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 - June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
---------------- ------------------
Commission File Number 0-18299
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)
7887 Bryan Dairy Road, Suite 105, Largo, Florida 33777
------------------------------------------------------
(Address of principal executive offices)
(727) 548-0918
--------------
(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 August 18, 2000: 71,667,104 shares $ .001 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 June 30, 2000
(Unaudited) and December 31, 1999......................................................2
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2000 and 1999 (Unaudited)..........................3
Condensed Consolidated Statement of Stockholders' Equity for the six months ended
June 30, 2000 (unaudited)..............................................................4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 (Unaudited)..............................................5-6
Notes to Condensed Consolidated Financial Statements...................................7
Item 2 - Management's Discussion and Analysis or Plan of Operation....................20
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K..............................................21
Signatures.....................................................................................22
PART I - FINANCIAL INFORMATION
EARTHFIRST TECHNOLOGIES, INCORPORATED
(F/K/A TOUPS TECHNOLOGY LICENSING, INC)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2000 December 31,
(unaudited) 1999
------------ -----------
Current assets:
Cash $ 203,372 $ 72,224
Accounts receivable 2,087,240 19,501
Inventories 206,809 1,072,280
Prepaid expenses and other current assets - 63,166
Costs and estimated earnings in excess of billings on
uncompleted contracts 358,030 -
------------ ------------
Total current assets 2,855,451 1,227,171
Property and equipment, net 2,629,123 1,970,334
Deferred charge, net - 279,367
Goodwill, net 4,455,071 -
Other assets 40,799 80,668
------------ ------------
$ 9,980,444 $ 3,557,540
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 74,174 $ 184,063
Due to related parties 1,819,021 719,803
Current maturities of long-term debt 913,950 250,733
Accounts payable 3,255,203 1,149,356
Accrued expenses 1,019,393 803,988
Customer deposits 74,402 288,148
Dividends payable 59,780 39,375
Billings in excess of costs and estimated earnings on
uncompleted contracts 132,545 -
------------ ------------
Total current liabilities 7,348,468 3,435,466
Notes payable, related parties, less current maturities - 41,487
Long-term debt, less current maturities 983,205 622,538
Convertible debentures, net of discount 932,044 750,000
------------ ------------
Total liabilities 9,263,717 4,849,491
------------ ------------
Commitments and contingencies - -
Stockholders' equity (deficit):
Series A preferred stock, par value $1, 10,000,000
shares authorized (A) 596 750
Common stock, 100,000,000 shares authorized, 69,983,604
(2000) and 33,290,948 (1999) shares issued (B) 6,998 33,291
Additional paid-in capital 27,045,453 17,988,553
Accumulated deficit (25,068,260) (18,046,485)
------------ ------------
1,984,787 ( 23,891)
-
Less treasury stock (1,950,000 shares of common stock at cost) ( 1,268,060) ( 1,268,060)
------------ -----------
Total stockholders' equity (deficit) 716,727 ( 1,291,951)
------------ ------------
$ 9,980,444 $ 3,557,540
============ ============
(A) 596 and 750 shares issued and outstanding in 2000 and 1999, respectively
(B) Par value 2000, $.0001; par value 1999, $.001
F-2
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- --------------------------------
1999 1999
2000 (Restated) 2000 (Restated)
----------------- ------------------ ----------------- -------------
Revenue $ 1,591,380 $ - $ 1,591,380 $ -
Cost of sales 1,332,754 - 1,332,754 -
----------------- ------------------ ----------------- ---------------
Gross profit 258,626 - 258,626 -
Selling, general and administrative
expenses 1,505,861 141,250 1,505,861 252,500
Research and development expenses 197,234 425,751 364,047 2,248,602
----------------- ------------------ ----------------- ---------------
Income (loss) from continuing
operations before income taxes and
other items ( 1,444,469) ( 567,001) ( 1,611,282) ( 2,501,102)
----------------- ------------------ ----------------- ---------------
Other income (expenses):
Interest expense ( 718,496) ( 105,325) ( 855,760) ( 198,150)
Write off of investment in joint
venture - ( 375,706) - ( 375,706)
Other income 19,499 1,044 19,499 3,301
----------------- ------------------ ----------------- ---------------
( 698,997) ( 479,987) ( 836,261) ( 570,555)
----------------- ------------------ ----------------- ---------------
Loss from continuing operations ( 2,143,466) ( 1,046,988) ( 2,447,543) ( 3,071,657)
Discontinued operations:
Loss from discontinued operations
