As filed with the Securities and Exchange Commission on May 27, 2005
Registration Number 333-____________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EARTHFIRST TECHNOLOGIES, INC0RPORATED
(Name of Small Business Issuer in its Charter)
FLORIDA 3990 59-3462501
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer)
incorporation or organization) Classification Code Number) Identification No.
2515 Hanna Avenue, Tampa, Florida 33610 (813) 238-5010
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(Address and telephone number of principal executive offices)
Copies to:
Darrin M. Ocasio, Esq.
Yoel Goldfeder, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor
New York, New York 10018
(212) 930-9700
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to Amount To Be Proposed Maximum Offering Proposed Maximum Amount of
be Registered Registered (1) Price Per Share Aggregate Offering Price Registration Fee
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Common Stock, $.0001 par value per 61,578,948(2) $0.16(3) $9,852,631.68 $1,159.66
share, issuable upon conversion of
convertible notes
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Common Stock, $.0001 par value per 16,744,185 $0.255(4) $4,269,767.18 $502.55
share, issuable upon exercise of
common stock purchase warrants
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Common Stock, $.0001 par value per 36,856,002 $0.01(4) $368,560.02 $43.38
share, issuable upon exercise of
common stock options
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Total 115,179,135 $14,490,958.88 $1,705.59
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(1) Includes shares of our common stock, par value $0.0001 per share, which may
be offered pursuant to this registration statement, which shares are issuable
upon conversion of secured convertible notes, the exercise of warrants and the
exercise of options held by the selling stockholders. In addition to the shares
set forth in the table, the amount to be registered includes an indeterminate
number of shares issuable upon conversion of the secured convertible notes and
exercise of the warrants, as such number may be adjusted as a result of stock
splits, stock dividends and similar transactions in accordance with Rule 416.
The number of shares of common stock registered hereunder represents a good
faith estimate by us of the number of shares of common stock issuable upon
conversion of the secured convertible notes, the exercise of warrants and the
exercise of options. For purposes of estimating the number of shares of common
stock to be included in this registration statement, we calculated a good faith
estimate of the number of shares of our common stock that we believe will be
issuable upon conversion of the secured convertible notes and upon exercise of
the warrants to account for market fluctuations, and antidilution and price
protection adjustments, respectively. Should the conversion ratio result in our
having insufficient shares, we will not rely upon Rule 416, but will file a new
registration statement to cover the resale of such additional shares should that
become necessary. In addition, should a decrease in the exercise price as a
result of an issuance or sale of shares below the then current market price
result in our having insufficient shares, we will not rely upon Rule 416, but
will file a new registration statement to cover the resale of such additional
shares should that become necessary.
(2) Includes a good faith estimate of the shares underlying the secured
convertible notes to account for market fluctuations.
(3) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the average
of the high and low price as reported on the Over-The-Counter Bulletin Board on
May 24, 2005, which was $0.16 per share.
(4) Calculated in accordance with Rule 457(g)(1).
The registrant hereby amends this registration statement on such date or date(s)
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the commission acting pursuant to said Section
8(a) may determine.
The information in this prospectus is not complete and may be changed. The
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
Subject to Completion, Dated May 27, 2005
EARTHFIRST TECHNOLOGIES, INCORPORATED
115,179,135 Shares of Common Stock
The selling stockholder named in this prospectus are offering to sell
up to 115,179,135 shares of common stock of EarthFirst Technologies,
Incorporated, including up to 41,052,632 shares of common stock underlying
secured convertible notes, 11,162,790 shares of common stock underlying warrants
to purchase common stock, 24,570,668 shares of common stock underlying options
to purchase common stock which were previously issued by us to the selling
stockholders in private transactions and 38,393,045 shares as a good faith
estimate of additional shares that may be issued to the selling stockholder
pursuant to our obligations under a registration rights agreement. We will not
receive any proceeds from the resale of shares of our common stock.
Our common stock currently trades on the Over the Counter Bulletin
Board ("OTC Bulletin Board") under the symbol "EFTI".
On May 24, 2005, the last reported sale price for our common stock on
the OTC Bulletin Board was $0.165 per share.
The securities offered in this prospectus involve a high degree of
risk. See "Risk Factors" beginning on page 3 of this prospectus to read about
factors you should consider before buying shares of our common stock.
The selling stockholders are offering these shares of common stock. The
selling stockholders may sell all or a portion of these shares from time to time
in market transactions through any market on which our common stock is then
traded, in negotiated transactions or otherwise, and at prices and on terms that
will be determined by the then prevailing market price or at negotiated prices
directly or through a broker or brokers, who may act as agent or as principal or
by a combination of such methods of sale. The selling stockholders will receive
all proceeds from the sale of the common stock. For additional information on
the methods of sale, you should refer to the section entitled "Plan of
Distribution."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is ________, 2005
TABLE OF CONTENTS
Page
Prospectus Summary...................................................... 1
Risk Factors............................................................ 3
Forward Looking Statements.............................................. 7
Use of Proceeds......................................................... 7
Management's Discussion and Analysis of
Financial Condition or Plan of Operation................................ 8
Description of Business................................................. 15
Description of Property................................................. 17
Legal Proceedings....................................................... 17
Directors and Executive Officers........................................ 18
Executive Compensation.................................................. 20
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure..................................... 21
Market for Common Equity and Related
Stockholder Disclosure.................................................. 21
Security Ownership of Certain Beneficial Owners
and Management.......................................................... 23
Selling Shareholders.................................................... 24
Certain Relationships and Related Transactions.......................... 24
Description of Securities............................................... 26
Indemnification for Securities Act Liabilities.......................... 26
Plan of Distribution.................................................... 27
Legal Matters........................................................... 30
Experts................................................................. 30
Available Information................................................... 30
Index to Financial Statements........................................... F-1
You may only rely on the information contained in this prospectus or that we
have referred you to. We have not authorized anyone to provide you with
different information. This prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the common stock
offered by this prospectus. This prospectus does not constitute an offer to sell
or a solicitation of an offer to buy any common stock in any circumstances in
which such offer or solicitation is unlawful. Neither the delivery of this
prospectus nor any sale made in connection with this prospectus shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date of this prospectus or that the information contained by
reference to this prospectus is correct as of any time after its date.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including, the
section entitled "Risk Factors" before deciding to invest in our common stock.
