Startech Environmental -- More Hot Air than Profit

Startech Environmental (STHK-$2.95) is a “waste to energy” company commercializing its proprietary plasma processing technology, the Plasma Converter system.

The Plasma Converter System achieves closed-loop elemental recycling that irreversibly destroys hazardous and non-hazardous waste and industrial by-products while converting them into useful commercial products. This “green” waste management alternative uses the extreme high temperature created by a plasma arc—the arc in the plasma plume within the vessel can be as high as 30,000 degrees Fahrenheit, or three times hotter than the surface of the Sun—to break down (molecular dissociation) any proportion or combination of solid or liquid waste (including sludge).

The two principal byproducts of the Plasma Converter are a synthesis fuel gas called PCG and an obsidian-like stone, which is non-toxic and non-leachable. Both are commodity products that offer the customer revenue potential. The PCG can be directly used for plant heating or cooling, to make electricity, or to desalinate water, as well as other uses. Additionally, the PCG can be used to make hydrogen or methanol. The obsidian-like stone can be sold to the construction and abrasives industries.

In June 2002, the Company submitted an application for a patent to the United States Patent and Trademark Office. The patent involved a torch positioning apparatus designed and developed by Startech engineers. Management believes it more prudent to treat its other proprietary intellectual property as trade secrets, for applying for patents would expose the Company to unauthorized use of its proprietary information.

Company Background

The Company's activities during the four fiscal years, November 1, 1992 to October 31, 1995, consisted primarily of the research and development of the Plasma Converter. In November 1995, Kapalua Acquisitions, Inc., completed the acquisition of Startech 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 non-hazardous waste materials. From that time to date, the Company has maintained this goal as its principal focus.

In 2003, recognizing the increasing importance of alternative energy and power sources in general, and hydrogen in particular, the Company expanded its product-line to include StarCell, a hydrogen separation technology that extracts hydrogen from PCG. Working in conjunction with the Plasma Converter, management says that StarCell provides an environmentally friendly renewable source of hydrogen power (only byproduct is water vapors).

Startech is a licensee of one patent critical to enhancing the commercial capability of its core plasma system for certain applications, like hydrogen power. 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 PCG and forms the basis of the StarCell system.

Key drivers of growth for the Plasma Converter include the need for customers to:

• Reduce the disposal costs associated with increases in waste, and in particular hazardous wastes, due to consumer/industrial consumption and population growth in most nations;
• Comply with present and anticipated new environmental regulations landfills and incineration in a socially and cost-effective manner;
• Meet the demand for critical resources such as power and water to sustain local economies; and,
• Find alternatives to fossil fuels.

Fuel from Waste

Startech believes that its core plasma technology addresses these waste and resource issues by offering remediation solutions that are integrated with a range of equipment solutions and services. In addition, these products will (allegedly) add value to potential 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.

The problem, too, with some “green” alternative energy, such ethanol from corn, is that the economic costs (e.g. capital, environmental, etc.) are often higher than the economic benefits. Simply put, the transport of energy used is greater than the amount of energy produced. [For those without a science background, see the refresh link on Laws of thermodynamics].

Carbon is abundantly present in the products and wastes of the industrial world. Such materials are inherently rich in latent chemical energy such as is found in fuel. The Company claims that when carbonaceous waste, such as infectious medical and pharmaceutical waste, municipal solid waste, shipboard waste, and such are processed, the Plasma Converter system will consume only one unit of electrical energy while producing about four units of energy residing in the Plasma Converted Gas (a synthesis gas recovered from the recycling system, or PCG). Further, with improved efficiencies of electrical generating units, the four units of energy can be used to create two units of electrical energy.

The units of energy recovered, however, is dependent on the type of waste being recycled.

Materials such as scrap tires, plastics, and solvents, for example, are so rich in energy, they will produce a relatively large amount of PCG with a high-energy content that will result in approximately 6-8 units of recovered PCG energy for each unit of electrical energy used in the process.

Not all wastes produce PCG. For example, processing contaminated soil will produce no appreciable amount of PCG.

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.

The Company believes that in some applications, the Plasma Converter will allow its customers to produce enough energy for their own needs, and produce a surplus that can be sold to the local electrical grid, or used in a customer's facility to reduce the need for purchased power or purchased fuel—the profitable means to generate a valuable product while at the same time using a zero cost basis, or revenue generating source of raw material (waste).

The 10Q Detective notes, however, that such applications would require a h-u-g-e initial capital outlay—pipelines to carry the surplus, (time-consuming) manufacturing footprint that complies with regulatory statutes, including emission standards, storage, handling and transportation of regulated materials, etc.

