10QSB 1 envk10qjun04.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2004 ---------------- [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____ Commission file number: 000-26095 ENVIROKARE TECH, INC. --------------------------------------------------------------- Exact name of small business issuer as specified in its charter) Nevada 88-0412549 ------------------------------- ------------------ State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5850 T.G. Lee Blvd., Suite 535, Orlando, Florida 32822 ------------------------------------------------------ (Address of principal executive offices) (407) 856-8882 -------------------------- (Issuer's telephone number) APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the issuer filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] NOT APPLICABLE APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: The total number of shares of Common Stock, par value $.001 per share, outstanding as of August 16, 2004, was 34,518,980. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] TABLE OF CONTENTS Part I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets.................................4 Consolidated Statements of Operations.......................5 Consolidated Statements of Cash Flows.......................6 Condensed Notes to the Consolidated Financial Statements....7 Item 2. Management's Discussion and Analysis or Plan of Operations..12 Item 3. Control and Procedures......................................15 Part II - OTHER INFORMATION Item 1. Legal Proceedings.........................................16 Item 2. Changes in Securities.....................................16 Item 3. Defaults Upon Senior Securities...........................16 Item 4. Submission of Matters to a Vote of Security Holders.......16 Item 5 Other Information.........................................16 Item 6. Exhibits and Reports on Form 8-K..........................17 SIGNATURES....................................................................19 CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS This document contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements, other than statements of historical facts, included in or incorporated by reference into this Form 10-QSB which address activities, events or developments which the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. The words "believes," "intends," "expects," "anticipates," "projects," "estimates," "predicts" and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, statements concerning: expectations, anticipations, beliefs, estimations, projections, and other similar matters that are not historical facts, including such matters as future capital and development expenditures and expansion and growth of business operations. These statements are based on certain assumptions and analysis made by the management of Envirokare Tech Inc., ("ENVIROKARE") in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. Envirokare cautions the reader that these forward-looking statements are subject to risks and uncertainties, including those associated with: the financial environment, general economic, market and business conditions, the regulatory environment, business opportunities that may be presented to and pursued by Envirokare, changes in laws or regulations, availability to obtain additional financing on favorable conditions, trend projections, and other factors, many of which are beyond the Company's control that could cause actual events or results to differ materially from those expressed or implied by the statements. Such risks and uncertainties include those risks and uncertainties identified in the Description of the Business and Management's Discussion and Analysis sections of this document and risk factors discussed from time to time in the Company's filings with the Securities and Exchange Commission. Significant factors that could prevent Envirokare from achieving its stated goals include: the inability of Envirokare to obtain financing for capital expenditures and acquisitions, declines or failure to develop in the market for the Company's products, development of superior products by competition, and adverse changes in the regulatory environment affecting the Company. The cautionary statements contained or referred to in this document should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by Envirokare or persons acting on its or their behalf. Envirokare undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ENVIROKARE TECH INC. Financial Statements June 30, 2004 3
ENVIROKARE TECH, INC. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS June 30, 2004 December 31, (unaudited) 2003 ----------------- ----------------- ASSETS CURRENT ASSETS Cash $ 285,377 $ 65,809 Deposits and retainers 22,466 22,466 Prepaid expenses 5,235 5,916 Inventory 43,216 43,216 ----------------- ----------------- TOTAL CURRENT ASSETS 356,294 137,407 ----------------- ----------------- PROPERTY AND EQUIPMENT Furniture and fixtures 7,129 7,129 Office equipment 18,167 18,167 Molds 170,912 170,912 Less accumulated depreciation (10,097) (8,050) ----------------- ----------------- TOTAL PROPERTY AND EQUIPMENT 186,111 188,158 ----------------- ----------------- OTHER ASSETS License agreement 525,000 525,000 Patent acquisition costs and technology rights 1,958,939 1,958,939 ----------------- ----------------- TOTAL OTHER ASSETS 2,483,939 2,483,939 ----------------- ----------------- TOTAL ASSETS $ 3,026,344 $ 2,809,504 ================= ================= LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 423,995 $ 327,285 Accounts Payable - related party 128,010 47,085 Deposits from customers 61,215 61,215 Deposit on exclusivity agreement 250,000 Notes payable 76,531 77,790 Accrued interest 34,677 31,579 Accrued interest to stockholders 13,759 16,259 Equipment lease payable, current portion 3,144 3,144 Notes payable to stockholders, current portion 93,000 86,321 ----------------- ----------------- TOTAL CURRENT LIABILITIES 1,084,331 650,678 ----------------- ----------------- LONG TERM LIABILITIES Equipment lease payable, net of current portion 2,827 5,196 Notes payable to stockholders, net current portion 1,536,334 1,584,566 ----------------- ----------------- TOTAL LONG TERM LIABILITIES 1,539,161 1,589,762 ----------------- ----------------- COMMITMENTS AND CONTINGENCIES - - STOCKHOLDERS' EQUITY Convertible preferred stock, 10,000,000 shares authorized, $.001 par value; 0 shares issued and outstanding - - Common stock, 200,000,000 shares authorized, $.001 par value; 35,368,970 and 32,992,390 shares issued and outstanding, respectively 35,369 32,992 Additional paid-in capital 5,474,326 5,060,660 Stock options and warrants 1,097,384 994,896 Accumulated deficit during development stage (6,204,226) (5,519,484) ----------------- ----------------- TOTAL STOCKHOLDERS' EQUITY 402,852 569,064 ----------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,026,344 $ 2,809,505 ================= ================= The accompanying condensed notes are an integral part of these consolidated financial statements. 4
