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, 2001
[ ] 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)
601 South Fremont Avenue, Tampa, Florida 33606
----------------------------------------------
(Address of principal executive offices)
(813)258-1065
--------------
(Issuer's telephone number)
1226 Tech Blvd., Tampa, Florida 33619
----------------------------------------------
(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 10, 2001: 141,151,402 shares $ .0001 par value common
stock.
Transitional Small Business Disclosure Format (check one) Yes No X
---- ----
FORM 10-QSB
EARTHFIRST TECHNOLOGIES, INCORPORATED
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1-Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2001
(Unaudited) and December 31, 2000............................... 1
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2001 and 2000 (Unaudited)......... 2
Condensed Consolidated Statements of Cash Flows for
the six months ended June 30, 2001 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................ 18
Item 6. Exhibits and Reports on Form 8-K......................... 19
Signatures................................................................ 19
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
2001 December 31,
(Unaudited) 2000
------------ -------------
Current assets:
Cash $ 35,376 $ 1,518,721
Accounts receivable (net of $525,000 allowance for
future returns) 1,367,566 2,156,677
Inventories 627,309 694,304
Costs and estimated earnings in excess of billings on
uncompleted contracts 281,924 515,804
Other current assets 1,500 1,207
------------ -------------
Total current assets 2,313,675 4,886,713
Property and equipment, net 2,210,016 2,235,440
Goodwill, net 1,500,000 4,210,651
Other assets 2,395 820
------------ -------------
$ 6,026,086 $ 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 2,064,714 3,646,377
Accrued expenses and other current liabilities 2,217,252 1,693,253
Dividends payable - 81,760
Billings in excess of costs and estimated earnings on
uncompleted contracts - 101,206
------------ -------------
Total current liabilities 4,603,150 6,097,798
Notes and other payables, related parties,
less current maturities 1,948,757 3,772,689
Long-term debt, less current maturities 221,876 371,340
Convertible debentures 380,000 700,000
------------ -------------
Total liabilities 7,153,783 10,941,827
------------ -------------
Commitments and contingencies - -
Stockholders' equity:
Series A preferred stock, par value $1, 10,000,000
shares authorized, 0 (2001) and 461 (2000) shares
issued and outstanding - 461
Common stock, par value $.0001, 250,000,000 shares
authorized, 130,370,902 (2001) and 84,834,825 (2000)
shares issued and outstanding 13,037 8,484
Additional paid-in capital 36,614,374 30,479,037
Accumulated deficit (36,487,048) (28,828,125)
------------ -------------
140,363 1,659,857
Less treasury stock (1,950,000 shares at cost) (1,268,060) (1,268,060)
------------ -------------
Total stockholders' equity (1,127,697) 391,797
------------ -------------
$ 6,026,086 $ 11,333,624
============ =============
See notes to condensed consolidated financial statements.
1
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ----------- ------------ ------------
Revenue $ - $ - $ - $ -
Cost of sales - - - -
------------ ----------- ------------ ------------
Gross profit - - - -
Selling, general and administrative
expenses 363,930 200,225 691,308 988,284
Research and development expenses 1,390,476 197,234 2,298,539 364,047
------------ ----------- ------------ -----------
Loss from continuing operations before
income taxes and other items (1,754,406) (397,459) (2,989,847) (1,352,331)
------------ ------------ ------------ -----------
Other income (expense):
Interest expense (18,602) (718,496) (124,602) (855,760)
------------ ------------ ------------ -----------
Loss from continuing operations (1,773,008) (1,115,955) (3,114,449) (2,208,091)
Discontinued operations (no applicable
income taxes):
Loss from discontinued operations (1,410,291) (2,089,663) (1,959,636) (2,815,457)
Loss on disposal of business segment (2,579,483) (2,062,711) (2,579,483) (2,062,711)
------------ ------------ ------------ -----------
Loss before extraordinary item (5,762,782) (5,268,329) (7,653,568) (7,086,259)
Extraordinary gain on
extinguishment of debt (no
applicable income tax) - 84,889 - 84,889
Net loss (5,762,782) (5,183,440) (7,653,568) (7,001,370)
Preferred stock dividends (5,355) (7,280) (5,355) (20,405)
------------ ------------ ------------ -----------
Net loss attributable to common
stockholders $ (5,768,137) $ (5,190,720) $ (7,658,923) $(7,021,775)
============ ============ ============ ===========
Loss per common share attributable
to common stockholders:
Continuing operations $ (.02) $ (.04) $ (.03) $ (.06)
Discontinued operations (.03) (.06) (.04) (.10)
------------ ------------ ------------ -----------
Net loss $ (.05) $ (.10) $ (.07) $ (.16)
============ ============ ============ ===========
Weighted average shares outstanding 108,923,897 53,383,003 107,172,650 44,070,063
============ ============ ============ ===========
See notes to condensed consolidated financial statements.