(no applicable income taxes) ( 1,062,152) ( 1,516,452) ( 2,576,005) ( 2,900,563)
Loss on disposal of business
segments (no applicable income
taxes) ( 2,062,711) - ( 2,062,711) -
----------------- ------------------ ---------------- ---------------
Loss before extraordinary item ( 5,268,329) ( 2,563,440) ( 7,086,259) ( 5,972,220)
Extraordinary gain on
extinguishment of debt (no
applicable income taxes) 84,889 - 84,889 -
----------------- ------------------ ----------------- ---------------
Net loss ( 5,183,440) ( 2,563,440) ( 7,001,370) ( 5,972,220)
Preferred stock dividends ( 7,280) ( 150,000) ( 20,405) ( 150,000)
----------------- ------------------ ----------------- ---------------
Net loss attributable to common
stockholders ($ 5,190,720) ($ 2,713,440) ($ 7,021,775) ($ 6,122,220)
================= ================== ================= ===============
Loss per common share
attributable to common stockholders:
Continuing operations ($ .04) ($ .04) ($ .06) ($ .12)
Discontinued operations ( .06) ( .06) ( .10) ( .11)
----------------- ------------------ ----------------- ---------------
Net loss ($ .10) ($ .10) ($ .16) ($ .23)
================= ================== ================= ===============
Weighted average shares outstanding 53,383,003 28,127,763 44,070,063 27,021,256
================= ================== ================= ===============
F-3
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
Preferred Series A Additional
7% Conv Common Paid-in Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2000 750 $ 750 33,290,948 $ 33,291 $ 17,988,553 $ (18,046,485) $ (1,268,060) $ (1,291,951)
Warrants issued in connection with:
Loan costs 38,347 38,347
Stock based compensation 31,230 31,230
Options issued to employees 56,000 56,000
Common stock issued for cash, net
of stock offering costs ($13,125) 4,380,243 4,380 1,285,530 1,289,910
Stock issued for services:
Employees and consultants 710,000 710 181,590 182,300
Loan costs 15,441 15 4,618 4,633
For legal services 1,600,000 1,600 398,400 400,000
In connection with segment disposal
and warranty assumption 500,000 500 124,500 125,000
Conversion of debt to equity 2,373,784 2,374 959,459 961,833
Preferred stock dividends (20,405) (20,405)
Convertible debenture beneficial
conversion feature (interest expense) 641,200 641,200
Conversion of preferred to common (154) (154) 613,188 613 (459) -
Acquisition of SAC 26,500,000 26,500 5,273,500 5,300,000
Net loss six months ended June 30 (7,001,370) (7,001,370)
Change in par value (62,985) 62,985 -
-------------------------------------------------------------------------------------------
Balances, June 30, 2000 596 $ 596 69,983,604 $ 6,998 $ 27,045,453 $ (25,068,260) $ (1,268,060) $ 716,727
===========================================================================================
See notes to condensed consolidated financial statements
F-4
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
1999
2000 (restated)
------------ -----------
Cash flows from operating activities:
Net loss ($7,001,370) ($5,972,220)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 221,653 205,033
Extraordinary gain in extinguishment of debt ( 84,889) -
Write-down of assets in connection with discontinued
operations 2,020,694 -
Stock-based compensation 838,160 2,240,848
Interest expenses funded from debt conversion to equity 73,620 -
Amortization of beneficial conversion feature of
convertible debenture 641,200 187,500
Write-off of investment in joint venture - 375,705
Increase (decrease) in cash due to changes in:
Current assets ( 440,044) ( 147,318)
Current liabilities 2,051,762 ( 442,652)
------------ ------------
Net cash used in operating activities ( 1,679,214) ( 3,553,104)
------------ ------------
Cash flows from investing activities:
Cash acquired in business acquisition 517,203 -
Loans to related parties - ( 87,826)
Acquisition of property and equipment ( 388,620) ( 457,432)
------------ ------------
Net cash provided by (used in) investing activities 128,583 ( 545,258)
------------ ------------
Cash flows from financing activities:
Proceeds from sale of capital stock 1,289,910 2,582,900
Principal repayments on long-term debt ( 149,022) ( 58,028)
Proceeds from convertible debentures 700,000 750,000
Proceeds from (repayment of) related party advances ( 159,109) 65,000
------------ ------------
Net cash provided by (used in) financing activities 1,681,779 3,339,872
------------ ------------
Increase (decrease) in cash 131,148 ( 758,490)
Cash, beginning of period 72,224 772,080
------------ ------------
Cash, end of period $ 203,372 $ 13,590
============ ============
See notes to condensed consolidated financial statements
F-5
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Supplemental schedule of cash flow information
Cash paid during the period for:
2000 1999
------------------ -----------
Interest $ 5,000 $ -
================== ==================
Income taxes $ - $ -
================== ==================