EarthFirst Technologies, Incorporated is referred to throughout this prospectus
as "EarthFirst" "we" or "us."
GENERAL
We were incorporated in the State of Florida in 1997. We are a
specialized holding company engaged in the research, development and
commercialization of technologies for the production of alternative fuel sources
and the destruction and/or remediation of liquid and solid waste. We are
committed to technologies that will produce economically and environmentally
superior products from carbon-rich solid and liquid materials considered wastes.
As part of our efforts, we are also attempting to develop and commercialize
applications of our technologies for the efficient production of alternative
fuels. Additional applications of our technologies are focused on the
environmentally desirable processing, destruction, purification, and/or
remediation of harmful liquid and solid wastes. We also supply electrical
contracting services internationally.
We maintain our principal executive offices at 2515 Hanna Avenue,
Tampa, Florida 33610 and our phone number is (813) 238-5010 and our facsimile
number is (813) 635-2073. We maintain an internet web site at
http://www.earthfirsttech.com. The information on our web site is not part of
this prospectus. You can review our periodic public filings including financial
statements at the Securities and Exchange Commission ("SEC") internet web site
at http://www.sec.gov.
THIS OFFERING
Shares offered by Selling
Stockholders.................................................... Up to 115,179,135 shares of common stock, including
41,052,632 shares of common stock issuable upon conversion of
secured convertible notes, 11,162,790 shares of common stock
issuable upon the exercise of warrants, 24,570,668 shares of
common stock issuable upon the exercise of options and
38,393,045 shares as a good faith estimate of additional
shares that may be issued to the selling stockholder pursuant
to our obligations under a registration rights agreement.
Common Stock to be outstanding after the offering............... 606,592,495*
Use of Proceeds................................................. We will not receive any proceeds from the sale of the common
stock. However, we will receive the exercise price of any
common stock we sell to the selling stockholders upon
exercise of the warrants and options. We expect to use the
proceeds received from the exercise of their warrants and
options, if any, for general working capital purposes.
Risk Factors.................................................... The purchase of our common stock involves a high degree of
risk. You should carefully review and consider "Risk Factors"
beginning on page 3.
OTC Bulletin Board
Trading Symbol.................................................. EFTI
* The above information regarding common stock to be outstanding after the
offering is based on 491,413,360 shares of common stock outstanding as of May
24, 2005 and assumes the subsequent conversion of our issued secured convertible
notes and exercise of warrants by our selling stockholders.
EXPLANATORY NOTE: ON MARCH 30, 2005, WE ENTERED INTO A SECURITIES PURCHASE
AGREEMENT AND SECURITY AGREEMENT WITH LAURUS MASTER FUND, LTD. CERTAIN ISSUANCES
OF SHARES OF COMMON STOCK PURSUANT TO THESE AGREEMENTS WOULD REQUIRE US TO ISSUE
SHARES OF COMMON STOCK IN EXCESS OF OUR AUTHORIZED CAPITAL. WE HAVE FILED AN
INFORMATION STATEMENT WITH THE SECURITIES AND EXCHANGE COMMISSION, SEEKING TO
RATIFY THE FILING OF A CERTIFICATE OF AMENDMENT TO OUR CERTIFICATE OF
INCORPORATION TO INCREASE OUR AUTHORIZED COMMON STOCK FROM 500,000,000 TO
750,000,000. WE INTEND ON FILING A CERTIFICATE OF AMENDMENT TO OUR CERTIFICATE
OF INCORPORATION 20 DAYS AFTER OUR INFORMATION STATEMENT IS MAILED TO OUR
SHAREHOLDERS PURUSANT TO WRITTEN CONSENT OF STOCKHOLDERS HOLDING A MAJORITY OF
THE SHARES OF OUR COMMON STOCK. WE ARE REGISTERING 115,179,135 SHARES OF COMMON
STOCK PURSUANT TO THIS PROSPECTUS THAT ARE UNDERLYING THE CONVERTIBLE NOTES,
WARRANTS AND OPTIONS ISSUED IN CONNECTION WITH THE SECURITIES PURCHASE
AGREEMENT.
1
To obtain funding for general corporate purposes we entered into
agreements with Laurus Master Funds, Ltd, a Cayman Islands corporation
("Laurus"), pursuant to which we sold convertible debt, an option and a warrant
to purchase our common stock to Laurus in a private offering pursuant to
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended. The securities being sold to Laurus include the following:
o a secured convertible minimum borrowing note and a secured revolving
note with an aggregate principal amount not to exceed $5,000,000;
o a secured convertible term note with a principal amount of
$3,000,000;
o a common stock purchase warrant to purchase 11,162,790 shares of our
common stock, at a purchase price of $0.23 for the first 5,581,395
shares and $0.28 for any additional shares, exercisable for a period
of seven years; and
o an option to purchase 24,570,668 shares of our common stock, at a
purchase price equal to $0.01 per share, exercisable for a period of
six years
At the closing of the foregoing financing from Laurus, on March 31,
2005, we received $3,000,000 in connection with the convertible term note. In
addition, we are permitted to borrow an amount based upon our eligible accounts
receivable and inventory, pursuant to the convertible minimum borrowing note and
the revolving note. Accordingly at the closing, we received an additional
$3,600,000 for an aggregate of $6,600,000 in financing from Laurus.
