products. These products could include a synthesis gas called PCG (Plasma Converted Gas), surplus energy for power, hydrogen, metals and silicate for possible use and sale by users of the Plasma Converter System. Until January 2004, we were engaged solely in the manufacture and sale of equipment for use by others. Since then, we have attempted to broaden the scope of our available revenues. This change was brought about by our decision to attempt to expand our 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 believe specific events will drive demand for our Plasma Converter System. They include: o Increases in waste, and in particular hazardous waste, due to rising consumer/industrial consumption and population growth in most nations; o Current waste disposal and remediation techniques such as landfills and incineration becoming regulatory, socially and environmentally less acceptable; 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. We believe that 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 our products will add value to our potential customers' businesses as they could possibly realize revenue streams from disposal or processing fees, as well as from the sale of resulting commodity products and services. We have been actively educating and promoting to our potential customers the benefits of the Plasma Converter System over other forms of waste remediation technologies. Our efforts to educate the public and governments are continuing. 8 Like most new technologies, we have been met with varying degrees of resistance. We believe that there is a rising comfort level with our Plasma Converter System technology, resulting in part from our educational and informational efforts. Our business model and our market development strategies arise from our mission, which is to change the way the world views and employs discarded materials. We expect to achieve this objective by strategically marketing a series of products and services emanating from our core Plasma Converter System technology that could possibly produce saleable fossil fuel alternatives while possibly providing a safer and healthier environment. We expect to implement this strategy through sales of our Plasma Converter System with our providing after-sales support and service, build own and operate/build own and transfer of ownership facilities, joint development projects and engineering services. Recognizing the increasing importance of alternative energy and power sources in general, and hydrogen in particular, in 2005, we expanded our product line to include StarCell(TM), a hydrogen separation technology. Working in conjunction with the Plasma Converter System, StarCell provides what we believe to be an environmentally friendly renewable source of hydrogen power. Recent Developments Renegotiation of Sales Agreement Payment Schedule- On May 10, 2007, we entered into a purchase agreement with EnviroSafe Industrial Services Corporation ("EnviroSafe") whereby we sold to EnviroSafe two 10 ton-per-day (rated capacity), or TPD, and one 5 TPD (rated capacity) Plasma Converter Systems to process various solid, liquid and gaseous feeds, including hazardous waste for a total purchase price of $19,275,000. On May 23, 2007, we received a down payment in the amount of $1,927,500, or 10% of the purchase price. The remainder of the purchase price was scheduled to be paid in installments, the last of which is scheduled to be paid upon the issuance of a certificate of completion following installation of the Plasma Converter Systems. The Company received aggregate payments under this sales agreement of $9,155,500 through January 31, 2009. As of January 31, 2009, payments aggregating $3,373,250 were past due. There can be no assurance that these payments or other payments contemplated by this contract will be made or that the Company will deliver the Plasma Converter Systems covered by the contracts. The Company understands that the delays in payment have been the result of a combination of factors, including the relocation of the installation site for the Plasma Converter Systems (as described below), changes to EnviroSafe's business plans in connection with the relocation and the impact of the global economic crisis on EnviroSafe's resources. As described above, EnviroSafe elected to relocate the site of installation for the Plasma Converter Systems from Barcelonita, Puerto Rico to a former Schering Plough pharmaceutical industry facility located in Maneti, Puerto Rico, which has resulted in delays in fabricating and assembling the Plasma Converter Systems. The Company is completing those items in the fabrication and assembly process that can be completed within the requirements of imposed reduced resources. On December 9, 2008, the Company announced that EnviroSafe acquired the new site where it plans to install the Plasma Converter Systems at its new Recycling and Energy-recovery, Environmental Center. Representatives of the Company have visited the new site and have been in discussions with EnviroSafe about revising the contract to change the final delivery date and payment schedule; however, the terms have not been finalized. The Company currently expects the project to continue forward with a delivery date targeted for late 2009. On August 10, 2007, the Company entered into a purchase agreement with a customer for the purchase of a Plasma Converter System for an aggregate sales price of $5,400,000. Through January 31, 2009, the Company received $1,350,000 in payments relating to this agreement. The balance of the purchase price is scheduled to be paid in installments. On March 5, 2008, the Company agreed to a revised payment schedule with the customer to extend the $540,000 payment originally due on May 15, 2008. The Company has not yet received this payment nor has this revised payment schedule been implemented There can be no assurance that these payments or other payments contemplated by this contract will be made or that the Company will deliver the Plasma Converter Systems covered by this purchase agreement. Management has indicated that the Company is currently in discussion with the customer with respect to a revised delivery schedule related to past due payments. On January 23, 2009, the Company entered into an agreement with an entity, as its exclusive distributor for the Republic of Slovenia, the Republic of Croatia, the Federation of Bosnia-Herzegovina, the Republic of Serbia, the Republic of Macedonia, the Republic of Montenegro and also the Republic of Austria, effective February 1, 2009. The Company received a cash payment of $250,000 on January 23, 2009 in connection with this agreement, which also requires the entity to purchase certain Plasma Converter Systems during the following years as a minimum requirement to maintain the possession of the distributorship rights. 