Supplemental schedule of non-cash financing and investing activities
During the six months ended June 30, 2000, the Company:
o Acquired 100% of the outstanding stock of SAC in exchange for the issuance
of 26,500,000 shares of common stock in a transaction valued at $5,300,000
o Converted $517,956 of convertible debentures along with accrued interest of
$109,877 to 1,037,784 shares of common stock
o Incurred $42,980 of loan costs in connection with the issuance of a
convertible debenture through the issuance of 15,441 shares of common stock
and 75,000 warrants
o Converted 154 shares of preferred shares to 613,188 shares of common stock o
Converted $334,000 of related party debt to 1,336,000 shares of common stock
During the six months ended June 30, 1999, the Company:
o Incurred $63,900 of loan costs through the issuance of common stock warrants
o Acquired equipment with a cost of $341,200 and $7,514 through capital lease
obligations and the issuance of 10,000 shares of common stock, respectively
o Incurred joint venture investment costs of $375,706 through the issuance of
500,000 shares of common stock
See notes to condensed consolidated financial statements
F-6
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting policies, basis of presentation, and nature of business:
The interim financial statements of EarthFirst Technologies, Inc. (the
"Company") which 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 periods, 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 two
years ended December 31, 1999 included in the Company's Annual Report
on Form 10-KSB for the year then ended. The report of the Company
independent auditors for the year ended December 31, 1999 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 and six months ended June
30, 2000 and 1999 potential dilutive securities had an anti-dilutive
effect and were not included in the calculation of diluted net loss per
common share.
During the third quarter of 1999, an operating segment was
discontinued. Results for the three and six months ended June 30, 1999
have been restated to reflect the discontinuance of this segment. As
discussed further in Note 5, during the second quarter of 2000, the
Company discontinued operations in three other business segments.
Results for the prior periods have been restated to reflect the
discontinuance of these segments.
F-7
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting policies, basis of presentation, and nature of business
(continued):
Nature of business:
EarthFirst Technologies, Incorporated ("EarthFirst" or the "Company"),
formerly known as Toups Technology Licensing, Incorporated, a Florida
corporation, was formed on July 28, 1997, and commenced operations on
November 1, 1997 to facilitate market applications through the
licensing of late-stage technologies.
Prior to May 15, 2000, the Company had four separate operating
segments. These segments were 1) Technology Development for
Environmental Solutions and Alternative Fuels, 2) Manufacture and sale
of the Balanced Oil Recovery System ("BORS") Lift, 3) Contract
Manufacturing, and 4) Sales of medical equipment (the "HealthCare
Division").
On May 15, 2000, the Company entered into an acquisition agreement (the
"Agreement") with the shareholders of Strategic Acquisition Corporation
("SAC") pursuant to which the Company exchanged 26,500,000 shares of
its common stock for all of the issued and outstanding shares of SAC
(see Note 2). Pursuant to the Agreement, all of the Company's officers
and the members of the Company's Board of Directors resigned, with the
exception of Phillip M. Rappa. John D. Stanton, Chairman of the Board
and Chief Executive Officer of SAC, was appointed to the Company's
Board as Chairman. Mr. Stanton also assumed the duties of the President
and Chief Executive Officer of EarthFirst. Upon consummation of the
Acquisition, new management determined that the Company should focus
its efforts and resources on the development of the technologies
related to environmental solutions and alternative fuels. Accordingly,
the Environmental Solutions and Alternative Fuels Division is the only
pre-May 15, 2000 continuing business segment of the Company.
The primary technological process under development in the
Environmental Solutions and Alternative Fuels segment is the Plasma Arc
Flow (TM) Reactor. This process creates an alternative fuel called
MagneGas.
F-8
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting policies, basis of presentation, and nature of business
(continued):
Nature of business (continued):
SAC has two business segments which include 1) demolition and recycling
and 2) government contracting. 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 contracting segment, SAC enters into contractual
arrangements primarily with the federal government to procure various
products. SAC acquired the business operations for the government
contracting segment on May 15, 2000, from an entity related to SAC in
contemplation of the Agreement.