ENVIROKARE TECH, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS Period from June 15,1998 Three Months Three Months Six Months Six Months (Inception) to Ended June 30, Ended June 30, Ended June 30, Ended June 30, June 30, 2004 2003 2004 2003 2004 (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) -------------- -------------- -------------- -------------- -------------- REVENUES $ - $ - $ - $ 37,150 $ 62,150 COST OF GOODS SOLD - - - (17,500) (17,500) -------------- -------------- -------------- -------------- -------------- GROSS PROFIT - - - 19,650 44,650 -------------- -------------- -------------- -------------- -------------- EXPENSES Consulting fees - related parties 78,654 27,834 178,656 73,334 1,242,762 Other consulting fees 18,000 10,891 56,780 49,655 1,102,218 Board of directors fees - - - - 367,689 Rent 20,199 24,060 38,312 40,683 121,171 General and administrative 47,141 38,002 104,236 69,936 896,536 Depreciation 684 632 2,048 1,364 13,060 Professional fees 82,725 100,732 144,938 137,803 980,687 Research and development - 14,373 5,059 59,373 303,524 Wages, salaries, and payroll taxes 18,015 11,315 39,393 11,315 214,897 -------------- -------------- -------------- -------------- -------------- TOTAL EXPENSES 265,418 227,839 569,422 443,463 5,242,544 -------------- -------------- -------------- -------------- -------------- LOSS FROM OPERATIONS (265,418) (227,839) (569,422) (423,813) (5,667,182) OTHER INCOME (EXPENSE) Financing costs - - - - (469,290) Gain on sale of assets - 577 - 577 577 Interest expense (51,754) (43,479) (115,321) (84,056) (537,620) -------------- -------------- -------------- -------------- -------------- TOTAL OTHER INCOME (EXPENSE) (51,754) (42,902) (115,321) (83,479) (1,006,333) -------------- -------------- -------------- -------------- -------------- LOSS BEFORE PROVISION FOR INCOME TAXES (317,172) (270,741) (684,743) (507,292) (6,204,226) PROVISION FOR INCOME TAXES - - - - - -------------- -------------- -------------- -------------- -------------- NET LOSS $ (317,172) $ (270,741) $ (684,743) $ (507,292) $ (6,204,226) ============== ============== ============== ============== ============== BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.01) $ (0.02) $ (0.02) ============== ============== ============== ============== WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED COMMON STOCK SHARES OUTSTANDING 34,663,495 31,387,811 34,329,907 31,029,977 ============== ============== ============== ============== The accompanying condensed notes are an integral part of these consolidated financial statements. 5
ENVIROKARE TECH, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS Period from Six Months Six Months June 15,1998 Ended Ended (Inception) to June 30, June 30, March 31, 2004 2003 2004 (unaudited) (unaudited) (unaudited) ------------------ ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (684,743) $ (507,292) $ (6,204,227) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 2,048 1,364 13,060 Gain on disposal or impairment of assets - - 35,943 Stock options and warrants issued for fees and expenses 38,780 - 1,764,932 Common stock issued for consulting fees - - 112,000 Interest paid with issuance of debt - - 350,890 Customer deposit - - 61,215 Inventory - (17,500) (43,216) Increase in prepaid expenses 681 (6,537) (5,235) Increase in accounts payable - related parties 80,925 - 455,298 Increase in accounts payable 130,710 158,026 130,710 Increase in accrued interest payable 598 82,544 63,188 Deposit on exclusivity agreement 250,000 - 250,000 ------------------ ------------------ ------------------ Net cash used by operating activities (181,001) (289,395) (3,015,442) ------------------ ------------------ ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Deposits and retainers - 40,537 (22,465) Purchase of equipment and molds - (56,671) (214,187) Payments of license agreement - - (525,000) Patent costs - - (10,129) Proceeds from sale of equipment - 1,275 1,275 ------------------ ------------------ ------------------ Net cash used by investing activities - (14,859) (770,506) ------------------ ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payment of equipment lease (2,369) - (3,492) Payment of notes payable (1,259) - (6,563) Proceeds from sale of preferred stock - - 250,000 Proceeds from sale of common stock and exercise of warrants 445,750 228,000 2,526,799 Repurchase of common stock - - (7,500) Proceeds from (payment of) notes payable to related parties (41,553) 90,000 1,312,082 ------------------ ------------------ ------------------ Net cash provided by financing activities 400,569 318,000 4,071,326 ------------------ ------------------ ------------------ Increase (decrease) in cash 219,568 13,746 285,377 Cash, beginning of period 65,809 9,506 - ------------------ ------------------ ------------------ Cash, end of period $ 285,377 $ 23,252 $ 285,377 ================== ================== ================== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ - $ 1,782 $ 14,989 ================== ================== ================== Income taxes paid $ - $ - $ - ================== ================== ================== NON-CASH TRANSACTIONS: Common stock issued for acquisition of subsidiary $ - $ - $ 1,925,000 Note issued for pending patent to related party and for deposit for stock $ - $ - $ 136,965 Warrants issued for financing activities $ - $ - $ 469,291 Stock options issued for consulting fees $ 38,780 $ - $ 1,764,932 Stock options issued for directors fees $ - $ - $ 1,204,689 Common stock issued for consulting fees $ - $ - $ 112,000 Common stock issued for retirement of debt $ 34,000 $ - $ 34,000 Stockholder's contribution for equipment $ - $ - $ 1,847 Equipment acquired via capital lease $ - $ - $ 9,463 The accompanying condensed notes are an integral part of these consolidated financial statements. 6
ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements JUNE 30, 2004 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION Envirokare Tech, Inc. (hereinafter, "the Company" or "Envirokare") was incorporated in June 1998 under the laws of the State of Nevada. In December 1998, the Company acquired assets of a business engaged in developing a rubber mold technology and patent rights potentially applicable to future development of a pallet made of recycled materials. The Company believes the early-stage rubber mold technology to be of marginal commercial value. During 2001, the Company acquired, via license agreement, extensive rights to a proprietary thermoplastic processing technology, the Thermoplastic Flow forming process (variously referred to herein as "TPF Process", the "Process" or "TPF technology"). The licensing agreement provides the Company with the ability to utilize the TPF technology to design, develop, manufacture, market, license and sublicense a wide range of large structural parts, including the Company's proprietary pallet. The pallet is now composed of long-fiber reinforced thermoplastic composite and will be manufactured using the acquired TPF technology. The Company's current operating strategy is based on developing products to be manufactured by the TPF Process, as well as marketing the TPF technology to potential sublicensees of the Company. The Company maintains offices in Orlando, Florida. The Company has elected a fiscal year-end of December 31. The Company includes the assets and investment in Electroship Acquisition Corporation and Envirokare Composite Corp., wholly-owned non-operating subsidiaries, in these financial statements. The Company is in the development stage as of September 30, 2003 and has not realized any significant revenues from planned operations. Basis of Preparation -------------------- The accompanying interim condensed financial statements are prepared in accordance with rules set forth in Regulation SB of the Securities and Exchange Commission. As said, these statements do not include all disclosures required under generally accepted principles and should be read in conjunction with the audited financial statements for the year ended December 31, 2003. In the opinion of management, all required adjustments, consisting of normal reoccurring accruals, have been made to the Company's financial statements. 7 ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements JUNE 30, 2004 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Going Concern ------------- The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has incurred an accumulated deficit of $6,204,226, which includes a net loss of $684,743 for the six months ended June 30, 2004, and has a working capital deficit and limited revenues. The Company, being a development stage enterprise, is currently marketing the TPF technology which will, if successful, mitigate these factors which raise substantial doubt about the Company's ability to continue as a going concern. Management plans to fund operations from sales of its debt and equity in the near-term and from product sales, product development agreements and proceeds realized from licensing the TPF technology on an ongoing basis. The Company has historically raised equity capital through the sale of its common and preferred stock. The Company has also raised debt capital through private placement offerings. Management has proceeded as planned in the ongoing development of numerous products, including a proprietary pallet composed of long-fiber reinforced thermoplastic composite. Management is also marketing the TPF technology to various potential clients with the intent of establishing product development agreements, with the agreements to include provisions for manufacturing and marketing successfully developed products. Management anticipates that the Company will realize licensing fee revenues in the near future. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in its present form. Recent Accounting Pronouncements -------------------------------- In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (hereinafter "SFAS No. 150"). SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement is not expected to have any material impact on the Company's financial statements. In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (hereinafter "SFAS No. 149"). SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material impact on the financial position or results of operations of the Company. Revenue Recognition ------------------- The Company recognizes revenue from product sales upon shipment to the customer. 8 ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements JUNE 30, 2004 NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight line method over the estimated useful lives of the assets, which range from five to seven years. Molds will be depreciated over their estimated useful lives once placed in service. Depreciation expense for the six months ended June 30, 2004 and 2003 was $2,048 and $1,364, respectively. NOTE 4 - NOTES PAYABLE - RELATED PARTIES During the year ended December 31, 2003, the Company entered into a promissory note arrangement with two Company shareholders, in the principal amount of $100,000. The note bears an interest rate of 15% per annum with principal and interest payment payable in 36 equal monthly installments of $3,467 commencing September 1, 2003. Three common stock warrants are attached to each dollar of debt, with an exercise price of $0.20 per share. These warrants are fully exercisable for up to three years from the dates of issuance. During the year ended December 31, 2003, the Company entered into a promissory note with a director and shareholder, in the principal amount of $200,000. The note bears an interest rate of 15% per annum, with principal and interest payment payable in 36 equal monthly installments of $6,933 commencing January 1, 2003. Three common stock warrants are attached to each dollar of debt, with an exercise price of $0.20 per share. These warrants are fully exercisable for up to three years from the dates of issuance. Also in December 2003, the Company rolled all of its outstanding notes payable and accrued interest to related parties into new notes. These notes bear an interest rate of 12% per annum with interest only payable in equal monthly installments of varying amounts, commencing on January 1, 2004. Common stock warrants totaling 5,125,000 were attached to these loans, with an exercise price of $0.20 per share. These warrants are fully exercisable for up to three years from the dates of issuance. Accrued interest on these notes totaled $13,759 and is reflected in the financial statements. NOTE 5 - COMMON STOCK During the six months ended June 30, 2004, the Company received $445,750 from the private sale of 2,228,750 shares of its common stock at $0.20 per share. In addition, these purchasers received warrants to purchase one additional share of common stock for each share purchased, exercisable at $0.40 per share for a period of two to three years. The warrants were valued at $63,707. See Note 6. Additionally, 147,826 shares were issued in consideration