UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended - March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to ______________
Commission File Number 0-23897
EARTHFIRST TECHNOLOGIES, INCORPORATED
-------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 59-3462501
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1226 Tech Blvd., Tampa, Florida 33619
-------------------------------------
(Address of principal executive offices)
(813)635-2050
--------------
(Issuer's telephone number)
_____________________________________________
(Former name, former address and former fiscal
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
12, 13 or 15 (d) of the Exchange Act during the past 12 months (or 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
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant 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 .
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 10, 2001: 114,963,422 shares $ .0001 par value common stock.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
FORM 10-QSB
EARTHFIRST TECHNOLOGIES, INCORPORATED
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001
(Unaudited) and December 31, 2000........................................................... 1
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 (Unaudited)............................................ 2
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 2000 (Unaudited)............................................ 3-4
Notes to Condensed Consolidated Financial Statements........................................ 5-12
Item 2 - Management's Discussion and Analysis or Plan of Operation.......................... 13
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds........................................... 16
Item 6. Exhibits and Reports on Form 8-K.................................................... 17
Signatures............................................................................................ 17
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2001 December 31,
(Unaudited) 2000
------------- -------------
Current assets:
Cash $ 27,195 $ 1,518,721
Accounts receivable (net of $525,000 allowance for
future returns) 2,139,862 2,156,677
Inventories 659,970 694,304
Costs and estimated earnings in excess of billings on
uncompleted
contracts 480,439 515,804
Other current assets - 1,207
------------- ------------
Total current assets 3,307,466 4,886,713
Property and equipment, net 2,220,193 2,235,440
Goodwill, net 4,079,483 4,210,651
Other assets 1,996 820
------------- ------------
$ 9,609,138 $ 11,333,624
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 321,184 $ 342,566
Notes payable, related parties - 232,636
Accounts payable 3,136,074 3,646,377
Accrued expenses and other current liabilities 2,501,412 1,693,253
Dividends payable 87,115 81,760
Billings in excess of costs and estimated earnings on
uncompleted contracts 42,831 101,206
------------- ------------
Total current liabilities 6,088,616 6,097,798
Notes and other payables, related parties, less current
maturities 2,325,241 3,772,689
Long-term debt, less current maturities 313,534 371,340
Convertible debentures 580,000 700,000
------------- ------------
Total liabilities 9,307,391 10,941,827
------------- ------------
Commitments and contingencies - -
Stockholders' equity:
Series A preferred stock, par value $1, 10,000,000
shares authorized, 306 (2001) and 461 (2000) shares
issued and outstanding 306 461
Common stock, par value $.0001, 250,000,000 shares
authorized, 102,765,697 (2001) and 84,834,825 (2000)
shares issued and outstanding 10,278 8,484
Additional paid-in capital 32,283,489 30,479,037
Accumulated deficit (30,724,266) (28,828,125)
------------- ------------
1,569,807 1,659,857
Less treasury stock (1,950,000 shares at cost) (1,268,060) (1,268,060)
------------- ------------
Total stockholders' equity 301,747 391,797
------------- ------------
$ 9,609,138 $ 11,333,624
============= ============
See notes to condensed consolidated financial statements.
F-1
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
------------ ------------
Revenue $ 3,439,807 $ -
Cost of sales 3,132,053 -
------------ ------------
Gross profit 307,754 -
Selling, general and administrative expenses 1,179,996 150,000
Research and development expenses 908,063 166,813
------------ ------------
Loss from continuing operations before income
taxes and other items ( 1,780,305) ( 316,813)
------------ ------------
Other income (expenses):
Interest expense ( 110,481) -
------------ ------------
Loss from continuing operations ( 1,890,786) ( 316,813)
Discontinued operations:
Loss from discontinued operations (no applicable
income taxes) - ( 1,501,117)
------------ ------------
Net loss ( 1,890,786) ( 1,817,930)
Preferred stock dividends ( 5,355) ( 13,125)
------------ ------------
Net loss attributable to common stockholders ($ 1,896,141) ($ 1,831,055)
============ ============
Loss per common share attributable to common
stockholders:
Continuing operations ($ .02) ($ - )
Discontinued operations - ( .05)
------------ ------------
Net loss ($ .02) ($. 05)
============ ============
Weighted average shares outstanding 98,401,930 34,757,123
=========== ============
See notes to condensed consolidated financial statements.