2. Business combination:
As discussed in Note 1, on May 15, 2000 the Company acquired 100% of
the outstanding stock of SAC in exchange for the issuance of 26,500,000
shares of the Company's common stock in a transaction accounted for as
a purchase. Accordingly, the results of operations of SAC are included
in the accompanying financial statements from May 15 through June 30,
2000. The $5,300,000 recorded cost of this acquisition was based upon
the estimated fair value of the common stock issued. Goodwill of
$4,510,683 resulting from this acquisition will be amortized over ten
years using the straight-line method.
F-9
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Business combination (continued):
Pro-forma results of operations for the three and six months ended June
30, 2000 and 1999 as though SAC and its predecessors had been acquired
at January 1, 1999 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues $2,443,361 $2,693,433 $4,167,433 $5,206,732
Loss before
extraordinary items ($5,366,671) ($3,164,495) ($7,394,084) ($7,041,811)
Net loss ($5,281,782) ($3,164,495) ($7,309,195) ($7,041,811)
Net loss per share ($ .08) ($ .06) ($ .11) ($ .13)
3. Restatement:
As more fully discussed in the Form 10-KSB for the year ended December
31, 1999, certain adjustments were made in the fourth quarter, 1999
which applied, in part, to the financial statements of the first,
second and third quarters of 1999 as previously reported. Accordingly
the accompanying financial statements for the periods ended June 30,
1999 have been restated to give effect to those adjustments as follows:
Increase (decrease) net income as
previously reported
--------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
-------------------------- -------------------
Reverse licensing fee revenue
recognized ($4,125,000) ($4,125,000)
Write-off investment in joint venture ( 375,706) ( 375,706)
Properly record stock-based
compensation 726,936 ( 907,889)
Other ( 46,691) 4,443
------------ ------------
($3,820,461) ($5,404,152)
============ ============
Decrease in net income per share
previously reported ($ .14) ($ .20)
============ ============
F-10
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Management 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 June
30, 2000. Historically, negative operating cash flows have been funded
with proceeds from sales of common and preferred stock, notes and
convertible debentures payable and equipment sale/leaseback
transactions. The total amount received from these sources approximated
$5,500,000 during 1999, $2,000,000 during the six months ended June 30,
2000 and $500,000 from July 1 through August 15, 2000. Notwithstanding
the proceeds of these financing sources, the Company had negative
working capital of approximately $4,500,000 at June 30, 2000.
During the second quarter of 2000, the Company made significant changes
in its operations including discontinuing three of its four previously
existing business segments in order to reduce cash outflows and reduce
outstanding debt. Management has refocused the attention of the Company
on developing the technologies owned or licensed in the alternative
fuel industry. These technologies are currently in the research and
development stage and consequently are not producing any revenue. As
such, the Company will continue to require additional equity or debt
financing in order to provide its cash requirements and continue as a
going concern. Additional expenditures will be required to further
develop these technologies and there can be no assurance that these
technologies will ultimately yield any commercially viable processes or
products.
During the quarter ended June 30, 2000, the Company acquired SAC, an
entity engaged in the demolition and recycling business and in
government contracting.
The demolition and recycling operations are consistent with the
Company's focus on the development of its environmentally friendly
technologies. The first commercial use of MagneGas was as a cutting gas
in demolition and scrap processing. MagneGas has qualities which show
promise as an effective fuel in such industrial uses.
The Company is currently undertaking activities intended to return the
demolition and recycling operations to profitability since the
acquisition, an affiliate of SAC has provided short term funding for
the Company's research and development activities for the alternative
fuels technologies and may be required to continued to do so in the
future. There can be no assurances that the Company will be successful
in these efforts.
F-11
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Discontinued operations:
Contract Manufacturing:
Contemporaneous with entering into the Agreement (see Note 1), new
management decided to discontinue the contract manufacturing operations
previously conducted by the Company. The Company is actively engaged in
liquidating the assets used in this segment and using the proceeds to
settle or reduce the liabilities associated with these operations. An
auction is planned for late August 2000 at which time substantially all
of the machinery and equipment used in this operation, subject to the
approval of any creditor with a secured interest in such property, will
be offered for sale. Machinery and equipment associated with this
segment are reflected on the June 30, 2000 balance sheet at their
estimated realizable value.
F-12
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Discontinued operations (continued):
Healthcare:
New management has also decided to suspend activity in the Health Care
business segment so that the Company can focus its resources on
developing alternative fuel technologies. Machinery and equipment used
in this operation was disposed of or offered for sale.
BORS:
Finally new management decided to dispose of its technology rights to
the BORS Lift to repay debt and focus on alternative fuel technology.