We must pay certain fees in the event the facility is terminated prior
to expiration. Our obligations under the notes are secured by all of our assets,
including but not limited to inventory, accounts receivable and a pledge of the
stock of Electric Machinery Enterprises, Inc., EarthFirst Resources, Inc., World
Environmental Solutions Company, Inc., EarthFirst Investments, Inc., EM
Enterprise Resources, Inc. and EME Modular Structures, Inc., our active
subsidiaries. The notes mature on March 30, 2008. Annual interest on the
convertible minimum borrowing note and the revolving note is equal to the "prime
rate" published in The Wall Street Journal from time to time, plus 2.0%,
provided, that, such annual rate of interest may not be less than 7.0%, subject
to certain downward adjustments resulting from certain increases in the market
price of our common stock. Annual interest on the convertible term note is equal
to the "prime rate" published in The Wall Street Journal from time to time, plus
2.5%, subject to certain downward adjustments resulting from certain increases
in the market price of our common stock.
The principal amount of the secured convertible term note is repayable
at the rate of $100,000 per month together with accrued but unpaid interest,
commencing on October 1, 2005. Such amounts may be paid, at the holder's option
(i) in cash with a 2% premium; or (ii) in shares of common stock, assuming the
shares of common stock are registered under the Securities Act of 1933. If paid
in shares of common stock the number of shares to be issued shall equal the
total amount due, divided by $0.19. If the average closing price of the common
stock for five consecutive trading days prior to an amortization date is equal
to or greater than $.209, we may require the holder to convert into common stock
an amount of principal, accrued interest and fees due under the term note equal
to a maximum of 25% of the aggregate dollar trading volume of the common stock
for the 22 consecutive trading days prior to a notice of conversion. We may
redeem the term note in cash by paying the holder 125% of the principal amount,
plus accrued interest during the first year of the note, 115% of the principal
amount, plus accrued interest during the second year of the note and 110% of the
principal amount, plus accrued interest thereafter. The holder of the term note
may require us to convert all or a portion of the term note, together with
interest and fees thereon at any time. The number of shares to be issued shall
equal the total amount to be converted, divided by $0.19.
The principal amount of the secured convertible minimum borrowing note,
together with accrued interest thereon is payable on April 1, 2005. The secured
convertible minimum borrowing note may be redeemed by us in cash by paying the
holder 103% of the principal amount, plus accrued interest during the first year
of the note, 102% of the principal amount, plus accrued interest during the
second year of the note and 101% of the principal amount, plus accrued interest
thereafter. The holder of the term note may require us to convert all or a
portion of the term note, together with interest and fees thereon at any time.
The number of shares to be issued shall equal the total amount to be converted,
divided by $0.19.
2
Upon an issuance of shares of common stock below the fixed conversion
price, the fixed conversion price of the notes will be reduced accordingly. The
conversion price of the secured convertible notes may be adjusted in certain
circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution.
120% of the full principal amount of the convertible notes are due upon
default under the terms of convertible notes. Laurus has contractually agreed to
restrict its ability to convert the convertible notes would exceed the
difference between the number of shares of common stock beneficially owned by
the holder or issuable upon exercise of the warrant and the option held by such
holder and 9.99% of the outstanding shares of our common stock.
RISK FACTORS
An investment in our shares involves a high degree of risk. Before
making an investment decision, you should carefully consider all of the risks
described in this prospectus. If any of the risks discussed in this prospectus
actually occur, our business, financial condition and results of operations
could be materially and adversely affected. If this were to happen, the price of
our shares could decline significantly and you may lose all or a part of your
investment. The risk factors described below are not the only ones that may
affect us. Additional risks and uncertainties that we do not currently know
about or that we currently deem immaterial may also adversely affect our
business, financial condition and results of operations. Our forward-looking
statements in this prospectus are subject to the following risks and
uncertainties. Our actual results could differ materially from those anticipated
by our forward-looking statements as a result of the risk factors below. See
"Forward-Looking Statements."
RISKS RELATED TO OUR BUSINESS:
WE HAVE HAD A HISTORY OF LOSSES AND MAY NEVER COMMERCIALIZE ANY OF OUR PRODUCTS
OR SERVICES OR EARN A PROFIT.
We have incurred losses since we were formed. At December 31, 2004, our
accumulated deficit was $(49,989,972). Our losses to date have resulted
principally from expenses incurred in our research and development programs,
including beta testing, and from general and administrative and sales and
marketing expenses. Our first revenues from operations were generated in the
fourth quarter of 2004, subsequent to our acquisition of Electric Machinery
Enterprises, Inc. We do not expect to incur substantial net losses for the
foreseeable future as a result of this acquisition and the prospect of finally
commercializing our solid waste technology products. We cannot predict the
extent of future net losses, or when we may attain profitability, if at all. If
we are unable to generate significant revenue from our electrical contracting
business or the sale of our solid waste technology products or attain
profitability, we will not be able to sustain operations.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, AND OUR FAILURE
TO OBTAIN FUNDING WHEN NEEDED MAY FORCE US TO DELAY, REDUCE OR ELIMINATE OUR
PRODUCT DEVELOPMENT PROGRAMS OR COLLABORATION EFFORTS.
To date, our sources of cash have been primarily limited to related party
funding and the sale of our equity securities. On March 30, 2005, we closed on
an $8,000,000 credit facility as a committed source of capital. If in the
future, our capital resources are insufficient to meet future requirements, we
may have to raise additional funds to continue the development,
commercialization, marketing and sale of our technologies.
We cannot be certain that additional funding will be available on
acceptable terms, or at all. To the extent that we raise additional funds by
issuing equity securities, our stockholders may experience significant dilution.
Any debt financing, if available, may involve restrictive covenants that impact
our ability to conduct our business. If we are unable to raise additional
capital if required or on acceptable terms, we may have to significantly delay,
scale back or discontinue the development and/or commercialization of one or
more of our product candidates, restrict our operations or obtain funds by
entering into agreements on unattractive terms.