2
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
Cash flows from operating activities:
Net loss $(7,653,568) $(1,817,930)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of goodwill 2,736,351 173,166
Stock based compensation - 94,010
Interest expense funded from debt conversion to
equity - 73,620
Increase (decrease) in cash due to changes in:
Accounts receivable 789,111 (9,468)
Inventories 66,995 101,818
Prepaid expenses (292) (16,786)
Other assets (1,576) (859)
Costs and earnings in excess of billings 233,880 -
Accounts payable (1,581,663) 448,719
Accrued expenses 523,677 -
Customer deposits - (3,850)
Billings in excess of costs and earnings (101,206) -
----------- -----------
Net cash used in operating activities (4,988,291) (957,560)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (276) (32,305)
----------- -----------
Net cash used in investing activities (276) (32,305)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of capital stock - 661,789
Principal repayments on long-term debt (170,846) (37,056)
Proceeds from convertible debentures - 700,000
Proceeds from related party notes payable 3,676,068 177,000
----------- -----------
Net cash provided by financing activities $ 3,505,222 $ 1,501,733
=========== ===========
See notes to condensed consolidated financial statements.
3
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- --------
Increase (decrease) in cash (1,483,345) 511,868
Cash, beginning of period 1,518,721 72,224
----------- --------
Cash, end of period $ 35,376 $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 461 shares of preferred shares outstanding at beginning of year to
4,101,000 shares of common stock
. Converted dividends payable on preferred stock of $87,115 into 500,000 shares
of common stock
. Converted $320,000 of convertible debentures along with accrued interest of
$72,024 to 2,493,629 shares of common stock
. Converted $4,660,291 of related party debt to 38,441,448 shares of common
stock
During 2000, the Company:
. Acquired 100% of the outstanding stock of SAC-I, Inc. in exchange for the
issuance of 26,500,000 shares of common stock in a transaction valued at
$5,300,000.
. 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 and 75,000 warrants.
. Converted 154 shares of preferred stock to 613,188 shares of common stock.
. Converted $334,000 of related party debt to 1,336,000 shares of common stock.
See notes to condensed consolidated financial statements.
4
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
1. Nature of business, basis of presentation and summary of significant
accounting policies:
Nature of business:
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 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, 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.
EarthFirst was formed to facilitate market applications through the licensing
of late-stage technologies. The Company's business is the development and
commercialization of two technologies to provide efficient and
environmentally friendly solutions for the disposition of solid and liquid
wastes and the production of alternative sources of fuel and energy.
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 development
of this technology has been conducted through USMagneGas, Inc.
("USMagneGas"), an 80% owned subsidiary of the Company.
5
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
Nature of business (continued):
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. This technology is being developed by
EarthFirst Waste To Energy, Inc. ("EFWE"), an entity in which the Company
owns a 51% interest.
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 June 30, 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 a $2,500,000 revolving
line of credit to the Company to fund operating deficits. This entity has
also provided a $2,500,000 revolving line of credit to SAC-I, Inc. ("SAC"), a
wholly-owned subsidiary of the Company, to finance its operating deficits.
Each revolving line of credit is secured by all of the assets of the Company
and SAC, respectively. A significant portion of the operating assets owned
by SAC are also secured by indebtedness owed to third parties that was
incurred in connection with the original acquisition of those assets.