Accordingly, on June 16, 2000, a Technology Assignment and Royalty
Agreement (the "BORS Agreement") was entered into by and among
EarthFirst, its wholly-owned subsidiary, Ennotech, Inc., (collectively
referred to as the "Company") and BORS International L.L.C. ("BIL").
Under the BORS Agreement, the Company transferred its rights to the
"BORS Lift" technology for lifting oil from shallow wells to BIL. In
addition, the Company sold its BORS Lift inventory, equipment, and
tooling for a purchase price of $324,921.
As part of the BORS Agreement, BIL assumed all actual or implied
warranty and service obligations of the Company in connection with all
BORS Lift units and related equipment services previously provided by
the Company to any customer. In consideration of this assumption, BIL
received 500,000 shares of the Company's unregistered common stock.
In addition to the BORS Agreement, the parties also entered into a
Royalty Agreement under which BIL agreed to pay the Company an amount
equal to 2% of the collected gross revenues, as defined, of BIL on a
monthly basis.
As part of the Royalty Agreement, as an incentive to BIL to maximize
its collected gross revenues, EarthFirst agreed to issue options to BIL
which will be granted upon the occurrence of certain performance
standards and which may be exercised during certain time limits. Upon
BIL's achieving $10,000,000 in collected gross revenues by December 31,
2001, the Company shall grant BIL options to acquire 833,333 shares of
the Company's common stock at an excercise price of $.30 per share. In
addition, upon BIL's achieving $20,000,000 in collected gross revenues
between January 1, 2002 and December 31, 2002, the Company shall grant
BIL
F-13
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Discontinued operations (continued):
BORS (continued):
options to acquire 833,333 shares of the Company's common stock at an
exercise price of $.40 per share. In addition, upon BIL's achieving
$40,000,000 in collected gross revenues between January 1, 2003 and
December 31, 2003, the Company shall grant BIL options to acquire
833,333 shares of the Company's common stock at an excercise price of
$.50 per share. In lieu of achieving the collected gross revenue
targets, BIL will be granted the options upon paying the Company an
amount equal to the royalty due had the gross collected revenue target
for the period been reached.
The Royalty Agreement provides that, at any time after 42 months from
entering into the agreement, BIL can satisfy and terminate all future
royalties due under the Royalty Agreement by making a cash payment
equal to 300% of the total royalty payments received by the Company in
the prior 12 months. The parties agreed that this termination payment,
when added to all prior monthly royalty payments, must total at least
$3,000,000.
Additional information with respect to discontinued operations is as
follows:
Segment of Business Discontinued
-----------------------------------
Contract Health
BORS Manufacturing Care
------- ------------- -------
Measurement date 5-16-00 5-15-00 5-15-00
Loss from operations from
measurement date to June 30, 2000 - $ 83,073 -
Proceeds from disposal received
through June 30, 2000 $375,000 $125,000 -
Expected or actual disposal date 6-16-00 9-1-00 9-1-00
Manner of disposal sold auction closed
Assets (equipment) remaining on
June 30, 2000 balance sheet - $350,000 -
6. Major customer information:
During the six months ended June 30, 2000, the Company derived revenues
from one customer which aggregated 37% of total revenues.
F-14
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7. Segment reporting:
The following summarizes key segment information for the six months
ended June 30, 2000:
Alternative
Fuels/
Environmental Demolition Government
Solutions & Recycling Contracting Corporate Consolidated
Revenue from
external customers $ -0- $ 997,306 $ 594,074 $1,591,380 $ -0-
Cost of sales -0- 800,283 532,471 -0- 1,332,754
Gross profit -0- 197,023 61,603 -0- 258,626
Research &
Development 364,047 -0- -0- -0- 364,047
Segment Assets 50,000 4,624,463 4,139,894 816,087 9,980,444
350,000
The following summarizes key segment information for the six months
ended June 30, 1999:
Alternative
Fuels/
Environmental Demolition Government
Solutions & Recycling Contracting Corporate Consolidated
Revenue from external
customers $ -0- $ -0- $ -0- $ -0- $ -0-
Cost of sales -0- -0- -0- -0- -0-
Gross profit -0- -0- -0- -0- -0-
Research & Development
2,248,602 -0- -0- -0- 2,248,602
F-15
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. Related party debt:
Related party debt consists primarily of short-term advances made by an
affiliate to fund operating deficits.
9. Long-term debt:
The Company has additional long-term debt obligations of SAC totaling
$868,678 as of June 30, 2000. These obligations are owed to a bank and
several financing companies and are secured by personal property. These
obligations are payable in aggregate monthly installments of
approximately $36,000 maturing through June 2004.