WE HAVE A LIMITED OPERATING HISTORY WHICH MAKES IT DIFFICULT TO ANALYZE OUR
FUTURE PROSPECTS.
We were organized on August 4, 1997 and up until 2004 when we acquired both
World Environmental Solutions Company, Inc. and Electric Machinery Enterprises,
Inc., we have conducted only limited operations consisting of negotiating
licenses to use our technologies, further research and development, including
beta testing, and limited sales efforts. Subsequent to the acquisition of these
two subsidiaries, we have generated a consistent revenue stream from electrical
contracting and have moved closer to the commercialization of our solid waste
technologies. However, there are no assurances that can be given that we will
develop a marketing and sales program which will generate significant revenues
from the licensing and sales of our solid waste technologies. The likelihood of
our success must be viewed in light of the delays, expenses, problems and
difficulties frequently encountered by an enterprise coming out of its
development stage, many of which are beyond our control. We are subject to all
the risks inherent in the development and marketing of new products.
3
IMPROVEMENTS OR CHANGES IN TECHNOLOGY MAY MAKE OUR PRODUCTS OBSOLETE OR
DIFFICULT TO SELL AT A PROFIT OR AT ALL.
There are many competitors seeking to develop efficient means of recycling
and disposing of various forms of solid wastes. The effect of numerous federal
and state environmental regulations has been to encourage the originators of the
waste, governmental entities, and entrepreneurial enterprises to seek to develop
more effective and efficient solutions. It is therefore always possible that
competitors might develop more effective and efficient waste treatment processes
that would render the Company's technology obsolete.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND WILL RELY UPON THIRD PARTY CONTRACT
MANUFACTURERS.
To be successful, we must manufacture, or contract with third parties for
the manufacture of our current and future products in sufficient quantities and
on a timely basis, while maintaining product quality and acceptable
manufacturing costs. Should for some reason our third party manufacturers be
unable to fulfill their obligation to us, or are no longer able to obtain key
elements from a supplier, this could cause us a delay in producing solid waste
systems for sale or distribution. These delays could adversely affect our
operations or sales or make continued operations or sales unprofitable.
THE NATURE OF OUR PRODUCTS SUBJECTS US TO PRODUCT LIABILITY RISKS.
A malfunction of or design defect in certain of our products or improper
design, construction, installation or servicing of facility and equipment
infrastructure could result in liability, tort or warranty claims. Although we
attempt to reduce the risk of exposure from such claims through warranty
disclaimers and liability limitation clauses in our sales agreements and by
maintaining product liability insurance, we cannot assure you that these
measures will be effective in limiting our liability for any damages. Any
liability for damages resulting from product malfunctions or services provided
could be substantial and could have a material adverse effect on our business
and operating results. In addition, a well-publicized actual or perceived
malfunction or impropriety involving our products or service could adversely
affect the market's perception of our products in general, regardless of whether
any malfunction or impropriety is attributable to our products or services. This
could result in a decline in demand for our products and services, which would
have a material adverse effect on our business and operating results.
COMPETITION FROM COMPANIES WITH ALREADY ESTABLISHED MARKETING LINKS TO OUR
POTENTIAL CUSTOMERS MAY ADVERSELY AFFECT OUR ABILITY TO MARKET OUR PRODUCTS.
Current and potential competitors have longer operating histories, larger
customer bases, greater brand name recognition and significantly greater
financial, marketing and other resources than we have. Certain of our
competitors may be able to secure product from vendors on more favorable terms,
devote greater resources to marketing and promotional campaigns, and adopt more
aggressive pricing or inventory availability policies, than we will. There can
be no assurance that we will be able to compete successfully against current and
future competitors, and competitive pressures faced by us are likely to have a
materially adverse affect on our business, results of operations, financial
condition and prospects.
OUR FAILURE TO MAINTAIN THE PROPRIETARY NATURE OF OUR TECHNOLOGY, INTELLECTUAL
PROPERTY AND MANUFACTURING PROCESSES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION AND ON OUR ABILITY TO
COMPETE EFFECTIVELY.
We principally rely upon patent, trademark, copyright, trade secret and
contract law to establish and protect our proprietary rights. There is a risk
that claims allowed on any patents or trademarks that we hold may not be broad
enough to protect our technology. In addition, our patents or trademarks may be
challenged, invalidated or circumvented and management cannot be certain that
the rights granted thereunder will provide us with competitive advantages.
Moreover, any current or future issued or licensed patents, or trademarks, or
currently existing or future developed trade secrets or know-how may not afford
sufficient protection against competitors with similar technologies or
processes, and the possibility exists that certain of our already issued patents
or trademarks may infringe upon third party patents or trademarks or be designed
around by others.
In addition, there is a risk that others may independently develop
proprietary technologies and processes, which are the same as, substantially
equivalent or superior to those possessed by us or become available in the
market at a lower price.
There is a risk that we have infringed or in the future will infringe
patents or trademarks owned by owners, that we will need to acquire licenses
under patents or trademarks belonging to others for technology potentially
useful or necessary to us and that licenses will not be available on acceptable
terms, if at all.
We may have to litigate to enforce our patents or trademarks or to
determine the scope and validity of other parties' proprietary rights.
Litigation could be very costly and divert management's attention. An adverse
outcome in any litigation may have a severe negative effect on our financial
results and stock price. To determine the priority of inventions, we may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office or oppositions in foreign patent and trademark offices, which
could result in substantial cost to us and limitations on the scope or validity
our patents or trademarks.
4
We also rely on trade secrets and proprietary know-how, which we seek
to protect by confidentiality agreements with our employees, consultants,
service providers and third parties. There is a risk that these agreements may
be breached, and that the remedies available to us may not be adequate. In
addition, our trade secrets and proprietary know-how may otherwise become known
to or be independently discovered by others.