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. An
additional $2,500,000 of the outstanding balance was converted into
13,333,333 shares of common stock in June 2001. There is no obligation on
the part of the lender to convert any additional portion of the outstanding
balance owed to it into common stock of the Company.
Notwithstanding the proceeds of these financing sources, the Company had
negative working capital of approximately $2,300,000 at June 30, 2001. It is
reasonable to conclude that the Company will continue operations only if
additional financing can be raised such as through the sale of its stock or
through additional borrowings.
6
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
2. Management's Plans Regarding Liquidity and Capital Resources (continued):
The Company, through the USMagneGas and EFWE subsidiaries, will continue to
perform significant additional research and development on 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. There can be no assurances that further
research and development will yield commercially viable products or that
funding can be obtained to finance such research.
At this time, the Company intends to focus its commercial operations in three
main areas. These main areas include the production and sale of: (1) tire
recycling processors through EFWE; (2) MagneGas(TM) for use as a cutting
fuel; and (3) MagneGas(TM) recycler units.
Tire Recycling Processors: 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. The sales price of the two units for used
tires is $13.5 million per unit. The actual order for these 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 Tiarga will be able to obtain the letters of credit or that
agreement will be reached regarding the final terms and conditions of this
arrangement. EFWE has received a $100,000 payment from individuals affiliated
with Tiarga in connection with the agreement. This amount has been utilized
to offset costs incurred by EFWE in connection with its efforts to finalize
this agreement.
Provided the parties can reach agreement to proceed, the remaining ten units
are to be designed for the processing of municipal solid waste and it is
contemplated that delivery of the units would be made over the following 18
months. In order for the production of the additional units to proceed, EFWE
will need to adequately demonstrate that its units will meet certain
performance measures. Additional testing will need to be performed to
demonstrate that these measures can be met and it is likely that the
technology will need to be further refined to accomplish these objectives.
The actual pricing for these additional units will be negotiated in the
future.
7
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
2. Management's plans regarding liquidity and capital resources (continued):
Since the execution of the agreement on May 3, 2001, the parties have worked
together to obtain certifications and verifications of various technical
aspects of the prototype unit that are required prior to proceeding with
production of the first two units. While obtaining these verifications has
taken longer than expected, the Company continues to be optimistic that these
matters will be successfully resolved and that its technology will produce
commercially viable units. The technology for producing these units, if
successful, will produce an environmentally friendly method for reclaiming
natural resources from waste products for which current solutions are either
not available or are less than satisfactory.
It is anticipated that the production of any units ordered by Tiarga will be
funded pursuant to one or more letters of credit established by Tiarga or its
affiliates after agreement between the parties is reached to begin
production.
Through its EFWE subsidiary, the Company will seek to sell its tire recycling
processors to additional end-users. In addition to selling to end-users,
EFWE will supply customers with ongoing technical support and maintenance for
the equipment and derive ongoing royalties from the use of the processors.
MagneGas(TM) As a Cutting Fuel: The Company, through USMagneGas, will seek
to be a sizeable producer of industrial cutting gas within its area of
operations. The cutting gas produced by USMagneGas has been successfully
used in the commercial manufacturing operations of a company controlled by
the Company's Chairman of the Board. The Company believes that it now has
the production capacity to produce cutting gas in sufficient capacity to fill
the demand for such products in targeted areas of the southeastern United
States. Negotiations will need to be conducted with the appropriate
distributors to achieve these objectives and commence a commercially viable
operation for the production and sale of cutting gas. The Company intends to
market its specialty cutting gas through large regional distributors. This
approach removes some significant barriers to entry and reduces cost of
sales.
8
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
2. Management's plans regarding liquidity and capital resources (continued):
MagneGas Recycler Units: USMagneGas will also focus on selling its sewage
recycling units and in further developing the next generation of these units
to meet the demands of the market place. USMagneGas has produced prototypes
of its total recycler that can serve as the basis for the production of units
for commercial sale. Currently the cost of operating the total recycyler
units will limit their application to situations where the customer has
serious environmental problems for which a specialized solution is necessary.