F-2
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss ($1,890,786) ($1,817,930)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of goodwill 156,868 173,166
Stock based compensation - 94,010
Interest expense funded from debt conversion to
equity 25,800 73,620
Increase (decrease) in cash due to changes in:
Accounts receivable 16,815 (9,468)
Inventories 34,334 101,818
Prepaid expenses 1,208 (16,786)
Other assets (1,177) (859)
Costs and earnings in excess of billings 35,365 -
Accounts payable (536,104) 448,719
Accrued expenses 761,615 -
Customer deposits - (3,850)
Billings in excess of costs and earnings (58,375) -
------------ ------------
Net cash used in operating activities ( 1,454,437) ( 957,560)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment ( 10,453) ( 32,305)
------------ ------------
Net cash used in investing activities ( 10,453) ( 32,305)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of capital stock - 661,789
Principal repayments on long-term debt ( 79,188) ( 37,056)
Proceeds from convertible debentures 700,000
Proceeds from related party notes payable 52,552 177,000
------------ ------------
Net cash provided by (used in) financing activities ( 26,636) 1,501,733
------------ ------------
See notes to condensed consolidated financial statements.
F-3
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
Increase (decrease) in cash ( 1,491,526) 511,868
Cash, beginning of period 1,518,721 72,224
----------- -----------
Cash, end of period $ 27,195 $ 584,092
=========== ===========
Supplemental schedule of cash flow information
----------------------------------------------
Cash paid during the period for interest $ - $ -
========= =========
Supplemental schedule of non-cash financing and investing activities
--------------------------------------------------------------------
During 2001, the Company:
. Converted 155 shares of preferred shares outstanding at beginning of year
to 2,066,667 shares of common stock
. Converted $120,000 of convertible debentures along with accrued interest of
$25,800 to 1,012,500 shares of common stock
. Converted $1,660,291 of related party debt to 14,861,705 shares of common
stock
During 2000, the Company:
. Converted $517,956 of convertible debentures along with accrued interest of
$36,257 and interest through the date of conversion of $73,620 by issuance
of 1,034,784 shares of common stock.
. Incurred $42,980 of loan costs through the issuance of 15,441 shares of
common stock.
See notes to condensed consolidated financial statements.
F-4
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
1. Nature of business, basis of presentation and summary of significant
accounting policies:
The interim financial statements of EarthFirst Technologies, Incorporated
("EarthFirst" or the "Company") that are included herein are unaudited and
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-QSB. In the opinion of management, these interim financial
statements include all the necessary adjustments to fairly present the
results of the interim period, and all such adjustments are of a normal
recurring nature. The interim financial statements should be read in
conjunction with the audited financial statements for the year ended
December 31, 2000 included in the Company's Annual Report on Form 10-KSB
for the year then ended. The report of the Company's independent auditors
for the year ended December 31, 2000 contains an explanatory paragraph as
to the substantial doubt of the Company's ability to continue as a going
concern. No adjustments have been made to the accompanying financial
statements to give effect to this uncertainty. The interim results
reflected in the accompanying financial statements are not necessarily
indicative of the results of operations for a full fiscal year.
The basic net loss per common share is computed by dividing the net loss by
the weighted average number of common shares outstanding.
Diluted net loss per common share is computed by dividing the net loss,
adjusted on an as if converted basis, by the weighted average number of
common shares outstanding plus potential dilutive securities (common stock
options and warrants). For the three months ended March 31, 2001 and 2000,
potential dilutive securities had an anti-dilutive effect and were not
included in the calculation of diluted net loss per common share.
Nature of business:
EarthFirst was formed to facilitate market applications through the
licensing of late-stage technologies. The Company operates in three
business segments. These segments include 1) Technology Development for
Environmental Solutions and Alternative Fuels, 2) Demolition and Recycling,
and 3) Government Contracts.
F-5
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
Nature of business (continued):
There are two technologies under development in the Environmental Solutions
and Alternative Fuels segment of EarthFirst. One technology is the
development of the Plasma Arc Flow (TM) Reactor. The Plasma Arc Flow (TM)
Reactors have been proven to effectively treat liquid wastes and produce an
alternative fuel called MagneGas(TM). The Environmental Solutions and
Alternative Fuels segment has been conducted through USMagneGas, Inc.