RISKS RELATING TO OUR CURRENT FINANCING ARRANGEMENTS:
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING WARRANTS AND OPTIONS THAT MAY BE
AVAILABLE FOR FUTURE SALE AND THE SALE OF THESE SHARES MAY DEPRESS THE MARKET
PRICE OF OUR COMMON STOCK.
As of the date of this prospectus, we had approximately 491,413,360
shares of common stock issued and outstanding and we had convertible notes which
could require the issuance of approximately 45,000.000 additional shares of
common stock to Laurus Master Fund, Ltd., and options and warrants which could
require the issuance of 35,733,458 additional shares of common stock. All of the
shares, including all of the shares issuable upon conversion of the convertible
notes and upon exercise of our warrants and option, are being registered
hereunder. Upon registration such shares may be sold without restriction. The
sale of these shares may adversely affect the market price of our common stock.
THE ISSUANCE OF SHARES UPON CONVERSION OF THE CONVERTIBLE NOTES AND EXERCISE OF
OUTSTANDING WARRANTS AND OPTIONS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO
OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the convertible notes and
exercise of warrants and options may result in substantial dilution to the
interests of other stockholders since the selling stockholders may ultimately
convert and sell the stock at a price lower than the current market prices.
Although Laurus may not convert their convertible notes and/or exercise their
warrants if such conversion or exercise would cause them to beneficially own
more than 4.99% of our outstanding common stock, this restriction does not
prevent Laurus from converting and/or exercising some of their holdings and then
converting the rest of their holdings. In this way, Laurus could sell more than
this limit while never holding more than this limit.
IF WE ARE REQUIRED FOR ANY REASON TO REPAY OUR OUTSTANDING SECURED CONVERTIBLE
NOTES TO LAURUS AT AN UNEXPECTED TIME, WE COULD DEPLETE OUR WORKING CAPITAL. OUR
INABILITY TO REPAY THE SECURED CONVERTIBLE NOTES, IF REQUIRED, COULD RESULT IN
LEGAL ACTION AGAINST US, WHICH COULD REQUIRE THE SALE OF SUBSTANTIAL ASSETS.
In March 2005, we entered into various agreements with Laurus for the
sale of convertible debt, an option and a warrant to purchase our common stock.
The $3,000,000 of secured convertible term notes are due and payable, with
interest, on a monthly basis over a three-year period, unless sooner converted
into shares of our common stock. The secured revolving note and minimum
borrowing note in the maximum amount of $5,000,000 are due in three years,
unless sooner converted into shares of our common stock. Any event of default
such as our failure to repay the principal or interest when due, our failure to
pay any taxes when due, our failure to perform under and or commit any breach of
the security agreements or any ancillary agreement, any event of default under
any other indebtedness by us or any of our subsidiaries could require the early
repayment of the secured convertible notes at a rate of 120%, including a
default interest rate on the outstanding principal balance of the notes if the
default is not cured within the specified grace period. If we are required to
repay the secured convertible notes, we would be required to use our limited
working capital and we would need to raise additional funds. If we were unable
to repay the notes when required, the note holders could commence legal action
against us and foreclose on all of our assets to recover the amounts due. Any
such action would require us to curtail or cease operations.
IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITY AGREEMENT, SECURED CONVERTIBLE
NOTES, WARRANTS, STOCK PLEDGE AGREEMENT OR SUBORDINATION AGREEMENT, THE
INVESTORS COULD TAKE POSSESSION OF ALL OUR AND OUR SUBSIDIARIES' ASSETS.
In connection with the security agreement we entered into in March 2005
we executed a stock pledge agreement in favor of Laurus granting them a first
priority security interest in the common stock of our subsidiaries all of our
and our subsidiaries' goods, inventory, contractual rights and general
intangibles, receivables, documents, instruments, chattel paper, and
intellectual property. The security agreement and stock pledge agreement state
that if an event of default occurs under any agreement with the lenders, the
lenders have the right to take possession of the collateral, to operate our
business using the collateral, and have the right to assign, sell, lease or
otherwise dispose of and deliver all or any part of the collateral, at public or
private sale or otherwise to satisfy our obligations under these agreements.
5
IF WE SELL ANY SECURITIES AT A AN EFFECTIVE PRICE BELOW $0.19 PER SHARE, THE
CONVERSION PRICE OF OUR LAURUS NOTES AND EXERCISE PRICE OF OUR LAURUS WARRANTS
WILL BE LOWERED, RESULTING IN ADDITIONAL DILUTION TO SHAREHOLDERS.
We shall allocate approximately 81,000,000 shares of common stock to
cover the conversion of the notes and exercise of warrants and options by Laurus
in this offering. If we engage in a lower priced transaction than our current
financing arrangements with Laurus while the convertible notes or warrants are
outstanding, then the conversion price of the notes and exercise price of the
warrants will be adjusted to the lower transaction price and we may be required
to issue additional shares of common stock to the investors. If this occurs, the
number of shares which are registered pursuant to this prospectus may not be
adequate. Accordingly, we may be required to file a subsequent registration
statement covering additional shares. If the shares we have allocated and are
registering herewith are not adequate and we are required to file an additional
registration statement, we may incur substantial costs in connection therewith.
RISKS RELATING TO OUR COMMON STOCK:
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"EFTI.OB." There is a limited trading market for our common stock. Accordingly,
there can be no assurance as to the liquidity of any markets that may develop
for our common stock, the ability of holders of our common stock to sell our
common stock, or the prices at which holders may be able to sell our common
stock.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock is likely to be highly volatile
and could fluctuate widely in price in response to various factors, many of
which are beyond our control, including:
o technological innovations or new products and services by us or our
competitors;
o intellectual property disputes;
o additions or departures of key personnel;
o sales of our common stock
o our ability to integrate operations, technology, products and
services;
o our ability to execute our business plan;
o operating results below expectations;
o loss of any strategic relationship;
o industry developments;
o economic and other external factors; and
o period-to-period fluctuations in our financial results.