However, the Company intends to further develop this technology to lower the
operating costs of the total recycler units and allow a more widespread usage
of these processors.
In addition, USMagneGas will continue research and development of its linear
recycler units to attempt to develop a more practical solution for the
elimination of harmful waste products. The linear recyclers are not yet
ready for commercial applications and will require significant further
development in order to produce units that are commercially viable. There
can be no assurances that such additional research and development will
result in a commercially successful line of products.
In order to achieve its strategies, the Company will need to obtain
sufficient financing from outside sources. There can be no assurances that
the Company will be successful in obtaining such financing or, if such
financing can be obtained, that implementation of the Company's corporate
strategies can be achieved or that commercially viable applications of the
technologies can be developed.
Financing: Subsequent to June 30, the Company executed a letter of agreement
with a private equity group ("the Investor") regarding financing for the
Company. Under this agreement, the Company may require the Investor to
purchase shares of the Company's common stock at a price determined 20 days
after providing notification to the Investor. The price per share the
Investor is required to pay is determined by formula and contemplates a
discount to the bid price quoted for the Company's common stock. There are
limitations on the number of shares that the Company may require the Investor
to acquire during any period.
In order to require the Investor to acquire the Company's shares, the Company
will need to have these shares registered with the Securities and Exchange
Commission (the "SEC"). There are no assurances that the SEC will approve
the registration statement necessary to have these shares registered.
9
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
2. Management's plans regarding liquidity and capital resources (continued):
As compensation for entering into the agreement, the Investor will receive a
warrant convertible into 3,600,000 shares of the Company's common stock. On
each six-month anniversary of the date of the above warrants, the Company is
required to issue to the Investor additional warrants to purchase a number of
shares of common stock, if necessary, such that the sum of the original
3,600,000 warrants and the number of additional warrants issued to the
Investor shall equal at least a fixed percentage of the number of fully
diluted shares of common stock of the Company on such six-month anniversary
date. The fixed percentage for the first six-month period is 3% and
decreases by .5% on each subsequent six-month anniversary date.
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. Discontinued operations:
The Company's Demolition and Recycling operations, as well as its government
contract operations, have been conducted through its wholly-owned subsidiary
SAC-1, Inc. ("SAC"). In its demolition operations, SAC entered into fixed-
price contracts to demolish structures such as buildings and bridges.
Services have been rendered primarily within the State of Florida.
In its recycling operations, SAC operated scrap yards at locations in
Gibsonton, Auburndale and Brooksville, Florida. SAC acquired 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 entered 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.
10
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
3. Discontinued operations (continued):
In anticipation of the appointment of a new Chief Executive Officer and
President, as well as the addition of new members of the Company's Board
of Directors, during the second quarter of 2001, the Company decided that it
was in the best interest of the shareholders to discontinue the demolition,
recycling, and government contract operations and either sell the businesses
or wind up their affairs. The Company anticipates disposing of most of the
assets of these businesses during the remainder of 2001 and utilizing the
proceeds to repay debt and provide funding for the environmental solutions
and alternative fuel operations. Goodwill associated with these two segments
has been written down to its estimated fair value and the write-down is
reflected as loss on disposal of discontinued operations. Operations
associated with these segments have been classified as discontinued
operations in the accompanying statements of operations.
The decision to discontinue the demolition, recycling, and government
contract operations was made to allow the new Chief Executive Officer and the
new members of the Board of Directors to focus on the core business of the
Company. The Company believes that it is now positioned to maximize its
value by exploiting the technological advances that have been achieved
through its research and development efforts.
4. Stockholders' equity:
Conversion of portion of revolving line of credit owed to related party into
common stock:
In April 2001, $1,500,000 of the revolving line of credit owed to an entity
affiliated with the Chief Executive Officer was converted into 10,256,410
shares of the Company's common stock. In June 2001, an additional $2,500,000
of the revolving line of credit was converted into 13,333,333 shares of the
Company's common stock.