("USMagneGas"), an 80% owned subsidiary of the Company.
The second technology is the development of a process to efficiently
convert waste products, such as tires, animal waste, and similar products,
into reusable raw materials and fuels. As discussed in Note 3, on January
13, 2001, the Company and the licensor of the rights to this technology
entered into an agreement for the formation of EarthFirst Waste To Energy,
Inc. ("EFWE"). All efforts related to the commercialization and further
development of this technology are now conducted within EFWE. The Company
owns 51% of the stock of EFWE.
The Demolition and Recycling operations are conducted through a wholly-
owned subsidiary SAC-1, Inc. ("SAC"). In its demolition operations, SAC
enters into fixed-price contracts to demolish structures such as buildings
and bridges. Services are rendered primarily within the State of Florida.
In its recycling operations, SAC operates scrap yards at locations in
Gibsonton and Brooksville, Florida. SAC acquires scrap metal and other
items from unrelated parties and from its demolition business. Scrap
acquired is processed ultimately for resale to mills.
In its government contract segment, SAC enters into contractual
arrangements to procure various products. Substantially all of the sales
made by the government contract segment are made to agencies of the federal
government.
F-6
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
2. Management's Plans Regarding Liquidity and Capital Resources:
The Company has experienced recurring net losses since its inception and,
as such, experienced negative operating cash flows through March 31, 2001.
Historically, negative operating cash flows have been funded with proceeds
from sales of common and preferred stock, notes and convertible debentures
payable and equipment financing transactions. In addition, an entity
controlled by a principal stockholder has provided an aggregate $5,000,000
in revolving lines of credit to fund operating deficits. In January 2001,
$1,500,000 of the outstanding balance under the lines of credit was
converted into 13,793,103 shares of the Company's common stock. In April
2001, an additional $1,500,000 of the outstanding balance under the lines
of credit was converted into 10,256,410 shares of common stock.
Notwithstanding the proceeds of these financing sources, the Company had
negative working capital of approximately $2,800,000 at March 31, 2001.
The Company, through its subsidiaries that own the licenses to the related
technologies, is focused on the further development and refinement of the
technologies possessed in the Environmental Solutions and Alternative Fuels
segment. Both technologies are in the initial stages of developing
commercial applications. In May 2001, EFWE, the Company's 51% owned
subsidiary, entered into an agreement to produce two tire recycling
facilities in Puerto Rico within the next six months and ten municipal
solid waste units over the following 18 months. (See Note 6)
The Company, through the USMagneGas and EFWE subsidiaries, will continue to
perform significant additional research and development of both
technologies in order to attempt to more fully develop the potential that
management believes each technology has for the future. Additional
expenditures will be required to further develop the technologies and
commercially viable applications of the technologies. The Company intends
to negotiate arrangements with the ultimate users of these technologies and
with joint venture partners to provide the funding to continue this
development and to produce the first generation of production units for
commercial use. There can be no assurances that these negotiations will be
successful or that funding can be obtained from other sources.
The Company, through its subsidiary SAC-1, has continued to incur
unfavorable financial results from its demolition operations. SAC-1 is
currently negotiating additional billings on certain demolition contracts
that, if successful, would provide additional cash to pay down debt
obligations. There are no assurances that these negotiations will be
successful in whole or in part.
F-7
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
2. Management's Plans Regarding Liquidity and Capital Resources (continued):
The Company will continue to require additional equity or debt financing in
order to provide for its cash requirements and continue as a going concern.
Management believes it will be successful in these financing efforts, but
there can be no assurance to that effect.
3. Formation Agreement and Formation of EarthFirst Waste To Energy, Inc.:
The Company and the licensor of the rights to the Waste To Energy
technology have cooperated on the further development of this technology
through the construction and operation of a prototype plant located in Port
Gibson, Mississippi. On January 13, 2001, a Formation Agreement (the "Waste
To Energy Agreement") was entered into by and among the Company, Marilyn
Chirinsky ("Chirinsky"), John Rivera ("Rivera"), and Tomorrows Innovative
Technology Today, Inc. ("TI Tech"). Under the Waste To Energy Agreement,
the above parties agreed to form a new entity named EarthFirst Waste To
Energy, Inc. ("EFWE") to carry out further development and
commercialization of the Waste To Energy technology.