Future maturities of long-term debt are as follows:
Year ending June 30,
2001 $ 913,950
2002 516,935
2003 322,614
2004 143,656
------------------
$ 1,897,155
==================
10. Stockholders' deficit:
Conversion of convertible debentures to equity/additional convertible
debt:
During January and March 2000, the investor in the Company's $750,000
Series 1999-A 8% convertible notes elected to convert an aggregate of
$517,956 of the notes and accrued interest into 1,037,784 shares of the
Company's common stock. Additionally, during March 2000, the investor
loaned the Company an additional $700,000 through the purchase of the
second installment of the 8% convertible notes. In connection
therewith, the investor was granted additional warrants to purchase
75,000 shares of common stock under terms similar to those granted in
1999. The $700,000 of convertible notes contain a beneficial conversion
feature which has been recognized as a discount on the notes in the
amount of $641,200. The discount was amortized to interest expense over
a three-month period ended June 30, 2000.
Conversion of convertible preferred stock to common:
During April and June 2000, the preferred stockholder elected to
convert 154 shares of preferred stock to 613,188 shares of common
stock.
F-16
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Stockholders' deficit:
Conversion of related party debt to equity:
During the quarter ended June 30, 2000, a related party elected to
convert $334,000 in debt into 1,336,000 shares of common stock.
Stock options and stock grants:
In January 2000, 550,000 common stock options were granted to key
employees and 1,400,000 common stock options to an officer/employee.
These three-year options are exercisable at $.30 to $.34 per share and
vest immediately.
Options outstanding at beginning of period 1,950,000
Granted during the period 1,950,000
---------
Outstanding and exercisable at June 30, 2000 3,900,000
==========
Weighted average remaining life 30 Months
Weighted average exercise price $ .71
Additionally, 2,810,000 shares of common stock were issued to the
Company's general counsel, officer/employees and in connection with the
BORS disposal. Total expense in connection therewith aggregated
$707,300 for the six months ended June 30, 2000.
F-17
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10. Stockholders' deficit:
Common stock warrants:
The following table summarizes information for stock warrants outstanding
and exercisable at June 30, 2000.
Warrants Outstanding and Exercisable
-------------------------------------------------
Range of Weighted Avg. Weighted Avg.
Prices Number Remaining Life Exercise Price
------------ --------- -------------- --------------
$ 2.34-2.40 218,750 36 months $ 2.38
$ .70 25,000 25 months .70
$ .40 3,800,000 52 months .40
------------ --------- --------- -------
Outstanding
1/1/00 4,043,750 51 months .51
Issued in 2000 739,620 35 months .35
--------- -------
Outstanding
06/00 4,783,370 49 months $ .48
========= -------
No warrants were exercised during the six months ended June 30, 2000.
Stock-based compensation recorded for warrants issued during the six
months ended June 30, 2000 aggregated $31,230.
The fair value of the options and the warrants granted in 2000 were
estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions:
Expected life of options 2-3 years
Risk free interest rate 5.458%
Expected volatility 50%
Expected dividend yield 0%
F-18
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
(F/K/A TOUPS TECHNOLOGY LICENSING, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
11. Commitments and contingencies:
SEC Enforcement Inquiry:
On November 19, 1999, the Company was notified that the Securities and
Exchange Commission was conducting an informal inquiry in connection
with matters relating to the Company's restatement of financial
results. The Commission has requested certain documents concerning the
previous revision of its financial results and financial reporting
documents. The Commission indicated that its inquiry should not be
construed as any indication that any violation of law has occurred, nor
as an adverse reflection upon any person, entity or security. The
Company is cooperating with the Commission in connection with this
inquiry and its outcome cannot be determined at this time.
12. Subsequent events:
Sales of common stock:
From July 1 through August 18, 2000, net proceeds of $500,000 were
generated from the sale of 1,683,500 shares of common stock to former
shareholders of SAC at a price equal to the 5-day trailing average of
the quoted closing price.
Execution of World-Wide Exclusive Assignment, License and Royalty
Agreement:
On July 5, 2000, EarthFirst entered into a World-Wide Exclusive
Agreement, License and Royalty Agreement (the "MagneGas Agreement")
with Hadronic Press, Inc. ("HPI"). Under the MagneGas Agreement,
EarthFirst acquired 80% of the capital stock of USMAGNEGAS, Inc., a
Florida corporation formed on June 15, 2000 in return for EarthFirst's
assignment of certain rights to technological processes related to
MagneGas to HPI. HPI simultaneously licensed their interests in these
technological rights, as well as their rights to other technology, to
USMAGNEGAS.
