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 -September 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)
-----------------------------------------------
(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 November 12, 2001: 142,411,809 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 September 30, 2001
(Unaudited) and December 31, 2000........................................... 1
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and 2000
(Unaudited)................................................................. 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and 2000 (Unaudited)........................ 3-4
Notes to Condensed Consolidated Financial Statements........................ 5-11
Item 2 - Management's Discussion and Analysis or Plan of
Operation................................................................... 12
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds........................... 20
Item 6. Exhibits and Reports on Form 8-K.................................... 20
Signatures............................................................................ 20
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2001 December 31,
(Unaudited) 2000
------------- -------------
Current assets:
Cash $ 93,376 $ 1,518,721
Accounts receivable (net of $525,000 allowance for
future returns) 1,866,847 2,156,677
Inventories 658,202 694,304
Costs and estimated earnings in excess of billings on
uncompleted contracts 43,932 515,804
Other current assets 4,454 1,207
------------ -------------
Total current assets 2,666,811 4,886,713
Property and equipment, net 2,188,163 2,235,440
Goodwill, net 1,500,000 4,210,651
Other assets 820 820
------------ -------------
$ 6,355,794 $ 11,333,624
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 321,184 $ 342,566
Notes payable, related parties - 232,636
Accounts payable 3,276,804 3,646,377
Accrued expenses and other current liabilities 2,261,377 1,693,253
Dividends payable - 81,760
Billings in excess of costs and estimated earnings on
uncompleted contracts 18,736 101,206
------------ -------------
Total current liabilities 5,878,101 6,097,798
Notes and other payables, related parties, less current
maturities 1,881,666 3,772,689
Long-term debt, less current maturities 251,174 371,340
Convertible debentures 161,000 700,000
------------ -------------
Total liabilities 8,171,941 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, 142,411,809 (2001) and 84,834,825 (2000)
shares issued and outstanding 14,241 8,484
Additional paid-in capital 39,040,037 30,479,037
Accumulated deficit (39,602,365) (28,828,125)
------------ -------------
(548,087) 1,659,857
Less treasury stock (1,950,000 shares at cost) (1,268,060) (1,268,060)
------------ -------------
Total stockholders' equity (1,816,147) 391,797
------------ -------------
$ 6,355,794 $ 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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------- ------------ ------------- -------------
Revenue $ - $ - $ - $ -
Cost of sales - - - -
------------- ------------ ------------- -------------
Gross profit - - - -
Selling, general and administrative
expenses 225,593 308,765 916,901 1,297,049
Research and development expenses 1,682,857 801,846 3,981,396 1,165,893
------------- ------------ ------------- -------------
Loss from continuing operations before
income taxes and other items (1,908,450) (1,110,611) (4,898,297) (2,462,942)
------------- ------------ ------------- -------------
Other income (expense):
Interest expense (256,519) (15,074) (381,121) (870,834)
------------- ------------ ------------- -------------
Loss from continuing operations (2,164,969) (1,125,685) (5,279,418) (3,333,776)
Discontinued operations (no applicable
income taxes):
Loss from discontinued operations - (543,779) (1,959,636) (3,359,236)
Loss on disposal of business segment (950,348) (502,337) (3,529,831) (2,565,048)
------------- ------------ ------------- -------------
Loss before extraordinary item (3,115,317) (2,171,801) (10,768,885) (9,258,060)
Extraordinary gain on
extinguishment of debt (no
applicable income tax) - 607,097 - 691,986
Net loss (3,115,317) (1,564,704) (10,768,885) (8,566,074)
Preferred stock dividends - (13,913) (5,355) (34,318)
------------- ------------ ------------- -------------
Net loss attributable to common
stockholders ($ 3,115,317) ($1,578,617) ($10,774,240) ($8,600,392)
============= ============ ============= =============
Loss per common share attributable
to common stockholders:
Continuing operations ($.02) ($.02) ($.04) ($.06)
Discontinued operations - (.01) (.05) (.11)
Extraordinary gain - .01 - .01
------------- ------------ ------------- -------------
Net loss ($.02) ($.02) ($.09) ($.16)
============= ============ ============= =============
Weighted average shares outstanding 138,485,967 74,886,910 117,725,123 54,417,326
============= ============ ============= =============
See notes to condensed consolidated financial statements.