The Company received a 51% interest in EFWE in exchange for transferring
all of its rights under the Exclusive License agreement entered into on
December 15, 1999. In addition, until such time as EFWE is profitable, the
Company is required to fund all operating expenses of EFWE. The Company is
also required to provide all financial recordkeeping and administration for
EFWE, as well as provide assistance with the coordination of grant
applications on behalf of EFWE.
In exchange for a 49% interest in EFWE, Chirinsky assigned to EFWE any and
all rights relating to the Waste To Energy technology not embodied within
the Exclusive Licensing agreement, and conveyed to EFWE all right, title
and interest in and to all matters and property associated with the Port
Gibson Mississippi facility. The parties also agreed that the December 15,
1999 license agreement would be amended to eliminate the royalty payments
required.
Under the Waste To Energy Agreement, it was agreed that each party would be
reimbursed all expenses they incurred in furtherance of the Waste To Energy
technology from the available cash of EFWE on a pro rata basis except that
the first $500,000 of expenses submitted by TI Tech, Rivera and Chirinsky
will be reimbursed prior to any expenses of the Company.
F-8
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
3. Formation Agreement and Formation of EarthFirst Waste To Energy, Inc.
(continued):
In connection with the development of the prototype facility, Rivera
incurred indebtedness in the course of equipping and otherwise facilitating
the prototype facility in Port Gibson, Mississippi for which he encumbered
1,900,000 shares he owns of the Company's common stock. Under the Waste To
Energy Agreement, the Company agreed to assume the obligations for which
Rivera pledged his common stock or otherwise insert itself in Rivera's
place so that the shares shall no longer be encumbered. If the Company is
unable to secure such a release, the Company has agreed to issue to Rivera
up to 1,900,000 shares of the Company's common stock.
Pursuant to the Waste To Energy Agreement, Mr. Rivera agreed to resign as
an employee of the Company and become an employee of EFWE. Rivera shall be
paid at the rate of $90,000 per annum. At such time as EFWE (i) receives
its first purchase order and (ii) receives the required down payment for
the sale of a plant utilizing the technology, then EFWE will increase
Rivera's compensation to $150,000 per annum, plus bonus and Chirinsky shall
become an employee of EFWE at a rate of no less than $100,000 per annum,
plus bonus.
4. Segment reporting:
Key segment information for 2001 is summarized as follows:
Alternative
Fuels/
Environmental Demolition Government
Solutions & Recycling Contracting Consolidated
--------- ----------- ----------- ------------
Revenue from
external
customers $ -0- $2,103,735 $1,336,072 $3,439,807
Cost of sales -0- 1,929,880 1,202,173 3,132,053
Gross profit -0- 173,855 133,899 307,754
Research &
Development 908,063 -0- -0- 908,063
Segment Assets 63,650 7,883,287 1,662,201 9,609,138
F-9
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
4. Segment reporting (continued):
The following summarizes key segment information for 2000:
Alternative
Fuels/
Environmental Demolition Government
Solutions & Recycling Contracting Consolidated
--------- ----------- ----------- ------------
Revenue from
external
customers $ -0- $ -0- $ -0- $ -0-
Cost of sales -0- -0- -0- -0-
Gross profit -0- -0- -0- -0-
Research &
Development 166,813 -0- -0- 166,813
5. Stockholders' Equity:
Conversion of portion of revolving line of credit owed to related party
into common stock:
In January 2001, $1,500,000 of the revolving line of credit owed to an
entity affiliated with the Chief Executive Officer was converted into
13,793,103 shares of the Company's common stock. In April 2001, an
additional $1,500,000 of the revolving line of credit was converted into
10,256,410 shares of the Company's common stock.
Conversion of certain related party debt into common stock:
In March 2001, the $51,962 note payable to the former Chief Executive
Officer and the $42,424 note payable to an entity owned by the former Chief
Executive Officer, as well as a $22,655 obligation owed to that entity,
were converted into 780,269 shares of the Company's common stock. In
addition, a $43,250 obligation owed to a shareholder and former director of
the Company was converted into 288,333 shares of the Company's common
stock.