Sales Potential

Startech expects a secondary benefit of the Plasma Converter system to be the salability of the recovered products: most of the PCG can be used as a fuel gas (such as hydrogen by use of the StarCell system) 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 made readily available for sale with little or no additional processing.

In May 2006, the Company announced it had successfully completed Phase One of a two-phase DOE Program that has as its focus the production of Plasma Converted Gas (PCG) from processing coal and municipal solid waste in the Plasma Converter for the production of hydrogen. Phase Two, now in progress, is focused on the separation of hydrogen from the PCG synthesis gas mixture using the Company's StarCell system.

In our view, potential investors should not rely on a recurring revenue stream—at present—from hydrogen fuel. In the U.S., car manufacturers take their cue from Washington—and the politicians are talking up ethanol—not hydrogen as the fuel of the future.

Markets

Startech views the future of its 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:

1. 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.
2. 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 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 the Plasma Converter System is for on-site use by industrial, institutional and government facilities, and also for commercial facilities that process waste under contract.

Financial Overview

The Company recognizes revenue on the sale of its manufactured products at the date of shipment. Revenue 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.

To date, however, educational and informational efforts have met with varying degrees of resistance. Startech has generated limited revenues from the sale of its products and does not expect to generate significant revenues until it sells a larger number of its products.

For the fiscal year ended October 31, 2006, total revenues were a paltry $948,794. The bulk of sales were attributable to three elements:

1. The amortization of distributorship agreements delivered about 28% of sales. The distributors signed were Plasteck Solutions Limited, representing Australia and New Zealand, Plasmatech Caribbean Corporation representing Puerto Rico, and Materiales Renovados, Sl representing Spain;
2. The initiation of engineering specs for the Liaoning GlobalTech Hazardous Waste Processing project—which will process 20,000-lb. per day of industrial waste , including PCBs—in Northern China delivered about 10%, or 100,000 in revenue; and,
3. The sale and installation of manufactured parts to Mihama in Japan generated more than 50% of this total.

Installation of the industrial waste system in Hiemji, Japan was completed back in January 2006, and the PCB (polychlorinated byphenyls) testing was completed in October 2006. Preliminary results indicated complete destruction of the PCB's in the Plasma Converter System. Pending the final test report, Mihama can apply for its operator certification.

Ideally, as the Company's Japan distributor, Mihama can then use this system to support its Startech sales and marketing operations and be able to demonstrate a workable Plasma Converter System in a commercial operation to its other customers.

As of October 31, 2006, Startech had an accumulated deficit of more than $30.8 million.

The Company has historically satisfied its capital needs primarily by the sale of equity securities.

“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.” – [Startech 2006 10-K]

Latest Developments

• “Startech lands $280M for pair of Polish waste disposal contracts.” – May 2004
• "Plasma Leasing Financings Near Completion in Poland.” – March 2005

“The initial contracts signed in Poland are still pending project funding and remain in the financial development stage. Discussions continue on project scope and configuration.” – November 2006

• “On March 15, 2006, the Company announced that it and Future Fuels, Inc. (FFI), a subsidiary of Nuclear Solutions, Inc. (OTCBB: NSOL) of Washington, D.C., had received a Letter Of Intent from FFI for FFI's purchase of a 100 ton-per-day Startech Plasma Converter System (PCS) for installation in a StarTech waste-to-ethanol facility in Toms River, New Jersey scheduled to go on-line in late 2007.” – June 20, 2006.

As of January 4, 2007, FFI was still waiting on funding—a planned tax-exempt bond offering, totaling $84 million for the construction of the plant.

“You made me promises, promises
You knew you'd never keep
Promises, promises
Why do I believe
All of your promises
You knew you'd never keep
Promises, promises
Why do I believe?” -- recorded by Eighties British synthpop duo Naked Eyes [Album – Everything And More, 1983]

In recent months, too, Startech has announced contract signings for the sale of three 200-tonne-per-day plasma converters to be installed In Panama and for one (to process industrial hazardous waste, including PCBs). The Panama plant is expected to be operational in 2008.

“He who is born a fool is never cured.” – Proverb

Startech’s business model needs to be modified to include the following defined variables:

1. Demonstrated technologies have never been utilized on a large-scale commercial basis. Critics claim the largest model has not been demonstrated to safely handle 200 tons of trash per day (as claimed). [Startech has yet to provide evidence supporting its position that emissions will likely be less than from a standard natural-gas power plant];
2. Care will be required during storage and handling of the Plasma Converted Gas (which may represent an explosion hazard) and during handling of the molten metal and slag produced by the process; and,
3. The failure to achieve market acceptance of the Plasma Converter within the United States (given alternative “green” fuels and demonstrated, lower—initial cost waste-management options, such as landfill dumping and incineration).