Our stock price may fluctuate widely as a result of any of the above.
In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our common stock.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR COMMON
STOCK.
We have never paid cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. The payment of
dividends on our common stock will depend on earnings, financial condition and
other business and economic factors affecting it at such time as the board of
directors may consider relevant. If we do not pay dividends, our common stock
may be less valuable because a return on your investment will only occur if its
stock price appreciates.
OUR COMMON STOCK MAY BE DEEMED PENNY STOCK WITH A LIMITED TRADING MARKET.
Our common stock is currently listed for trading on the OTC Bulletin
Board which is generally considered to be a less efficient market than markets
such as NASDAQ or other national exchanges, and which may cause difficulty in
conducting trades and difficulty in obtaining future financing. Further, our
securities are subject to the "penny stock rules" adopted pursuant to Section 15
(g) of the Securities Exchange Act of 1934, as amended, or Exchange Act. The
penny stock rules apply to non-NASDAQ companies whose common stock trades at
less than $5.00 per share or which have tangible net worth of less than
$5,000,000 ($2,000,000 if the company has been operating for three or more
years). Such rules require, among other things, that brokers who trade "penny
stock" to persons other than "established customers" complete certain
documentation, make suitability inquiries of investors and provide investors
with certain information concerning trading in the security, including a risk
disclosure document and quote information under certain circumstances. Many
brokers have decided not to trade "penny stock" because of the requirements of
the penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited. In the event that we remain
subject to the "penny stock rules" for any significant period, there may develop
an adverse impact on the market, if any, for our securities. Because our
securities are subject to the "penny stock rules," investors will find it more
difficult to dispose of our securities. Further, for companies whose securities
are traded in the OTC Bulletin Board, it is more difficult: (i) to obtain
accurate quotations, (ii) to obtain coverage for significant news events because
major wire services, such as the Dow Jones News Service, generally do not
publish press releases about such companies, and (iii) to obtain needed capital.
6
A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE PRICE
OF OUR COMMON STOCK TO DECLINE.
If our stockholders sell substantial amounts of our common stock in the
public market, including shares issued upon the exercise of outstanding options
or warrants, the market price of our common stock could fall. These sales also
may make it more difficult for us to sell equity or equity-related securities in
the future at a time and price that we deem reasonable or appropriate.
Approximately 115,179,135 shares of common stock to be registered under this
registration statement will be freely tradeable upon effectiveness of this
registration statement.
FORWARD-LOOKING STATEMENTS
Statements contained in this prospectus include "forward-looking
statements", which involve known and unknown risks, uncertainties and other
factors which could cause actual financial or operating results, performances or
achievements expressed or implied by such forward-looking statements not to
occur or be realized. These forward-looking statements generally are based on
our best estimates of future results, performances or achievements, based upon
current conditions and assumptions. Forward-looking statements may be identified
by the use of forward-looking terminology such as "may," "can," "could,"
"project," "expect," "believe," "plan," "predict," "estimate," "anticipate,"
"intend," "continue," "potential," "would," "should," "aim," "opportunity" or
similar terms, variations of those terms or the negative of those terms or other
variations of those terms or comparable words or expressions.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the common stock.
However, we will receive the exercise price of any common stock we sell to the
selling stockholders upon exercise of the warrants and options. We expect to use
the proceeds received from the exercise of their warrants and options, if any,
for general working capital purposes.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis provides information which
management believes is relevant for an assessment and understanding of the
results of operations and financial condition. The discussion should be read in
conjunction with the audited consolidated financial statements and notes
thereto.
Catalytic Activated Vacuum Distillation Process ("CAVD") Reactors
We developed the Catalytic Activated Vacuum Distillation Process
Reactor. The CAVD Reactor offers a unique solution to the problem of disposing
of harmful solid wastes in and environmentally friendly manner and allows raw
materials from the wastes to be recycled and reused.
We believe that the CAVD Reactor can be designed to process a number of
harmful solid waste products. We anticipate that governmental and
nongovernmental entities who are faced with the problem of disposing of various
types of solid waste products through conventional means will conclude that the
CAVD Reactors can provide a superior, safe and effective means of eliminating
these materials.
Initially, we are focusing on the processing of rubber tires. However,
other uses are also being pursued. Such uses include the recycling of carpet
materials, the destruction of animal waste and remains, transuranic wastes (e.g.
gloves, overalls, tools, etc. that have been exposed to low levels of
radiation), and medical wastes.
In general, we process used tires by having shredded tires added to a
low pressure, heated, catalytically driven process in the CAVD Reactor. The
tires are converted to a high quality carbon and a light hydrocarbon mix that
can be used as a fuel. Scrap steel and gases that can be used as a fuel are also
recovered. Traditionally, tires have been disposed of in landfills, placed in
stockpile areas, or recycled using low-level technologies to produce products
such as tire-derived fuel and mulch. Stockpiles of discarded tires are
particularly vulnerable to catching fire. Fires at tire dumps are extremely
difficult to extinguish and may take years to burn themselves out. Such fires
can release significant amounts of pollution into the atmosphere.
The owners of these dumping areas have long sought a cost-effective
means of disposing of the unwanted tires. We believe the CAVD Reactor provides a
solution for the environmentally safe and efficient problem of the disposal of
used tires.
Our first CAVD Reactor was constructed at a facility in Mobile, Alabama
and processes shredded tires. During processing in the CAVD Reactor, carbon,
scrap steel, gas and oil are recovered and are available for resale. The
processing of a 20-pound tire yields approximately 5.5 to 8.5 pounds of carbon,
1.2 to 2 gallons of fuel oil, 12 to 16 cubic feet of gas, and .36 pounds of
scrap steel. The amounts recovered depend upon the type of tire and the length
of time in the reactor.