F-10
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
5. Stockholders' Equity (continued):
Conversion of preferred stock:
During January through March of 2001, the holder the Company's Series A
Preferred Stock converted 155 of their remaining 461 shares of the
preferred stock ($461,000 stated value) into 2,066,667 shares of common
stock. In May 2001, the holder of the preferred stock elected to convert an
additional 110 shares of preferred stock into 751,879 shares of common
stock. As of May 10, 2001, the holder of the Company's Series A Preferred
Stock has 196 shares of preferred stock remaining.
Conversion of convertible debt:
In March 2001, the holder of the Company's 8% convertible debentures
elected to convert $120,000 of the $700,000 face value of the debentures,
plus $25,800 accrued interest and penalties (associated with the lack of
share registration), into 1,012,500 shares of the Company's common stock.
In May 2001, the holder of the Company's 8% convertible debentures elected
to convert an additional $150,000 face value of the debentures, plus
$35,552 of accrued interest and penalties, into 1,189,436 shares of the
Company's common stock. As of May 10, 2001, there remains outstanding a
principal balance of $430,000 of the convertible notes, exclusive of
accrued interest and penalties.
6. Subsequent Events:
On May 3, 2001, EFWE and Tiarga Corporation, a Puerto Rico Corporation
("Tiarga") executed an agreement concerning the purchase of 12 production
units for the reclamation of solid waste products. Pursuant to this
agreement, the initial two units are to be designed for the processing of
used rubber tires and are scheduled for delivery over the next 6 months.
The remaining ten units are to be designed for the processing of municipal
solid waste and are currently scheduled for delivery over the following 18
months.
The sales price of the two units for used tires is $13.5 million per unit.
The sales price of the remaining ten units is to be negotiated within 90
days from the date of the contract. The actual order for each of the twelve
units will be activated with the placement of a letter of credit and
agreement among the parties as to payment schedule and additional terms and
conditions. There is no assurance that agreement will be reached as to
these additional terms and conditions. EFWE has received a $100,000 good
faith deposit in connection with the agreement.
F-11
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
6. Subsequent Events (continued):
In addition, a licensing agreement (the "Licensing Agreement") was also
entered into by and among EFWE and Tiarga, effective May 1, 2001. Under the
Licensing Agreement, EFWE and Tiarga agreed to form a business venture for
the operation of the units acquired by Tiarga. The purpose of the business
venture is to, among other things, participate in the installation and
operation of a multi-waste stream destructive distillation energy recovery
system within the territory specified in the Licensing Agreement. After-tax
profits from the business arrangement between Tiarga and EFWE are to be
shared equally. Tiarga shall appoint four (4) members of the board of
directors for the business venture and EFWE shall appoint three (3)
members.
Pursuant to the Licensing Agreement, Tiarga is to contribute to the
business venture: (i) access to and use of Tiarga's production facility for
the shredding of waste tires for the purpose of providing a continuous
supply of shredded tire waste starting material to the System, (ii) the use
of a 40,000 square foot facility where the System will be installed and
operated, (iii) all labor necessary for the shredding of waste tires and
operation and maintenance of all equipment used for the shredding of waste
tires, (iv) managerial expertise and oversight to operate and maintain the
tire shred production and maintenance of the related equipment, (v) a
continuous supply of shredded tires for the System, (vi) funding necessary
for the implementation and operation of the System, (vii) all necessary
permits and licenses, and (viii) certain additional items.
Pursuant to the Licensing Agreement, EFWE is to contribute to the business
venture: (i) an exclusive license to implement and operate the System
within the Territory designated under the Licensing Agreement, (ii) design,
consulting, and construction services to implement and operate the System,
(iii) all reasonable necessary training of personnel to operate the System
together with information necessary to create a set of standard operating
and maintenance manuals for the System, and (iv) the services of its System
Implementation Team designees. The Territory contemplated under the
Licensing Agreement is the Commonwealth of Puerto Rico and Tiarga has been
given a right of first refusal for the remainder of Central and South
America.
F-12
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2001 AND 2000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis provides information that is relevant to
an assessment and understanding of the Company's results of operations and
financial condition. The discussion should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto, as well
as the unaudited March 31, 2001 statements and notes thereto.