The MagneGas Agreement was entered into in order to cure alleged
defaults in previous agreements with HPI and to secure the rights to
other intellectual properties needed to develop MagneGas.
Pursuant to the MagneGas Agreement, EarthFirst is obligated to provide
financing, facilities and resources to facilitate a program of research
and development for the MagneGas technology conducted by USMAGNEGAS. In
addition, EarthFirst agreed to issue 1,500,000 shares of its common
stock to HPI in return for HPI entering into the MagneGas Agreement and
procurement of future patents by HPI which patents will become subject
to this agreement.
F-19
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis provides information which 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.
During the quarter ended June 30, 2000, the Company decided to
concentrate its primary focus on alternative fuel technologies.
Alternative fuels, generally, are fuels not derived substantially from
petroleum and that provide environmental benefits. The various
technologies licensed by the Company were evaluated for relevance to
the development of alternative fuels. Accordingly, the Company has
initially focused on a plan to develop MagneGas. There is broad
potential for MagneGas in diverse applications including use as an
automotive fuel.
Because of the decision to position the Company within the alternative
fuel industry, certain unrelated operations were discontinued and the
associated assets sold, or are scheduled for sale. The BORS Lift sale
to BIL was concluded primarily because BORS did not fit the established
paradigm. Similarly, all existing technologies under license
arrangements are being evaluated to determine their ultimate plan of
development or disposition. Generally, the Company's current plan is to
limit its focus to alternative fuel technologies.
During the quarter ended June 30, 2000, the Company acquired SAC, an
entity engaged in the demolition and recycling business and in
government contracting.
The demolition and recycling operations are consistent with the
Company's focus on the development of its environmentally friendly
technologies. The first commercial use of MagneGas was as a cutting gas
in demolition and scrap processing. MagneGas has qualities which show
promise as an effective fuel in such industrial uses.
The Company is currently undertaking activities intended to return the
demolition and recycling operations to profitability. Since the
acquisition, an affiliate of SAC has provided short term funding for
the Company's research and development activities for the alternative
fuels technologies and may be required to continued to do so in the
future. There can be no assurances that the Company will be successful
in these efforts.
Three and Six Months Ended June 30, 1999 Compared to Three and Six
Months Ended June 30, 2000
Revenues, cost of sales, and gross profits for the three and six month
periods ended June 30, 2000 and 1999 were not comparable because the
businesses which generated revenues in the June 30, 1999 periods were
discontinued on or before June 30, 2000. Accordingly, the results of
these operations are included under the Discontinued Operations section
of the Condensed Consolidated Statements of Operations. In addition,
the business segments which produced revenues during the periods ended
June 30, 2000 were acquired on May 15, 2000 and consequently did not
impact the fiscal 1999 amounts.
Selling, general and administrative expenses for the three and six
month periods ended June 30, 2000 are also not comparable to the three
and six month periods ended June 30, 1999 for the reasons stated
above. Selling, general and administrative expenses for the periods
ended June 30, 2000 are related primarily to the business operations
of SAC, accounting fees, stock issued for legal services, and stock
issued to employees.
F-20
Direct research and development expenses declined from $2,248,602 and
$425,751 in the six and three months ended June 30, 1999 to $364,047
and $197,234 in the six and three months ended June 30, 2000 or an 83%
and 54% decrease. The decline is attributable to non-cash charges
relating to research-related stock-based compensation and licensing
agreements in the six months ended June 30, 1999 (principally in the
first quarter), which did not occur in the comparable period in 2000.
Total stock-based compensation related to research and development in
the three and six months ended June 30, 2000 was $-0- and $-0- as
compared to $274,970 and $1,994,040 in the three and six months ended
June 30, 1999, respectively.
Interest expense increased for the three and six months ended June 30,
2000 over that of the comparable prior year period due principally due
to the beneficial conversion feature of convertible debentures issued
late in the first quarter 2000 of resulting in non-cash interest
expense for the periods of $641,200.
Losses from continuing operations decreased approximately $500,000 from
$3 million to $2.5 million in the six months ended June 30, 2000. This
decrease is a result of lower research and development costs in 2000,
offset by increased interest expenses in the same period. Consolidated
net loss of $7 million for the six months ended June 30, 2000 was up
approximately $900,000 from the $6.1 million reported in the comparable
1999 period, a 15% increase. The increase is a result of the
aforementioned changes in research and development and interest
expenses, coupled with the loss on the segment disposals.