11
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
4. 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 its preferred shares into 2,066,667 shares
of common stock. In April and May 2001, the holder of the preferred stock
elected to convert its remaining 306 shares of preferred stock into 2,034,333
shares of common stock. In June 2001, the holder of the Preferred Stock
elected to convert accrued dividends totaling $87,115 into 500,000 shares of
the Company's common stock. This final conversion satisfied the Company's
remaining obligation to the preferred shareholder.
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. On June 22, 2001, the holder elected to convert an additional $50,000
face value of the debentures, plus $10,672 of accrued interest and penalties,
into 291,693 shares of the Company's common stock. Subsequent to June 30,
2001, the note holder elected to convert an aggregate of $150,000 face value
of the debentures, plus $38,588 of accrued interest and penalties, into
873,093 shares of the Company's common stock. Subsequent to these
conversions, there remains outstanding a principal balance of $230,000 of the
convertible notes, exclusive of accrued interest and penalties.
12
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 June 30, 2001 condensed statements and notes thereto.
Management intends to continue the efforts of USMagneGas, Inc. ("USMagneGas")
and EarthFirst Waste To Energy, Inc. ("EFWE") to further develop their
respective technologies. Management continues to believe that both technologies
show significant promise for creating solutions for very serious waste
reclamation and recycling problems. Management also continues to believe that
improvements can be made to both technologies to improve efficiencies and
enhance performance of the processes developed thus far.
Commercial Operations: Management believes that applications of the
technologies are now ready for commercial use. The Company intends to focus its
commercial operations in the areas involving the production and sale of: (1)
tire recycling processors through EFWE; (2) MagneGas(TM) for use as a cutting
fuel; and (3) MagneGas(TM) recycler units.
On May 3, 2001, EFWE, an entity in which the Company owns a 51% interest, 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 tires. EFWE has been working with Tiarga to
complete the technical verifications of the prototype unit to be produced.
Completing these steps has taken longer than originally expected, however,
discussions are continuing between the parties and the Company continues to
believe that a satisfactory resolution of the remaining issues involving the
contract can be achieved. The Company is hopeful that these issues can be
resolved and the terms and conditions of the agreement finalized in the near
future, however, there can be no assurances that this will be achieved.
Financing for the production of the units contemplated under the agreement with
Tiarga will come from one or more letters of credit with a bank or banks
acceptable to EFWE. Negotiations are being held to determine payment dates for
draws under the letter of credit and the related protocols. It is intended that
the payments under the letter of credit will be sufficient to cover the cash
flow requirements to construct the units and that EFWE and the Company will not
have to finance any portion of the costs of the project once the parties reach a
final agreement to proceed.
13
The agreement entered into by EFWE also provides for participation as a joint
venture in the operation of the units after installation is completed. If
successful, the joint venture should provide sources of revenues in the future.
However, it is likely that given the start up nature of the joint venture, the
arrangement should be viewed as a long-term venture that will not produce cash
flow to EFWE in the short term.
The Company realizes that additional experienced personnel are needed to
transform the technological knowledge that has been developed into commercially
viable products and to introduce these products to the market. To accomplish
these objectives, the Company recently hired Jim Mahoney as its new Chief
Executive Officer. Mr. Mahoney led an entity controlled by Pacific Gas &
Electric of more than 800 employees that operated 33 power generating facilities
and has extensive experience in moving research and development into
commercially successful operations. Mr. Mahoney's knowledge of the power
generation industry and his contacts will prove invaluable to the Company.
In addition to Mr. Mahoney, the Board of Directors recently voted to add three
new members to the Board. These new board members bring significant experience
and expertise to the Company that will be extremely beneficial in assisting the
Company in successfully bringing financially viable products to market.
The Company is continuing its efforts to refine and further develop the
MagneGas(TM) technology. Applications of the MagneGas(TM) technology continue
to show significant promise in the remediation of environmentally harmful waste
products and in use as a clean burning fuel. The Company will need to raise
additional capital to continue to finance these efforts.