During the quarter ended March 31, 2001, efforts continued to refine the
MagneGas(TM) technology. The MagneGas(TM) technology continues to show promise
in both the remediation of environmentally harmful waste products and in use as
a clean burning fuel.
It is anticipated that by year-end, the Company will begin producing
MagneGas(TM) on a commercial basis for use as a cutting fuel. It is also
anticipated that the Company will establish a new facility to begin production
on a commercial basis and will obtain the necessary regulatory licenses to begin
production.
The Company recently filed a grant application that, if approved, will provide
funding to allow it to partner with a major university to further develop the
linear reactor units for the termination of bacteriological activity in animal
waste. A response on the grant application is anticipated by the end of the
second quarter.
A contract for the first commercial use of the Waste To Energy technologies was
signed in May 2001 and is discussed in detail in the notes to the financial
statements. EarthFirst Waste To Energy, Inc. ("EFWE"), a 51% owned subsidiary of
the Company, will provide production units for use in the Commonwealth of Puerto
Rico. The parties are currently negotiating the terms for the first two units
including the placement of a letter of credit by the purchaser to fund the
purchase price of each unit. We anticipate that the units will be in place and
operational by the end of calendar 2001.
The agreement entered into by EFWE also provides for participation as a joint
venture in the operation of the units after installation is completed.
The Company is also negotiating with other potential users and / or joint
venture partners of both the MagneGas(TM) and Waste To Energy technologies and
hopes to successfully enter into additional mutually beneficial arrangements by
the end of the third quarter.
During the first quarter of 2001, the Company, through its wholly-owned
subsidiary SAC-1, Inc. ("SAC"), continued to experience unfavorable results from
its demolition contracts. These contracts are nearing conclusion and the Company
is negotiating to obtain additional billings for cost overruns attributable to
additional work not contemplated in the original bids and with respect to
certain disputed amounts on other contracts. The Company has scaled back its
activity in this operation to focus its attention on maximizing shareholder
value with respect to ongoing demolition contracts. Based upon the results of
its ongoing efforts, the Company will assess its long-term objectives in this
activity.
SAC is continuing to conduct its recycling operations and has opened a new
location in an effort to increase the volume of scrap metals purchased. While we
believe that the recycling operations will be profitable in the future, there is
significant competitive pressure in this market. Consequently, the primary focus
of the Company will continue to be in the Environmental Solutions and
Alternative Fuels segment.
Government contract operations continued to show a slight profit during the
first quarter of 2001. We believe that the Company's efforts in the government
contract segment cannot be leveraged on the scale necessary to achieve
significant growth and profitability. We anticipate that over the next two
quarters the government contract operations will be curtailed in order to allow
the Company's resources to be focused on the Environmental Solutions and
Alternative Fuels technologies.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2000.
Revenues, cost of sales, and gross profits for the three months period ending
March 31, 2001 and 2000 were not comparable because the businesses that
generated revenues in the March 31, 2000 period were discontinued prior to 2001.
Accordingly, the results of these operations are included under the Discontinued
Operations section of the Condensed Consolidated Statements of Operation. In
addition, businesses that produced revenues during the period ended March 31,
2001 were acquired on May 15, 2000 and consequently did not impact the fiscal
2000 amounts.
Selling, general and administrative expenses for the three month period ending
March 31, 2001 are also not comparable to the three month period ending March
31, 2000 for the reasons stated above. Selling, general and administrative
expenses for the period ending March 31, 2001 are related primarily to the
business operations of SAC, administrative expenditures incurred by the Company
as a public entity, and expenditures for marketing, promotion, and related
efforts incurred by USMagneGas and EFWE.
Research and development expenses increased from $166,813 in the three months
ended March 31, 2000 to $908,063 in the three months ended March 31, 2001 or a
544% increase. The increase is attributable to the increased efforts devoted to
the MagneGas(TM) technologies during the latter period as well as the effects of
the Formation Agreement executed in January 2001 that resulted in the formation
of EFWE. Included in the increased levels of research and development are the
effects of the July 2000 agreements that resulted in the formation of USMagneGas
and the related consulting agreement and a separate royalty agreement that
provides for the payment of advance royalties.
Interest expense increased for the three month period ended March 31, 2001 over
that of the comparable prior year period due principally to borrowings pursuant
to two separate revolving lines of credit from a related party.