2
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
------------ -----------
Cash flows from operating activities:
Net loss ($10,768,885) ($8,566,074)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization of goodwill 2,771,603 353,541
Gain on disposal of property and equipment (5,175) -
Extraordinary gain on extinguishment of debt - (691,986)
Write-down of assets in connection with
discontinued operations and loss on disposal - 2,151,072
Stock based compensation - 1,464,573
Interest expense funded from debt conversion to
equity - 73,620
Amortization of beneficial conversion feature of
convertible debenture - 641,200
Increase (decrease) in cash due to changes in:
Current assets 794,557 (2,180,214)
Current liabilities 173,626 1,818,021
------------ -----------
Net cash used in operating activities (7,034,274) (4,936,247)
------------ -----------
Cash flows from investing activities:
Cash acquired in business acquisition - 517,203
Acquisition of property and equipment (8,500) (346,045)
------------ -----------
Net cash used in investing activities (8,500) 171,158
------------ -----------
Cash flows from financing activities:
Proceeds from sale of capital stock 650,000 1,888,410
Principal repayments on long-term debt (141,548) (149,022)
Proceeds from long-term debt - 700,000
Proceeds from related party notes payable 5,108,977 2,326,264
------------ -----------
Net cash provided by financing activities 5,617,429 4,765,652
------------ -----------
(Continued)
3
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
---------- -------
Increase (decrease) in cash (1,425,345) 563
Cash, beginning of period 1,518,721 72,224
---------- -------
Cash, end of period $ 93,376 $72,787
=========== =======
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 $539,000 of convertible debentures along with accrued interest of
$129,891 to 3,868,307 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 NINE MONTH PERIODS ENDED SEPTEMBER 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 nine
months ended September 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 Reactor. The Plasma
Arc Flow Reactors have been proven to effectively treat liquid wastes and
produce an alternative fuel called MagneGas. 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 NINE MONTH PERIODS ENDED SEPTEMBER 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, LLC ("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 September 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.
During 2000 and 2001, the lender agreed to convert significant amounts of
debt owed under the credit lines into shares of the Company's common stock.
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 $3,200,000 at September 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 NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
2. Management's Plans Regarding Liquidity and Capital Resources (continued):
The Company, through USMagneGas, EFWE, and other entities, 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.
The Company is continuing 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 for use as a cutting fuel;
and (3) MagneGas 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 tires. 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.
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 As a Cutting Fuel: The Company, through USMagneGas, will seek to be
a sizeable producer of certain 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.
7
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
2. Management's plans regarding liquidity and capital resources (continued):
MagneGas Recycler Units: USMagneGas will also focus on selling its liquid
waste stream 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: During the third quarter, the Company was able to identify an
equity line having more favorable terms than the one referred to in the Form
10-Q for the quarter ending June 30, 2001. The Company and the new investor
are close to executing an investment agreement.
Under the Investment Agreement, the Company will be able to require the
Investor to acquire certain amounts of its common stock at a price based upon
95% of the average of the lowest trading prices during the five trading days
following the date on which the Company provides notice to the Investor. The
Investor will deduct an additional 5% of the gross proceeds from the sale as
an underwriting commission. The Company is also required to issue warrants
to the Investor for the purchase of 100,000 shares of the Company's common
stock which may be exercised at any time during the next five years.
8
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
2. Management's plans regarding liquidity and capital resources (continued):
There are limitations on the number of shares that the Company may require
the Investor to acquire during any period. Typically, the Company will be
able to require the Investor to acquire a number of shares equal to up to 15%
of the trading volume of the Company's stock during the five day trading
periods contemplated in the agreement.
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.
If the Company does not sell certain amounts of stock to the Investor during
the 15 month period following the date the registration statement is declared
effective, the Company will be required to issue to the Investor 200,000
shares of common stock.
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.
The proceeds that may be raised under the Equity Line described above will
not be sufficient to finance the needs of the Company in the foreseeable
future. Management believes it will be successful in efforts to raise
additional financing which may be required, 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.
9
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 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 four 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.
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. In July 2001, an additional $1,500,000 of the
revolving line of credit was converted into 7,407,407 shares of the Company's
common stock.
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.
10
EARTHFIRST TECHNOLOGIES, INCORPORATED
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
4. Stockholders' equity (continued):
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. During the third quarter,
the note holder elected to convert an aggregate of $219,000 face value of the
debentures, plus $57,867 of accrued interest and penalties, into 1,374,678
shares of the Company's common stock. Subsequent to these conversions, there
remains outstanding a principal balance of $161,000 of the convertible notes,
exclusive of accrued interest and penalties.