The financial viability of the CAVD Reactor for use in processing used
tires appears contingent upon the successful sale of the carbon recovered. We
believe that approximately 80% of the value of the raw materials recovered from
the CAVD Reactor is attributable to the carbon. It is expected that the steel
recovered from the process will be sold for scrap and the oil recovered can be
used as an industrial oil or other fuel. Optimal operation of the CAVD Reactor
may include the use of a generator with the reactor which can utilize the gas
produced from the processing to produce electricity that can be both used by the
operator of the reactor and additional electricity sold to the electrical grid.
Testing of the carbon recovered from our CAVD Reactor has led us to
believe that the carbon has certain unique qualities that will prove valuable in
the development of high-performance polymers in various industrial uses.
Researchers concluded that due to the unique formation method through the CAVD
Reactor, the carbon can be used as is or economically modified to produce a
functionalized polymer that can replace petroleum based chemical polyurethanes
with a less expensive recycled product made from reclaimed tires. Work is being
conducted to improve the carbons' performance by adding reactive compounds that
improve the product's ability to bond with the urethane matrix.
As with most new products, it is time consuming for the end users of
the carbon to satisfy themselves as to the advantages of this product over the
products that they are currently using. To hasten the acceptance of our carbon
in the marketplace, we are working with several potential end users who are
conducting substantive testing of the carbon for use in their operations. We are
currently working with carpet manufacturers, producers of asphalt and shingles,
with third parties in automotive applications, and with producers of other
products to prove the advantages of the carbon produced by the CAVD Reactor as a
polymer with their products.
The carbon recovered through the CAVD Reactor is rapidly gaining
acceptance with potential end users as a polymer. We believe that the carbon has
unique qualities that may ultimately enable its acceptance as a substitute for
certain high-end polymers currently being used in addition to use in the more
traditional roles currently being explored.
8
We have several letters of intent with unrelated entities to license
the technology for CAVD Reactors. Based upon our experiences thus far, we expect
that there is considerable interest in the CAVD Reactor from potential users. We
believe that delays in the creation of definitive agreements with the end users
of the CAVD Reactors have centered around the evaluation of the financial
viability of the alternative uses of the carbon product recovered from the
process. In addition to the efforts described above, we are also seeking to work
with one or more nationally recognized scientific and technology enterprises to
further commercialize the technology for the CAVD Reactor for additional uses.
It is expected that such an arrangement could allow our technology to gain
immediate credibility in the marketplace with both a variety of potential end
users of the CAVD Reactors as well as the end users of carbon products recovered
in the process. It is envisioned that joint efforts would include work on
adapting the CAVD Reactors to process other solid waste streams such as
municipal solid wastes, animal remains, and certain types of industrial waste
products.
Liquid Waste Technologies
We are continuing to attempt to identify and implement commercially
viable applications of our plasma arc converter technologies embodied in the
BigSpark(TM) converter. Our BigSpark(TM) plasma based technology splits apart
the complex molecular bonds of water and hydrocarbon wastes to produce the clean
burning, hydrogen-based fuel. BigSpark(TM) compares favorably with conventional
combustion technologies used in the disposal of liquid wastes in several
significant areas. First, the waste is subjected to higher temperatures for
longer periods of time (7,000 degree temperature of the plasma arc; and
materials spend minutes, not seconds, in the reaction zone). Second,
BigSpark(TM) has a second stage combustion in a very high temperature oxygen
flame. Third, BigSpark(TM) converters are compact and can be moved to the source
of contaminated waste.
One application of the plasma arc technology that we have been
investigating involves the destruction of Poly-Chlorinated Biphenyls, commonly
referred to as "PCBs." PCBs have many stable qualities that led to its use in
various industrial applications before it was learned that long-term exposure to
PCBs may increase the risk of cancer in humans.
Preliminary tests have indicated that passing PCB laden liquids through
a plasma arc similar to that found in the BigSpark(TM) converters results in the
destruction of the PCB molecules. While the results of such tests are
encouraging, in order to be commercially successful, the technology will need to
be adapted to destroy PCBs in surroundings where such elements are commonly
found and on a sufficient scale to economically address the problems faced in
PCB disposal.
We are also considering commercial adaptations for the plasma arc
converters to develop solutions to issues involving the disposal and/or
remediation of other liquid wastes including waste oils and antifreeze.
Activated Carbon Technologies
Our efforts in commercializing the technologies we have developed for
activated carbon products has been slowed due to the current emphasis on our
solid waste technologies. The technology developed is promising and we intend to
pursue commercialization in the future. We believe that the research and
development efforts conducted by us have yielded results that may produce
superior qualities in a wide range of water treatment applications.
Electrical Contracting - Electric Machinery Enterprises
We perform electrical contracting and subcontracting services on
commercial and municipal projects primarily in Florida and the Caribbean through
our subsidiary Electric Machinery Enterprises, Inc. ("EME").
EME was profitable in the fourth quarter of 2004 and the first quarter
of 2005. Accordingly, we are optimistic about the prospects for EME's future
profitability and believe its recent emergence from the jurisdiction of the
Bankruptcy Court will enable it to obtain contracts that may previously have not
been available.
EME's revenues are generated through three separate sources: Offshore,
Domestic, and Domestic Services.
Offshore work includes electrical contract work performed on commercial
properties throughout the Caribbean. The damage caused throughout the Caribbean
during the Hurricane Season of 2004 has resulted in a sharp increase in the
contracts obtained by EME and we currently have a backlog of approximately $18
million. During 2004, EME entered into a joint venture agreement to operate
Peleme, Ltd. to perform electrical contracting work in the Cayman Islands. This
joint venture is currently performing work on a sizable contract to repair
hurricane damage on one of the major hotels in the Caymans. We anticipate that
this joint venture will be able to secure significant additional contract work
for the continuing development of the Caymans.