Losses from continuing operations increased approximately $1.1 million
from $1 million to $2.1 million in the three months ended June 30,
2000. This increase is principally a result of the SAC general and
administrative expenses, which did not exist in 1999. Consolidated net
loss of $5.2 million for the three months ended June 30, 2000 was up
approximately $2.5 million from the $2.7 million reported in the
comparable 1999 period, a 91% increase. The increase is a result of the
aforementioned SAC general and administrative expenses and the loss on
the segment disposal.
Liquidity and Capital Resources
The Company has experienced recurring net losses since its inception
and, as such, has experienced negative operating cash flows through
June 30, 2000. Historically, these negative operating cash flows have
been funded with proceeds from sales of common and preferred stock,
notes and convertible debentures payable and equipment sale/leaseback
transactions. The total amount received from these sources approximated
$2,000,000 during the six months ended June 30, 2000 and $500,000 from
July 1 through August 15, 2000. Notwithstanding the proceeds of these
financing sources, the Company had negative working capital of
approximately $4,500,000 at June 30, 2000.
On May 15, 2000, the Company acquired the outstanding stock of SAC in
exchange for 26,500,000 shares of common stock. In connection with this
acquisition, the management and board of directors of the Company
underwent significant changes. Management is currently evaluating the
cost structure of the Company and has recently made significant cost
reductions. However, there can be no assurance that these efforts will
result in positive operating cash flows or restore working capital to
adequate levels. As such, the Company may continue to require
additional equity or debt financing in order to cover its cash
requirements and continue as a going concern.
The Company is currently reviewing options to finance its ongoing
operations and development activities, and to repay debt. The Company
believes that additional capital will be needed after receipt of the
proceeds from the disposal of all assets not related to the Company's
core focus on alternative fuels.
F-21
Note on Forward-Looking Statements
CERTAIN STATEMENTS IN THIS REPORT ON FORM 10-QSB, UNDER THE SECTION
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," RELATE TO
FUTURE EVENTS AND EXPECTATIONS AND AS SUCH CONSTITUTE "FORWARD-LOOKING
STATEMENTS," WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION
REFORM 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 BE MATERIALLY DIFFERENT 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.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(c ) The securities described below were issued by us during the period
covered by this 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 legended, 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.
Between April 5 and June 21, 2000, the holder of 154 shares of Series A
Preferred Stock, par value $1.00 per share, converted such shares into an
aggregate of 613,188 shares of Common Stock at a conversion rate of $.21 per
share with respect to 256,045 shares and $.28 per share with respect to 357,143
shares.
Between April 14 and June 30, 2000, the Company issued to nine (9)
individuals, including John Stanton, the Company's Chairman, President and Chief
Executive Officer and certain other former stockholders of SAC an aggregate of
2,096,199 shares of Common Stock in exchange for cash payments approximating
$627,500. In connection with such offering, the Company issued 27,551 shares of
Common Stock in consideration for certain financial consulting services rendered
to the Company.
On April 24, 2000, Leslie D. Reagin, III, a former director of the
Company, converted a 12% convertible note in the principal amount of $334,000
into 1,336,000 shares of Common Stock at a conversion price of $.25 per share.
On April 27 and May 15, 2000, the Company issued an aggregate of
1,600,000 shares of Common Stock to Dominic Massari, Esq., the Company's general
counsel in consideration of legal services rendered to the Company by Mr.
Massari's law firm valued at $400,000.
On June 19, 2000, the Company issued 500,000 shares of Common Stock to
Tim Klace, the Company's Chief Financial Officer, in consideration for certain
services valued at $125,000.
On May 15, 2000, the Company acquired all of the outstanding capital
stock of SAC in exchange for an aggregate of 26,500,000 shares of Common Stock
pursuant to an Acquisition and Stock Exchange Agreement between the Company and
the stockholders of SAC. See Note 1 of the Notes to Condensed Consolidated
Financial Statements for further information about this transaction.
In connection with the Company's assignment of its BORS Lift technology
and sale of its BORS related inventory to BIL, the Company issued 500,000 shares
of Common Stock to BIL. See Note 5 of the Notes to Condensed Consolidated
Financial Statements for further information about this transaction.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K with the Securities and Exchange
Commission on May 30, 2000, in which it reported under Item 2 that it
had acquired all of the outstanding stock of Strategic Acquisition
Corporation in exchange for 26,500,000 shares of the Company's common
stock.
F-22
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: August 21, 2000
By: /s/ John Stanton
---------------------------------------------------
John Stanton, President and Chief Executive Officer
F-23