for $34,000 in accounts payable debt. The fair market value of these shares was $0.23. During the six months ended June 30, 2003, existing warrant holders were offered a reduction in their respective warrant exercise prices from $0.50 to $0.15 per share if exercised on or before February 14, 2003. This offer resulted in the Company raising $198,000 in cash and issuing 1,320,000 shares of common stock. Participants were issued replacement warrants, exercisable over a two-year period, for the same number of shares of the Company's common stock as issued on exercise of the amended warrants. Additionally, the Company received $30,000 from the private sale of 150,000 shares of its common stock at $0.20 per share. The purchasers received warrants to purchase one additional share of common stock for each share purchased, exercisable at $0.40 per share for a period of one year. 9 ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements JUNE 30, 2004 NOTE 6 - STOCK OPTIONS AND WARRANTS Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (hereinafter "SFAS No. 123"), defines a fair value-based method of accounting for stock options and other equity instruments. The Company has adopted this method, which measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period. In accordance with SFAS No. 123, the fair value of stock options and warrants granted are estimated using the Black-Scholes Option Price Calculation. The following assumptions were made to value the stock options and warrants for the six months ended June 30, 2004: risk-free interest rate of 4%, volatility ranging from 45% to 60%, and terms of two to three years. Options ------- During the six months ended June 30, 2004, the Company granted 200,000 common stock options, exercisable at $0.24 per share, in consideration for consulting services received. The Company has recorded a $38,780 expense related to this transaction. Warrants -------- During the six months ended June 30, 2004, the Company issued 2,228,750 warrants valued at $63,707. See Note 5. For warrant activity during the six months ended June 30, 2003. See Note 5. NOTE 7 - COMMITMENTS AND CONTINGENCIES Lease Agreements ---------------- The Company entered into a lease for office space in Orlando, Florida on September 16, 2002 for a period of 36 months. Lease payments are currently $2,595 per month, with additional charges for common area. A security deposit was paid in the amount of $2,600. Total Orlando lease payments for the six months ended June 30, 2004 and 2003 were $14,530 and $16,789, respectively. The Company entered into a lease for office space in Boca Raton, Florida on February 7, 2001 for sixty months. Lease payments are currently $3,023 per month, with additional charges for common area of $1,472. This amount totals $4,495 per month. A security deposit and last month's rent were paid in the amount of $8,412. A portion of this office space was being subleased with the sublessee reimbursing the Company $3,000, and the Company's share of the sublease totaling $1,495. Total net lease payments for six months ended June 30, 2004 and 2003 were $8,970 and $6,000, respectively. The future minimum lease payments below for the Boca Raton office is the total amount of the payments as is there was no sublease. The Company anticipates the sublease to continue through the end of the lease term. 10 ENVIROKARE TECH, INC. (A Development Stage Company) Condensed Notes to the Consolidated Financial Statements JUNE 30, 2004 NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued) Future annual minimum lease payments for the terms of the Orlando and Boca Raton lease agreements are as follows for the years ending December 31: Orlando Office Boca Raton Office Total --------------- ----------------- -------- 2004 $ 23,355 $ 40,455 $ 63,810 2005 $ 23,355 $ 53,940 $ 77,295 2006 $ - $ 8,990 $ 8,990 Litigation The Company is a named defendant in an action filed by Mr. Real Morel in May 2000 in the Supreme Court of British Columbia, Canada. In this action, Mr. Morel alleges non-payment by the Company of amounts due pursuant to the aforementioned demand promissory notes. After consultation with British Columbia legal counsel and a review of the circumstances surrounding the issuance of the notes, the Company has resolved to dispute this liability. Management of the Company believes that the outcome will not have a material adverse effect on the financial position of the Company. Capital Leases During the year ended December 31, 2003, the Company acquired computer equipment through two capital leases. The Company recognizes the value of the equipment in property, plant and equipment in the financial statements and the lease liability in both current liabilities and long-term liabilities on the financial statements. The leases, totaling $9,463, are for 36 months, with interest and principal payments of $345 per month. Interest of $497 was paid during the six months ended June 30, 2004. Future minimum lease payments for the remainder of 2004 are $1,572. For 2005 and 2006, lease payments are $3,154 and $1,245, respectively. NOTE 8 - SUBSEQUENT EVENTS In July 2004, the Company commenced a private placement offering of 1,725,000 "units" at the price of $0.20 per unit. Each unit offered consisted of one share of Company common stock and two three-year warrants entitling the warrant holder to purchase another share of Company common stock at $0.40 per share. Under these same terms, the Company converted $100,000 in related party debt into 500,000 units. In June 2004, the Company entered into an exclusivity agreement with Nova Chemicals, Inc. (hereinafter "Nova"). Under the terms of this agreement, the Company has agreed to not participate in any discussion or negotiations with any third party regarding transactions related to the use, license or sublicense of the TPF Technology. The term of the agreement ends August 31, 2004. The agreement requires Nova to pay the Company $250,000 as consideration. Additionally, the Company must issue Nova a common stock purchase warrant for 1,250,000 shares at purchase price of $0.20 per share. If the negotiations and discussions detailed in the agreement result in a definitive agreement between the parties for a transaction, Nova will receive shares in the Company worth $250,000. In this event, the warrants issued may be cancelled at the discretion of the Company. During the six months ended June 30, 2004, the Company received the aforementioned $250,000. The transaction has been recorded and is classified as a current liability in the financial statements. 