11
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 September 30, 2001 condensed statements and notes thereto.
The Company realized that it needed additional experienced personnel in order to
transform the technological knowledge that has been developed by the Company
into commercially viable products and to introduce these products to the market.
The first steps in this transformation were to hire James V. Mahoney as the new
Chief Executive Officer and President of the Company and to add three new
members to its Board of Directors (the "Board") in addition to Mr. Mahoney.
The four new board members have the experience and insights that will enable the
Company to either prove or disprove the viability of the technologies it
possesses and, if one or more of the technologies is successfully proven, to
take such technologies to a financially rewarding level for the Company and its
shareholders. Mr. Mahoney has a proven track record of moving research and
development into successful operations and in running operating companies in
commercial endeavors. The other new members of the Board bring a wealth of
knowledge and experience in both business and legal matters in operating
successful companies. These individuals have the contacts and skill sets to
enable the Company to take the actions necessary to advance at this juncture of
its existence.
Mr. Mahoney has added, and continues to add, technical expertise not previously
possessed by the Company in its development of the technologies. These
resources supplement the efforts previously conducted by the Company and are
primarily focused on developing test protocols and methods for gathering
technical evidence supporting the viability of the technologies for commercial
applications. These resources are also participating in the development and
refinement of the technologies for commercial purposes.
Management has concluded that the Company's progress with its technologies
needed to be improved. Management restructured the Company to increase the speed
of development of commercial improvement. As a result, the Director of Research
and Development for USMagneGas, Inc. ("USMagneGas") as well as the Vice
President of Sales and Development for EarthFirst Waste To Energy, LLC ("EFWE")
are no longer employed by the Company or its subsidiaries.
12
Management believes that it is in the best interest of the shareholders to
utilize the talents of skilled professionals not previously associated with the
technologies to independently perform appropriate testing as well as identify
potential applications of the technologies and ultimately resolve the commercial
viability of the technologies for such applications. Other management changes
are likely to be made in the effort to streamline the development of the
technologies and commercial activities. Management continues to believe that
both technologies show significant promise for creating solutions for very
serious waste reclamation and recycling problems.
Commercial Operations: The Company intends to continue to focus its commercial
operations in the areas involving the production and sale of: (1) tire recycling
processors; (2) gas for use as a cutting fuel; and (3) recycler units.
Tire Recycling Processors
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.
Since the execution of the agreement with Tiarga, 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. The conditions requested by Tiarga involve the completion
of various testing of the technology to confirm that the units will be able to
achieve the expected levels of performance as well as adequately documenting the
operating costs.
The Company is confident it can focus additional technical resources not
previously associated with the development of this technology to improve the
quality and completion timing of testing believed necessary to independently
verify the technology and determine whether it can economically be applied to
commercial uses.
The fulfillment of the agreement with Tiarga, as well as any other sales
involving this technology, will depend upon achieving successful results in this
additional testing. While initial results are encouraging, there are no
assurances that this testing will demonstrate that this technology can be
implemented in a commercially viable manner.
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Plasma Arc Reactors and Gas Technologies
The Company is continuing its efforts to refine and further develop the plasma
arc reactor technology. As discussed in the Company's most recent Form 10-KSB,
in July 2000, the Company entered into a series of agreements with Ruggero Maria
Santilli ("Santilli"), the Institute for Basic Research, Inc. ("IBR"), and
Hadronic Press, Inc. ("HPI").
A Consulting Agreement was entered into on July 7, 2000 by and between Santilli,
IBR, and USMagneGas. The Consulting Agreement was terminated when Santilli
resigned as Director of Research and Development for USMagneGas.
Management believes that the Company is capable of performing, through new
experts and other technical advisors, the necessary testing to determine whether
commercially viable applications of this technology exist.
A World-Wide Exclusive Assignment, License and Royalty Agreement (the "Royalty
Agreement") was entered into on July 5, 2000 by and between HPI and the Company.
The license required excessive expenses with few, if any, perceived benefits for
the Company. Consequently the Royalty Agreement was terminated because it is
unnecessary to the Company's efforts to commercialize its technology.
The Company has engaged legal counsel with the law firm of Winston & Strawn who
specialize in intellectual property rights, contract law and patents to assist
it in these matters. The Company, after extensive review by and discussions
with legal counsel, concluded that it possesses all of the rights necessary to
continue the development of the technologies necessary to continue all
commercialization initiatives. It is possible that HPI or other parties may
attempt to challenge this position.