9 Results of Operations Comparison of three months ended January 31, 2009 and 2008 Operations Revenues. Total revenues were $0 for the three months ended January 31, 2009, compared to $107,988 for the same fiscal period in 2008. During the three months ended January 31, 2008, the Company recognized revenue of $32,988, related to distributorship agreements that have now been fully amortized. Unamortized distributorship agreements were $250,000 at January 31, 2009, compared to $0 at October 31, 2008. The Company will begin to amortize the distributorship agreement effective February 1, 2009. Gross Profit. Gross profit was $0 for the three months ended January 31, 2009, compared to $4,940 in the same period in fiscal 2008. Gross profit decreased due to the Company not recognizing any revenue from the amortization of distributorship agreements during the three months ended January 31, 2009. Selling Expenses. Selling expenses for the three months ended January 31, 2009 were $178,858, compared to $191,644 for the same period in the prior year, a decrease of $12,786, or 6.67%, primarily due to lower marketing and consulting expenses. Research and Development Expenses. Research and development expenses for the three months ended January 31, 2009 were $47,543, compared to $51,115 for the same period in the prior year, an decrease of $3,572 or 6.99%, primarily due to a decrease in salary expenses. General and Administrative Expenses. General and administrative expenses for the three months ended January 31, 2009 were $746,512, compared to $1,214,733 for the same period in 2008, an decrease of $468,221, or 38.5%. This was primarily due to a decrease in professional fees including accounting, consultants, legal and stock compensation by $466,510, from $648,042 to $181,532. In addition, insurance, utilities, placement fees and related expenses increased by $60,430 from $61,932 to $122,362 during the three months ended January 31, 2009, and the Company made contributions to its 401(k) plan in the amount of $95,088, compared to an aggregate contribution of $26,398 for the same period in the prior year. Stock compensation for the three months ended January 31, 2009 was $0, compared to $84,300 for the three months ended January 31, 2008. Depreciation and Amortization Expenses. Depreciation and amortization expenses for the three months ended January 31, 2009 were $58,386, compared to $55,235 for the same period in the prior year, an increase of $3,151, or 5.7%, primarily due to higher depreciation expenses on the equipment at our facility in Bristol, Connecticut. Other Income (Expense) Interest Income. Interest income for the three months ended January 31, 2009 was $8,993, compared to $107,352 in the same fiscal period in 2008, a decrease of 91.6%, due to lower cash balances and lower interest rates on our money market investments. Liquidity and Capital Resources For the three months ended January 31, 2009, net cash used in operating activities was $989,188, primarily due to a net loss of $1,022,306, offset by $173,201 of non-cash charges. During the three months ended January 31, 2009 the Company received $250,000 from a distributorship agreement. As of January 31, 2009, we had cash and cash equivalents of $3,653,289 and a working capital deficiency of $3,648,640. Investing activities resulted in $15,692 of cash outflows during the three months ended January 31, 2009 due to the purchase of equipment. 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, has 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 incurred a net loss of $1,022,306 during the three months ended January 31, 2009. For the three months ended January 31, 2009, net cash used by operating activities was $989,188. As of January 31, 2009, the Company had cash and cash equivalents of $3,653,289 and had negative working capital of $3,648,640. The Company has historically obtained funds to operate its business through the sale of equity and debt instruments, through the receipt of installment payments in respect of sales of its products and through the receipt of payments in connection with entering into distributorship agreements. During 10 the three months ended January 31, 2009, the Company received a payment of $250,000 in connection with a Distribution Agreement from an entity relating to the Republic of Slovenia, the Republic of Croatia, the Federation of Bosnia-Herzegovina, the Republic of Serbia, the Republic of Macedonia, the Republic of Montenegro and also the Republic of Austria. The Company has been and continues to be dependent upon the deposits and installment payments from the execution of distributorship agreements, sales of its products and sales of its securities. The Company's ability to continue to operate as a going concern depends on its ability to generate sufficient revenue from the sale of its products, payments in connection with entering into distributorship agreements and/or the receipt of additional capital from one or more financing sources. Due to the fact that the Company has been unsuccessful in consummating additional sales of its products or otherwise raising additional capital, it has relied on a portion of the funds the Company received as non-refundable customer deposits in connection with the two sales agreements for products to cover operating expenses. Management is continuing its efforts to sell the Company's products and to secure additional funds through the receipt of additional capital. However, there can be no assurance that the Company will be able to sell its products or that the Company will be able to raise additional capital on terms acceptable to it or at all. If the Company is unable to sell its products or raise additional capital, the Company will be forced to utilize the remaining balance of its non-refundable customer deposits to remain a viable entity and accordingly, the Company might need to significantly restrict or discontinue its operations. Off-Balance Sheet Arrangements We have not entered into any off-balance sheet arrangements. Item 3. Controls and Procedures. -------------------------------- Disclosure Controls and Procedures The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports filed with the SEC is recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC and includes, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's Chief Executive Officer and Chief Financial Officer are responsible for establishing, maintaining and enhancing these controls and 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 Quarterly Report on Form 10-Q, 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. Our independent auditors have reported to our board of directors a matter involving internal controls that our independent auditors considered to be a reportable condition and material weakness, under standards established by the Public Company Accounting Oversight Board. The material weakness 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. Given this reportable condition and material weakness, management devoted additional resources, including the engagement of an outside consultant, to address disclosure issues during the three months ending January 31, 2009. As a result, we are confident that our financial statements for the three months ended January 31, 2009 fairly present, in all material respects, our financial condition and results of operations. Management does not believe that the above reportable condition and material weakness affected the results for the three months ended January 31, 2009 or any prior period. Changes in Internal Control Over Financial Reporting During the three months ended January 31, 2009, there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings. None Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits. The following exhibits are attached to this report or are incorporated by reference herein. 31.1 Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * 31.2 Certificate of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 * 32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * 32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * ---------- * Filed herewith 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STARTECH ENVIRONMENTAL CORPORATION (Registrant) Dated: March 16, 2009 BY: /s/ Joseph F. Longo --------------------------- Joseph F. Longo Chairman, Chief Executive Officer, President and Director Dated: March 16, 2009 BY: /s/ Peter J. Scanlon ---------------------------- Peter J. Scanlon Chief Financial Officer, Secretary, Vice President, and Principal Financial Officer 13