“The only source of knowledge is experience.” – Albert Einstein (1879 – 1955)

Management

In our view, a background check of Startech’s management and board raises doubt as to whether the Company has the right team in place to successfully execute on the economics of waste-to-energy burns. To wit:

The board consists of CEO/Chairman Joseph F. Longo and four outside directors:

1. L. Scott Barnard, age 63, is currently the owner and Managing Partner of Programmix, LLC, a sales and marketing firm based in Norwalk, CT;
2. Joseph A. Equale, CPA, age 60, active in the accounting profession, where he served as President and is a member of the Board of Governors of the 6,500 member Connecticut Society of CPAs (CSCPA);
3. John J. Fitzpatrick, age 66, is an independent management consultant, having retired in 1995 from the “old” Dun & Bradstreet Corporation as an executive officer and Senior Vice President-Global Human Resources, where he was employed since 1983; and,
4. Chase P. Withrow III, age 62, is a former manager at Advest. His claim-to-fame being that his brokerage office set records for gross commission production as well as gross sales production per broker!

Aside from CEO Longo, whose background is in waste-management, not one director has knowledge of refuse-to-fuel technology. Granted, the company burns more cash than it produces—ergo, it helps to have two directors with Wall Street connections.

Just as unsettling to us is that of the five senior executives, again—only—Joseph Longo brings industry experience to the table:

1. The Company is dependent on the global marketplace for most of its contracts. Peter J. Scanlon, age 57, who serves as Vice President, Chief Financial Officer, Treasurer and Secretary, brings a prodigious three-years of international experience to Startech (having once served on assignment for IBM in London, England);
2. Talk about breaking a cardinal rule in business management—the Company’s Vice President of Sales and Marketing, Stephen J. Landa, age 42, was previously a financial news talk show host; and,
3. A dearth of management with any science background (esp. in thermodynamics!). Karl N. Hale, age 41, serves as Vice President of Engineering. Mr. Hale is a chemist by training and is a recognized expert in the field of explosives industry Safety, Health and Environment. “He has invented several novel processes for treatment of explosives industry waste materials.” A good man to have at the helm—if a waste plant is in danger of blowing up!

Startech brags that founder Joseph E. Longo, 73, with more than 25 years of waste-management industry experience, has been awarded many waste industry equipment patents, all of which have been successfully commercialized. An extensive Google search turned up patents in his name for, among other uses, a refuse compactor slide bearings, a household garbage compaction unit, and the hydraulics for a self-powered bucket bowls—but no patents with any relevance to refuse-to-fuel technology.

“Lying is done with words and also with silence.” – American poet and essayist, Adrienne Rich

Startech makes claims, too, on its website that the Plasma Converter process can irreversibly destroy hazardous contaminants including anthrax, mad cow disease, and foot and mouth disease.

The Company alleges, too, that its technology is relative to Homeland Defense: “Truck-mounted mobile Plasma Converter systems could be rapidly deployed to process and destroy hazardously contaminated materials at ground zero.”

In 1999, the Department of Defense initiated a program called the Assembled Chemical Weapons Assessment (ACWA) program. In accordance with the wishes of Congress, the DOD looked to identify and demonstrate at least two non-incineration chemical weapons disposal technologies.

Contrary to the aforementioned claims, Startech’s plasma arc system was eliminated from consideration. In ACWA’s 30 September 1999 Report to Congress, among other issues, the DOD noted:

• Creation of hazardous by-products— "Demonstration data shows that the following hazardous substances were characterized during demonstration: formaldehyde; carbonyl sulfide; cyanide; and dioxins/furans.”
• Lacking Process Maturity—The ACWA determined, too, that while “the PWC components represent a mature technology...the ACWA demonstration indicates that the proposed PWC configurations are not as mature as or comparable to their industrial counterparts.”

A Call to Startech’s management seeking comment was not returned.

"In the year 2525, If man is still alive,
If woman can survive, They may find
In the year 3535
Ain’t gonna need to tell the truth, tell no lie..." -- Hit song from 1969, Zager and Evans

The 10Q Detective, at present, is skeptical that Plasma arc technology and hydrogen gas as a fuel alternative will be sufficiently utilized in the conditions and sold in the sales volumes necessary for Startech Environmental to become a profitable enterprise and to continue as a going concern.

Trash to fuel profits— not in this decade.

Editor David J Phillips does not hold a financial interest in any waste-to-energy stocks. The 10Q Detective has a Full Disclosure policy.