11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. Envirokare Tech, Inc. (the "Company" or "Envirokare") is engaged in the application design, development and manufacturing, utilizing proprietary thermoplastic composite technologies including Thermo Plastic Flowforming for TPF(TM). Technology: The TPF Process is a proprietary process developed by Thermo Composite Designs, Inc., that enables the manufacture of large structural parts using long-fiber reinforced thermoplastic resins. The Process utilizes recycled or virgin resins and is designed to reuse its own production scrap, thereby eliminating production waste by-products. TPF Process patents are pending. Historically, advanced composite materials were utilized almost exclusively by the military and aerospace industries where such usage was normally restricted to the manufacture of small parts due to the inordinate cost of hand application, i.e., the process of manually applying layers of composite materials to a mold or shape. Management believes that the TPF Process provides a cost-effective alternative for the in-line production of larger, long-fiber reinforced plastic parts at very low processing costs. The Process has key advantages over many manufacturing processes currently in use such as compression molding, injection molding and rotational molding, including significantly, cost savings realized in the reduced labor required to create larger parts made using the TPF Process. The cost required to assemble multiple smaller components to generate a complete larger part, which often occurs in current production environments, is higher than with the TPF Process. Material costs will typically also be lower because of its use of recycled material, reuse of its own production scrap and in-line compounding, which is the process of mixing raw material components as an actual part of the production process. The TPF Process has application in a broad range of industries including: agriculture, automotive, material handling, transportation, marine, medical, waste management and aerospace. TPF composite products are an advantaged replacement for many wood, aluminum, steel, other metal alloys, concrete, other plastic and fiberglass products, by providing products that have corrosion resistance, are lighter and cost less to manufacture. As a thermoplastic process, TPF has an additional advantage in that it does not emit volatile organic contaminants (VOCs). The Company is acquiring this technology through License and Merger Agreements with Thermo Composite Designs, Inc. On March 30, 2001, the Company, through its wholly-owned subsidiary, Envirokare Composite Corp. ("ECC"), entered into a licensing agreement with TCD that allows the Company to commercially exploit the TPF Process. The agreement provides the Company with the ability to utilize the TPF technology to design, develop, manufacture, market, license and sublicense a wide range of applications including the Company's proprietary Pallet, manufactured through the joint efforts of the Company and TCD, or the Company's sublicensees, for use in agriculture, aerospace, automotive, construction, marine, medical, military, transportation and waste management. The Company paid TCD a one time license fee of $525,000 under the agreement. The Company entered into an Amendment ("Amendment") signed the 28th day of September, 2003, amending that certain License Agreement ("Agreement") entered into on the 30th day of March, 2001 between Thermoplastic Composite Designs, Inc., a Florida corporation ("Licensor"), having a business address of 7400 State Road, #46, Mims, Florida 32754, and Envirokare Composite Corp., a Delaware corporation, ("Licensee"). This amendment provided for the extension of the term of the exclusive agreement to and including March 1, 2005 To complete this acquisition, the Company entered into a merger agreement with TCD, which provides that TCD will merge with ECC if Envirokare's shares achieve an average of the closing bid asked prices at or above five dollars per share at any point in time during the thirty-month period following the agreement date, with Envirokare paying merger consideration to TCD in the amount of 3,000,000 shares of its common stock. In the event that Envirokare's shares have not traded at such specified level of five dollars per share by the end of the thirty-month period, Envirokare has the option to effect the merger of TCD with ECC by Envirokare's paying to TCD's shareholders a $15,000,000 consideration, either in shares of Envirokare or in a combination of cash and shares, with the cash payment to be no greater than $7,500,000. The date of such payment would be no later than March 30, 2004. The Company has entered into an Amendment ("Amendment") signed September 28, 2003 to that certain Merger Agreement dated March 30, 2001 ("Agreement"), by and among, Envirokare Tech, Inc., a Nevada corporation ("Parent"), and Envirokare Composite Corp., a Delaware corporation and wholly owned subsidiary of Parent ("Merger Sub"), on the one hand, and Thermoplastic Composite Designs, Inc., a Florida corporation ("TCD"), Dale Polk, Sr., an individual ("Polk Sr."), and Dale Polk, Jr., an individual ("Polk Jr." and, together with Polk Sr., the "Shareholders"), on the 12 other hand. This Amendment provides for the extension of the term of the Merger Agreement to and including March 1, 2005. A provision was added which permits TCD to incur debt in an amount greater than originally provided, for the purposes of capital improvements. An additional provision was added which limited the debt Envirokare could carry forward at the time of closing except for debt related to capital expenditures. During the Six Month Period Ended June 30, 2004, the Company entered into an Exclusivity Agreement with NOVA Chemicals Inc., (hereinafter "NOVA") .Envirokare Tech, Inc. (ENVK) ( hereinafter "Envirokare") dated June 1, 2004 which generally states that until August 31, 2004, Envirokare will not undertake, encourage or institute any proposed transaction related to the use, license or sublicense of the TPF(tm) Technology (the "technology") with other companies except as otherwise provided in that agreement and will exclusively negotiate with NOVA to secure an agreement for such use, license and sublicense of the technology. The Exclusivity Agreement in its entirety is filed as Exhibit 10.26. In Exchange for this Agreement and the Warrant Agreement described below Nova has paid to Envirokare the sum of $250,000.00. As part of this transaction, Envirokare has issued to NOVA a Common Stock Purchase Warrant dated June 1, 2004 which entitles Nova to purchase 1,250,000 shares of Envirokare common stock at a price of $.20 per share until June 2014.In the event that Envirokare and NOVA enter into a definitive agreement for a transaction, NOVA will receive $250,000 