It is anticipated that by year-end, the Company will begin producing
MagneGas(TM) on a commercial basis for use as a cutting fuel. The Company is
considering seeking one or more distribution partners to bring MagneGas(TM) to
market for use as a cutting fuel. Additional capital will need to be raised in
order to enable USMagneGas to commence commercial sales of MagneGas(TM) as a
cutting gas.
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.
Discontinuation of Businesses Conducted By SAC-I, Inc.: The Company believes
that the MagneGas(TM) and Waste To Energy technologies offer the most attractive
opportunities to significantly increase shareholder value. Given the limited
resources of the Company, during the quarter ending June 30, 2001, Management
determined that the continued operation of the businesses conducted by SAC-I,
Inc. ("SAC") would detract from its ability to focus all energies and resources
on the successful commercial exploitation of MagneGas(TM) and Waste To Energy
technologies. Accordingly, both the demolition and recycling business segment
and the government contract business segment conducted by SAC are reflected on
the accompanying financial statements as discontinued operations.
14
The demolition contracts entered into by SAC 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. While the Company is
optimistic regarding the potential for reaching agreement with the contracting
parties that will result in SAC receiving additional billings, there can be no
assurances that such additional amounts will be agreed to or if agreement is
reached, when such amounts will be received by the Company.
SAC expects to dispose of its recycling operations through sale of the business
to an identified buyer or others, or if negotiations are unsuccessful,
liquidation of the assets. It is considered likely that the operating assets
attributable to the demolition and recycling operations will be sold at auctions
and via similar means as opposed to a complete sale of the business. A
significant portion of the proceeds will be used to satisfy secured creditors.
Management anticipates selling the government contract operations to individuals
associated with that business. These individuals will have no further
involvement with the Company after the sale. It is anticipated that the sales
price of the government contract business will approximate the amount of
liabilities to be assumed by the buyer.
THREE AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 2000.
Revenues, cost of sales, and gross profits for the three months period ending
June 30, 2001 and 2000 were not comparable because the demolition and recycling
business segment as well as the government contract business segment were
discontinued during 2001. Accordingly, the results of these operations are
included under the Discontinued Operations section of the Condensed Consolidated
Statements of Operation.
Selling, general and administrative expenses for the three-month and six-month
period endings June 30, 2001 are also not comparable to the three-month and six-
month periods ending June 30, 2000 for the reasons stated above. Selling,
general and administrative expenses for the periods ending June 30, 2001 are
related primarily to the 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 to $2,298,539 and $1,390,476 in the
six and three months ended June 30, 2001 from $364,047 and $197,234 in the six
and three months ended March 31, 2000 or a 631% increase for the six month
period. 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.
15
Interest expense decreased for the six and three-month periods ended June 30,
2001 over that of the comparable prior year periods. The amount reflected for
the six-month period ending June 30, 2000 includes a charge of $641,200
attributable principally to the beneficial conversion feature of convertible
debentures issued late in the first quarter of 2000.
Losses from continuing operations for the six and three-month periods ending
June 30, 2001 are not comparable with those reflected for the six and three-
month periods ending June 30, 2000 because the demolition and recycling segment
and the government contract segment conducted by SAC, which were acquired in May
2000, were discontinued during the second quarter of 2001.
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, 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 which is secured
by all of the assets owned by SAC. 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. In
June 2001, an additional $2,500,000 of the revolving line of credit was
converted into 13,333,333 shares of the Company's common stock. In July 2001,
an additional $1,500,000 was converted into 7,407,407 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 June 30, 2001 and
thereafter and this line of credit has been the Company's only significant
source of funds during the period.
The Company intends to finance its operations through the sale of common stock
as well as continued borrowings under the revolving line of credit with a
related party. In July 2001, the Company sold common stock to unrelated parties
raising over $500,000. In July the Company also entered into a preliminary
agreement with an investment organization regarding an Equity Line.