Losses from continuing operations for the three months ended March 31, 2001 are
not comparable with the three months ended March 31, 2000 on account of the
reasons noted above. The losses were generated within the demolition and
recycling segment conducted by SAC.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced recurring net losses since its inception and, as
such, has experienced negative operating cash flows through March 31, 2001. The
Company has historically funded these negative operating cash flows with
proceeds from sales of common and preferred stock, notes and convertible
debentures, and equipment sale/leaseback transactions.
Since the acquisition of SAC on May 15, 2000, John Stanton and entities
associated with Mr. Stanton have advanced the Company significant amounts.
During December 2000, the Company entered into a revolving line of credit with
an entity related to Mr. Stanton, which is secured by all of the assets of the
Company. SAC entered into a similar revolving line of credit. During January
2001, $1,500,000 of the revolving line of credit was converted into 13,793,103
shares of the Company's common stock. In April 2001, an additional $1,500,000 of
the revolving line of credit was converted into 10,256,410 shares of the
Company's common stock. The Company and its subsidiaries have continued to
borrow under the revolving line of credit during the period ending March 31,
2001 and this line of credit has been the Company's only significant source of
funds.
The Company believes that additional capital will be needed in the future to
fund further development and commercialization of the technologies comprising
the Environmental Solutions and Alternative Fuels segment. As discussed above,
the Company believes that the future development of these technologies might be
accomplished by partnering with likely end users of specific applications of the
technologies or with joint venture partners. It is anticipated that such
partnering may provide additional liquidity to fund future development, but
there can be no assurances that the Company will be successful in identifying
these partners.
NOTE ON FORWARD-LOOKING STATEMENTS
The information set forth in this Report on Form 10-QSB under the Sections
"Management's Discussion and Analysis or Plan of Operation" and elsewhere relate
to future events and expectations and as such constitute "Forward-Looking
Statement" within the meaning of the Private Securities Litigation Act of 1995.
The words "believes," "anticipates," "plans," "expects," and similar expressions
in this report are intended to identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to materially differ from any future results, performance, or
achievements expressed or implied by such forward-looking statements and to vary
significantly from reporting period to reporting period. Such factors include,
among others, those listed under Item 1 of the Form 10-KSB and other factors
detailed from time to time in the Company's other filings with the Securities
and Exchange Commission. Although management believes that the assumptions made
and expectations reflected in the forward-looking statements are reasonable,
there is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual future results will not be different from the
expectations expressed in this report.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c) The securities below were issued by the Company during the period
covered by the report and were not registered under the Securities Act of 1933,
as amended. Each of the transactions is claimed to be exempt from registration
pursuant to Section 4 (2) of the Securities Act as transactions not involving a
public offering. All of such securities are deemed to be restricted securities
for the purposes of the Securities Act. All certificates representing such
issued and outstanding restricted securities have been properly legend, and the
Company has issued "stop transfer" instructions to its transfer agent with
respect to such securities. Except as noted, no commissions were paid in
connection with any of these issuances.
In January 2001, the Company issued 13,783,103 shares of the Company's
common stock to John Stanton in connection with the satisfaction of $1,500,000
of the revolving credit line owed by the Company at a conversion rate of $.10875
per share.
In March 2001, the Company issued 780,269 shares of common stock to Leon
Toups or an entity controlled by Mr. Toups in satisfaction of $115,962 of loans
made to the Company during a prior year at a conversion rate of $.15 per share.
At the same time, an additional 288,333 shares of the Company's common stock was
issued to a former director of the Company in satisfaction of a $43,250
obligation to this individual at a conversion rate of $.15 per share.
During January 2001, the holder of the Company's Series A Preferred Stock,
par value $1.00 per share, elected to converted 155 shares of the preferred
stock into an aggregate of 2,066,667 shares of the Company's common stock at a
conversion rate of $.075 per share.
In March 2001, the holder of a convertible note payable converted $120,000
of principal and $25,800 of interest and penalties into 1,012,500 shares of the
Company's common stock at a conversion rate of $.144 per share.
Item 6. Exhibits and Reports on Form 8-K
(c) Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EarthFirst Technologies, Incorporated
(Registrant)
Date: May 14, 2001
By: /s/ John Stanton
------------------------------
John Stanton, President and Chief
Executive Officer