in Envirokare common shares at the then market price. In that event, the Common Stock Purchase Warrant referenced above will at the option of Envirokare be cancelled. Product Research, Development and Testing ----------------------------------------- General Product Technology Testing: During the second quarter of 2002, the Company engaged the Metis Design Corporation, Inc. ("Metis Design"), formerly Horizon Defense and Aerospace Solutions, Inc., to conduct a review of the TPF technology. Metis Design, based in Cambridge, Massachusetts, is an advanced technology firm specializing in composites consulting, damage monitoring and structural concept design and analysis. In September 2002, Metis Design presented the Company's management with final findings regarding the TPF technology. In its report, Metis Design noted that, as the utilization of advanced thermoplastic composite materials has extended into market segments such as military and aerospace, commercial manufacturers are increasingly demanding lower cost, quicker and more flexible reinforced thermoplastic processing techniques. Metis Design found that the TPF Process has significant potential to address this need. In addition, Metis Design reported that the TPF Process could represent a solution to a long-standing need in the long-fiber reinforced composite manufacturing process the TPF Process enables manufacturers to mass-produce at high rates and labor efficiencies compared to many current production techniques, while retaining accuracy and the ability to utilize low molding pressures. The report also noted that the TPF Process provides economic advantages over other thermoplastic composite molding methods through reduced labor, material, tooling and machine costs. Metis conducted narrow coupon tensile tests on composite material samples produced from the TPF Process. These tests are the standard procedure for determining certain mechanical properties of a material. The test results demonstrated that the material properties exhibited in the product, as formed by the TPF Process, are comparable to those from products formed through traditional processes, and are similar to those properties published by commercially available materials. Product Development - E Pallet: Since inception, the Company has been engaged in the development of the Pallet. In December 1998, acquired equipment, early-stage rubber mold technology and patent rights to the development of rubber mold technology for creating a pallet made of recycled materials. In 1999, the Company and TCD entered into a product/technology contract for the continued development of the pallet. TCD undertook to assist the Company in optimizing earlier versions of the Pallet design. The contract required TCD to deliver a pallet that would meet design specifications including specified size and weight requirements and a customized composition matrix. The contract also provided that TCD would supply an engineered mold for the Company's first production facility. The Company's payments for the development of a first generation Pallet mold totaled $50,800 in 1999 and $83,000 in 2000. 13 Commencing in May 2000, additional Pallet testing and evaluation was conducted by the Pallet and Container Research Laboratory of Virginia Polytechnic Institute and State University, located in Blacksburg, Virginia. This laboratory is recognized for its work in the area of testing and analysis of products designed for use in the materials handling industry. Based on the initial test results, the Company and its product design contractor, TCD, made design adjustments to the Pallet. Further Pallet testing and evaluation through 2001 resulted in further design adjustments. As a result of the design adjustments and modifications, the first generation mold was deemed to be of no commercial value. The Company built a second generation mold during 2001, at a cost of $43,000, incorporating design modifications based on technical information derived from tests of the previous mold. Pallets produced from this mold were tested and evaluated at the Pallet and Container Research Laboratory during the second quarter of 2002. The study of the second mold evaluated the strength, stiffness and durability of the Pallet as a general purpose pallet with a 2,800 pound weight capacity set as the standard. The study findings included the following: a. The Pallet could safely support a 2,800 pound, uniformly distributed load in warehouse storage racks as well as on conveyors; b. The Pallet was found to be highly resistant to damage caused by rough handling, based on the drop test protocol carried out, which involved dropping empty Pallets from various heights after the Pallets were chilled to a temperature of -13 degrees Fahrenheit; and c. Because the Pallet's performance was found to significantly exceed requirements for a 2,800-pound uniform load standard, the study recommended that the Company consider reducing the Pallet's glass loading (i.e. the percentage of glass fiber used in the composite), or refining its design, to further reduce Pallet weight and cost. Based on the results of testing conducted on the second generation E Pallet, during the second quarter of 2002, the Company engaged Metis Design to optimize this Pallet redesign. The Pallet design modifications, as proposed by Metis Design, allow for a significant weight reduction of the Pallet making the Pallet more cost-effective and easier to handle, while structural features are not anticipated to be materially affected. The Company is presently negotiating product development agreements with prospective partners to produce the next generation Pallet prototypes which the Company believes will lead to a comprehensive production agreement for Pallet manufacture. Once redesign work is completed by Metis Design, the Company will conduct further tests on the Pallet, with testing designed to provide information as to the longevity of the Pallet, as compared to pallets made from non-TPF processes, including pallets made from other materials. Information provided from this additional engineering analysis will further the development of marketing strategies for the Company. There can be no assurance that this additional engineering will not delay the Company's plans for the commercialization of the Pallet. The Company is presently negotiating with prospective clients who may complete development of the Pallet in cooperation with the Company and make it available for commercialization. The Company anticipates that the reengineered E Pallet will be available for sale sometime in early 2004. In addition to the second-generation Pallet discussed above, the Company is also evaluating pallets and other material