16
Under the Equity Line, the Company will be permitted to require the investor to
acquire certain amounts of the Company's newly issued common stock. There are
numerous contractual conditions that must be met in order for the Company to
require the investor to acquire such stock and there are limitations on the
amount of shares that the Company can require to be sold at any given time. One
of the conditions that must be met is that the Company must register the common
stock with the Securities and Exchange Commission ("SEC"). This will require
the filing of a registration statement which must be approved by the SEC. The
SEC is not required to approve such a statement and may request follow up
information in their review process which could delay such approval. The
Company estimates that the process involving the preparation, filing, and
approval of the registration statement could take between three and nine months.
There are no assurances that the SEC will ultimately approve the registration
statement.
If the registration statement is approved, the amount of stock that the Company
will be able to sell to the investor will be limited based upon the trading
volume of the stock. It is likely that the investor will in turn sell the stock
either to other investors they identify or on the market. Accordingly, shares
sold to the investor will likely increase the number of shares of the Company's
stock trading on the market.
Under the Equity Line agreement, the Company will issue the investor warrants to
acquire 3,600,000 shares of the Company's common stock at a price equal to the
fair market value of the stock on the date the agreement is finalized. These
warrants will be earned by the investor regardless of whether the registration
statement is approved and regardless of whether the Company ever sells any
shares of its common stock to the investor (absent the investor's failure to
comply with the terms of the agreement).
Even if the Company is able to sell shares under the Equity Line, there will be
cash needs to fund the Company's plans during the interim. It is anticipated
that this financing will be derived under the revolving line of credit with a
related party. The Company will also seek out other sources of capital. One
possibility is a bridge loan from the investor providing the Equity Line
described above.
The Company has also attempted to obtain grants that would have allowed it to
partner with a major university to further develop the linear reactor units for
the termination of bacteriological activity in animal waste. The application
was not granted, however, the application will be reconsidered for funding at
the time the research facility receives its next funding. If obtained, the
funding would offset a portion of the costs of continuing research of the
MagneGas(TM) technology.
The Company does not anticipate that any significant royalties will be received
from its licensing of the BORS Lift technology in the short term. The licensee
of this technology has indicated that the commercial development of the BORS
Lift has taken more time and resources than it had anticipated at this point.
17
The cash flow needs for the environmental solutions and alternative fuels
technology operations has caused Management to reconsider the continued
operation of the demolition and recycling business segment and the government
contract business segment. During the second quarter of 2001, the Company
decided to discontinue the operation of its demolition and recycling business
segment and its government contract segment that are conducted through its
wholly-owned subsidiary SAC. This decision was made in anticipation of hiring a
new Chief Executive Officer who will develop the potential of the MagneGas(TM)
and Waste To Energy technologies and the addition of the new members of the
Board of Directors.
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", "Management's plans
regarding liquidity and capital resources" 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 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. 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 April 2001, the Company issued 10,256,410 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 $.14625 per
share.
18
In June 2001, the Company issued 13,333,333 shares of common stock
in satisfaction of $2,500,000 of the revolving credit line owed by the Company
at a conversion rate of $.1875 per share. In July 2001, the Company issued
7,407,407 shares of common stock in satisfaction of an additional $1,500,000 of
the revolving credit line owed by the Company at a conversion rate of $.2025 per
share.
During the second quarter of 2001, the holder of the Company's Series A
Preferred Stock, par value $1.00 per share, elected to converted their remaining
306 shares of the preferred stock into an aggregate of 2,034,333 shares of the
Company's common stock at an aggregate conversion rate of $.1463 per share. In
addition, this party also converted dividends payable on the Preferred Stock of
$87,115 into 500,000 shares of the Company's common stock at a conversion rate
of $.17423 per share.
In May and June 2001, the holder of a convertible note payable converted an
aggregate of $200,000 of principal and $46,224 of interest and penalties into
1,481,129 shares of the Company's common stock at a conversion rate ranging from
$.1463 to $.208 per share.
During July 2001, the Company sold 2,500,000 shares of its common stock to
unrelated parties for an aggregate of $625,000 in cash.
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this Quarterly
Report on Form 10-Q:
None.
(b) Reports on Form 8-K:
None.
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 13, 2001
By: /s/ John Stanton
-------------------
John Stanton, Chairman of the Board
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