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Discontinuation of Businesses Conducted By SAC-I, Inc.: 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 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.
SAC is in the process of winding up its performance obligations with respect to
the bridge demolition project in Palm Beach, Florida. The project involved the
removal of significantly more concrete and other materials than had originally
been contemplated by the parties at the time the project was begun. This
resulted in SAC-I incurring significantly more expenditures than had originally
been estimated. SAC-I is negotiating with the State of Florida Department of
Transportation to obtain additional billings for the additional work performed.
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 hopes 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.
SAC-I is continuing to acquire and resell scrap. Machinery and equipment have
been sold by SAC-I for an aggregate amount of approximately $36,000.
It is anticipated that the government contract operations conducted by SAC-I
will be sold to the individual who historically has operated this business for
an amount equal to the difference between any accounts receivable associated
with this business and any accounts payable. It is also anticipated that all
accounts payable and other liabilities of the business will be assumed by the
buyer.
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THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2000.
Revenues and cost of sales for the three-month and nine-month periods ending
September 30, 2001 and 2000 were comparable because the only business segment
conducted by the Company is not currently producing revenues. Both 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 nine-month
periods ending September 30, 2001 decreased by approximately 27% and 29%
compared to the three-month and nine-month periods ending September 30, 2000.
This decrease is attributable to the conclusion of certain activities of an
administrative nature that occurred during 2000 as a result of an acquisition
and associated with the creation of certain contracts. Selling, general and
administrative expenses for the periods ending September 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 $3,981,396 and $1,682,857 in the
nine and three months ended September 30, 2001 from $1,165,893 and $801,846 in
the nine and three months ended September 30, 2000 or a 341% increase for the
nine month period. The increase is attributable to the increased efforts
devoted to the MagneGas 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 that were to be spent on
filing patent applications to protect the Company's technology ownership.
Interest expense increased for the three-month period ended September 30, 2001
over that of the comparable prior year periods due principally to borrowings
pursuant to two separate revolving lines of credit from a related party. The
amount reflected for the nine-month period ending September 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. Interest
expense for the nine-month period ended September 30, 2001 decreased from the
comparable nine month period for the prior year because there was no comparable
interest attributable to any beneficial conversions in the later period.
Losses from continuing operations for the nine and three-month periods ending
September 30, 2001 increased compared to those reflected for the nine and three-
month periods ending September 30, 2000 by approximately 58% and 92%
respectively
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primarily as a result of increases in the amount of research and development
expenditures.
Losses from discontinued operations between the periods is not comparable
because the losses for periods ending during 2000 include the results of
operations that were terminated and wound down during 2000. Similarly, the loss
on disposal of business segments involves different business segments in the
2001 and 2000.
There has been no debt extinguishments during 2001 as there was during 2000.
Preferred stock dividends have decreased in 2001 from comparable periods during
2000 because the preferred stock has been converted into common stock over a
period of time.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced recurring net losses since its inception and, as
such, has experienced negative operating cash flows through September 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 September 30, 2001 and
thereafter and this line of credit has been the Company's only significant
source of funds.
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. Recently, the Company also entered into a preliminary agreement
with an investment organization regarding an Equity Line.
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.
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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.
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.
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.
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 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 differ from any future results, performance, or achievements
expressed or implied by such forward-looking statements and to vary
significantly from reporting period to reporting period. Such factors include,
among others, those listed under Item 1 of the Form 10-KSB and other factors
detailed from time to time in the Company's other filings with the Securities
and Exchange Commission. Although management believes that the assumptions made
and expectations reflected in the forward-looking statements are reasonable,
there is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual future results will not be different from the
expectations expressed in this report.
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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 July 2001, the Company issued 7,407,407 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 $.2025 per
share.
Between July 30, 2001 and September 4, 2001, the holder of a convertible
note payable converted an aggregate of $219,000 of principal and $57,867 of
interest and penalties into 1,374,951 shares of the Company's common stock at a
conversion rate ranging from $.176 to $.216 per share.
Item 6. Exhibits and Reports on Form 8-K
(c) Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EarthFirst Technologies, Incorporated
(Registrant)
Date: November 13, 2001
By: /s/ James V. Mahoney
----------------------------------------
James V. Mahoney, Chief Executive Officer
and President
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