handling devices incorporating wireless tracking capabilities, based on technology acquired in the Company's 2000 acquisition of Electroship (N.Y.) Inc. Design work commenced on initial wireless Pallet prototypes during the first quarter of 2001. The Company believes that initial Pallet designs that incorporate wireless tracking capabilities will prove marketable in multiple markets. Company plans for additional development of this wireless tracking technology are scheduled for late 2003. Product Development - Beam: The Company has initiated a product development for a structural beam having application in the housing and marine industries. A prototype mold was built by TCD for the company in 2002 at a cost of $16,000. The Beam is designed to carry specific weights or loads and to act as an interconnector for structural components for modular structures an docks. The Company expects to begin commercialization of the Beam during 2004. Product Development - Schaefer Systems International, Inc. On March 28, 2003, the Company entered into a product development and purchase agreement with SSI replacing a earlier agreement dated August 6, 2002. Under the terms of this agreement and pursuant to performance and dimensional criteria provided by SSI, the Company will design and develop and produce a quantity of prototypes for field testing, field trials and related approvals. Payments to the Company for successful completion of product development will aggregate $185,500, with an additional $300,000 to be payable if SSI elects to develop an additional, similar product with different dimensions. The initial term of the contract is 26 weeks. A payment of $61,215 was made by SSI to the Company (at the time of the August 6, 2002 agreement) to facilitate the development of the proprietary product. The balance of the development fee is payable: 47% upon completion of first parts off of the product and verification of performance and 20% within 30 days after Development Completion. SSI continued its right to order additional development for an additional payment of $300,000. 14 Product Marketing and Market Exploitation: The Company's plan for the marketing and exploitation of its technologies over the next twelve (12) months includes: a. direct development and manufacturing of products for materials handling (pallets), construction (beams), housing, marine and other commercial and consumer applications. b. 3rd party licensing of TPF(TM)Technology for specific applications and products as well as for specific geographic areas. c. product development for 3rd parties applications and licensed manufacturing. The Company expects to continue to market its technology both directly through officers and directors and through third party marketing agreements. The Company expects additional results from a broad range of continuing marketing and sales activities. As well, the Company expects to close its merger with TCD during the next quarter and with it acquire additional marketing and sales opportunities. Expected Purchase of Plant and Significant Equipment and Expected Significant Changes in Number of Employees -------------------------------------------------------- During the second quarter of 2005, the Company expects to close it Merger Agreement with TCD combining that company with its wholly owned subsidiary ECC. This will bring into the Company an existing TPF(TM) production facility including equipment and leased premises. The size of this facility is limited and is used primarily for product development and small production runs. The Company has continued preliminary development work toward the end of creating a full scale production facility for manufacture of Company and third party products, however, no specific site has yet been contracted for. The Company continues to consider the option of assisting a prospective third party licensee in the construction of a manufacturing facility in exchange for access to such a facility but no decisions has been made. There is no assurance that funds will be available for the development of such a facility or that a third party licensee can be located for the alternative. During the balance of the fiscal year, the Company expects to add one to three people to its existing staff. As well, the Company will add personnel required for the operation of the existing TCD facility upon the completion of the merger with that company. The schedule for any new production facility will dictate the addition of any personnel associated with that facility. Liquidity --------- The Company has budgeted expenditures of $720,000 for the 12 months ending September 30, 2004. During the six month period ended June 30, 2004, the Company received $445,750 from the private placement of 2,228,750 shares of its common stock. In addition, the Company received $250,000 from NOVA Chemicals, Inc. pursuant to the terms of the Agreement referenced above. In July 2004, the Company commenced a private placement offering of 1,725,000 "units" at the price of $0.20 per unit. Each unit offered consisted of one share of Company common stock and two three-year warrants entitling the warrant holder to purchase another share of Company common stock at $0.40 per share. Under these same terms, the Company converted $100,000 in related party debt for 500,000 shares. Although management believes these sources to be sufficient, there is no assurance that the Company will be successful in raising additional capital to fund operations. ITEM 3. CONTROL AND PROCEDURES Within the 90 days prior to the filing date of this Quarterly Report, the issuer carried out an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-14(a) and Rule 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and the Principal Accounting Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in this Quarterly Report. There have been no significant changes in our internal controls or in other factors, which could significantly affect such internal controls, subsequent to the date we carried out our evaluation. 15 PART II -OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Reference is made to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 (the "2003 Annual Report"), for a discussion of an action filed by Mr. Real Morel against the Company in the Supreme Court of British Columbia, Canada. The status of this matter remains the same as discussed in the 2003 Annual Report. ITEM 2. CHANGES IN SECURITIES During the six months ended June 30, 2004, the Company granted 200,000 common stock options, exercisable at $0.24 per share, in consideration for consulting services received. The Company has recorded a $38,780 expense related to this transaction. During the six months ended June 30, 2004, the Company issued 2,228,750 warrants valued at $63,707. In July 2004, the Company commenced a private placement offering of 1,725,000 "units" at the price of $0.20 per unit. Each unit offered consisted of one share of Company common stock and two three-year warrants entitling the warrant holder to purchase another share of Company common stock at $0.40 per share. Under these same terms, the Company converted $100,000 in related party debt for 500,000 shares. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Item 6. Exhibits and Reports on Form 8-K Exhibit Number Description of Document ----- 3.1 Company's Articles of Incorporation, as amended October 12, 1999 (1) 3.2 Company's By-laws as amended and restated December 11, 2000 (2) 10.1 Merger Agreement by and among the Company, Electroship Acquisition (3) Corp., Electroship (N.Y.) Inc., Electroship Partners, John Gremmo, John A. Notarianni, Leo J. Mangan, Raymond Anthony Joao and Richard Reichler, dated as of December 1, 2000 10.2 Assignment of Patent Application from Electroship Partners to (3) Electroship (N.Y.) Inc. and Defined Field of Use License Agreement between Electroship Partners and Electroship (N.Y.) Inc. dated as of September 20, 2000 10.3 License Agreement between Envirokare Composite Corp. and (2) Thermoplastic Composite Designs, Inc., dated March 30, 2001 10.4 Merger Agreement by and among the Company, Envirokare Composite (2) Corp., Thermoplastic Composite Designs, Inc., Dale Polk, Sr. and Dale Polk, Jr., dated March 30, 2001 10.5 Letter Agreement between the Company and Charles H. Stein, (4) dated May 8, 2001 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) 10.6 Agreement and General Release between the Company and (5) Charles H. Stein, dated November 27, 2001 10.7 SSI Product Development and Purchase Agreement, dated August 6, 2002 (6) 10.8 New Age Shelters Letter Agreement, dated October 1, 2002 (6) 10.9 New Age Shelters Letter Agreement, dated March 20, 2003 (7) 10.10 Promissory Note between the Company and Leo and Betty Kapakos (8) 10.11 Warrant Agreement between the Company and Leo and Betty Kapakos (8) 10.12 Amendment signed the 28th day of September, 2003, amending that (9) certain License Agreement entered into on the 30th day of March, 2001 between Thermoplastic Composite Designs, Inc., a Florida corporation, having a business address of 7400 State Road, #46, Mims, Florida 32754, and Envirokare Composite Corp., a Delaware corporation. 10.13 Amendment signed September 28, 2003 to that certain Merger (9) Agreement dated March 30, 2001, by and among, Envirokare Tech, Inc., a Nevada corporation, and Envirokare Composite Corp., a Delaware corporation and wholly owned subsidiary of Parent, on the one hand, and Thermoplastic Composite Designs, Inc., a Florida corporation, Dale Polk, Sr., an individual, and Dale Polk, Jr., an individual and, together with Polk Sr., 10.14 Nick Pappas, Executive Chairman of the Board of (10) Directors Letter Agreement 10.15 Nick Pappas, Executive Chairman of the Board of (10) Directors Warrant Agreement 10.16 E. Gary Cook, Director Letter Agreement (10) 10.17 E. Gary Cook, Director Warrant Agreement (10) 10.18 John Verbicky, Director/Chief Executive Officer (10) Compensation Agreement 10.19 John Verbicky, Director/Chief Executive Officer Warrant Agreement (10) 10.20 George Kazantzis, Director/Chief Operating Officer (10) Compensation Agreement 10.21 George Kazantzis, Director/Chief Operating Officer (10) Warrant Agreement 10.22 Jonathan Edelstein, Director Warrant Agreement (10) 10.23 Leo Kapakos, Former Director Warrant Agreement (10) 10.24 Erwin Pruefer, Director of Operations Compensation Agreement (10) 10.25 Erwin Pruefer, Director of Operations Warrant Agreement (10) 21 Subsidiaries of the Company (incorporated herein by reference to Exhibit 21 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000, filed with the Commission on April 16, 2001) 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) 31.1 Section 302 Certification of Chief Executive Officer, dated May 21, 2004 31.2 Section 302 Certification of Chief Operating Officer and acting Chief Financial Officer, dated May 21, 2004 32.1 Section 906 Certification of President, dated May 21, 2004 32.2 Section 906 Certification of Chief Operating Officer and acting Chief Financial Officer, dated May 21, 2004 ---------------------------- (1) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, filed with the Commission on April 7, 2000, and incorporated herein by reference. (2) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000, filed with the Commission on April 16, 2001, and incorporated herein by reference. (3) Filed as an exhibit to the Company's Current Report on Form 8-K, filed with the Commission on January 3, 2001, and incorporated herein by reference. (4) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the period ended March 31, 2001, filed with the Commission on June 15, 2001, and incorporated herein by reference. (5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001, filed with the Commission on March 28, 2002, and incorporated herein by reference. (6) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2002, filed with the Commission on April 14, 2003, and incorporated herein by reference. (7) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the period ended March 31, 2003, filed with the Commission on May 15, 2003, and incorporated herein by reference. (8) Filed as an exhibit to the Company's Current Report on Form 8-K, filed with the Commission on September 26, 2003, and incorporated herein by reference. (9) Filed as an exhibit to the Company's Current Report on Form 8-K, filed with the Commission on October 3, 2003,and incorporated herein by reference. (10) Filed as an exhibit to the Company's Current Report on Form 8-K, filed with the Commission on October 20, 2003, and incorporated herein by reference. (b) Reports on Form 8-K A report on Form 8-K regarding Item 5 was filed by the Company on February 20, 2003. A report on Form 8-K regarding Item 5 was filed by the Company on August 27, 2003. A report on Form 8-K regarding Item 5 was filed by the Company on September 18, 2003. A report on Form 8-K regarding Item 5 was filed by the Company on September 26, 2003. A report on Form 8-K regarding Item 5 was filed by the Company on October 3, 2003. A report on Form 8-K regarding Item 5 was filed by the Company on October 20, 2003. A report on Form 8-K regarding Item 5 was filed by the Company on June 15, 2004. 18 SIGNATURE In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 23, 2004. ENVIROKARE TECH INC. By: /s/ John W. Verbicky, Jr. ---------------------------- Name: John W. Verbicky, Jr. Title: President, CEO 19