Domestic work includes electrical contract work performed principally
in the State of Florida. We are attempting to improve profitability in this
segment of our business by introducing enhanced technology in the bidding
process for these contracts and in monitoring the progress with budgeted amounts
as work is performed. We are optimistic that these and other enhancements will
enable us to be the successful bidder on an increased number of financially
attractive contracts.
9
Domestic services include numerous small projects for electrical
contract work on a time and materials basis for commercial projects located in
Florida.
During calendar 2005, EME anticipates entering the market as an
electrical contractor for residential real estate on a limited basis to
determine the financial viability of providing such services. Initially these
services will be provided on a small scale to allow us to evaluate the economic
viability of this market and operational considerations as may arise. It is
anticipated that EME may have certain competitive advantages that may allow it
to successfully operate profitably in this market.
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2004.
Revenues for the three month period ending March 31, 2005 exceeded
those of 2004 by $8,153,099. These revenues are a result of consolidating the
financial statements with the new subsidiary of EME. Revenues for the three
months ended March 31, 2004 were comprised of commissions pertaining to
representing a polymer manufacturing company.
Selling, general and administrative expenses for the three-month period
ending March 31, 2005 increased by $1,065,172, from $137,915 in the prior year,
to $1,203,087 in the current period, or an increase of approximately 773%
compared to the three-month period ending March 31, 2004.
Selling, general and administrative expenses for the prior year related
primarily to the administrative expenditures incurred by us as a public entity,
legal fees related to ongoing litigation, and expenditures for marketing,
promotion, and related efforts incurred in connection with our investigation of
the activated carbon market. The current year includes expenses relative to the
administration of Electric Machinery.
Research and development expenses decreased from $1,908,547 in the
three months ended March 31, 2004 to $193,327 in the three months ended March
31, 2005 or a 90% decrease for the three-month period.
This decrease is attributable primarily to the premium paid over hard
costs as "In progress Research and Development" in the amount of $1,800,000 in
January 2004, associated with the acquisition of the balance of WESCO Holdings
LLC. As "In progress Research and Development" this premium was expensed rather
than capitalized. This is a non-recurring expenditure.
Income from operations increased by $2,555,696 from a loss for the
three months ended March 31, 2004 of $2,031,462, to a profit of $ 524,234 for
the three months ended March 31, 2005. This increase is due to the results of
operations from the consolidated subsidiary of EME.
During the quarter ending March 31, 2005, we realized a gain on
cancellation of debt in the amount of $2,178,568 attributable to the settlement
of the secured creditor in EME's plan of reorganization. We did not realize any
gain on cancellation of debt during the three month ending March 31, 2004.
Interest expense increased from $51,399 for the three-month period
ended March 31, 2004 to $79,430 for the three months ended March 31, 2005, an
increase of approximately 15.29%. This increase in interest expense is due
primarily to payments made prior to settlement of the secured creditor, in
accordance with EME's plan of reorganization.
Interest expense - beneficial conversion is an accounting charge
recorded during the three months ended March 31, 2005 relative to the beneficial
conversion features of the Laurus credit facility. This is a one time non-cash
charge against the current period based on a fair valuation of the intrinsic
value of the conversion features of the debt, and the value of the options and
warrants granted at the same time. There were no similar charges recorded for
the three month period ended March 31, 2004.
FISCAL 2004 COMPARED TO FISCAL 2003
Revenue for the year ended December 31, 2004 increased by $15,314,892,
as there were no revenues for the year ended December 31, 2003. This increase is
due almost exclusively to the acquisition of Electric Machinery Enterprises,
Inc. on August 20, 2004.
Cost of Sales for the year ended December 31, 2004 increased by
$11,209,802, as there were no cost of sales for the year ended December 31,
2003. This increase is due almost exclusively to the acquisition of Electric
Machinery Enterprises, Inc. on August 20, 2004.
Selling, general and administrative expenses for the year ended
December 31, 2004 increased to $3,425,839 from $651,948 for the year ended
December 31, 2003, an increase of approximately 426%. This increase was due
primarily to the acquisitions of EME and WESCO, as well as an increase in the
level of activities undertaken by us during 2004.
10
Direct research and development expenses for the year ended December
31, 2004 increased to $2,474,949 from $345,057 for the year ended December 31,
2003, an increase of approximately 617%. This increase was due primarily to the
"in progress research and development" purchased with the acquisition of WESCO
in the amount of $1,800,000, as well as an increase in the the level of
activities undertaken by us during 2004.
Settlement expense of $280,000 for 2003 results from preliminary
settlements initiated in the third quarter of 2003. This amount pertains to
litigation with Ruggero Santilli and his related parties pertaining to
differences surrounding certain of our technologies. During 2003, we have
attempted to resolve these differences, and have included this amount in accrued
expenses for 2003 based on amounts estimated to ultimately settle the matter.
There were no such settlements in the corresponding periods in 2004.
Forgiveness of debt during the year ended December 31, 2004 in the
amount of $1,298,068 was a result of the Plan of Reorganization of Electric
Machinery Enterprises, Inc., which was approved by the Bankruptcy Court during
the fourth quarter of 2004. During the quarter ended March 31, 2003, we realized
a gain on cancellation of debt in the amount of $155,000 attributable to the
settlement of invoices incurred primarily during calendar 2000, and an
additional amount of $40,000 during the quarter ended September 30, 2003.
Miscellaneous income for the year ended December 31, 2004 in the amount
of $333,214 represents non operational sources of income. These revenues pertain
to activities within the acquired entity of Electric Machinery Enterprises, Inc.
There were no miscellaneous incomes during the year ended December 31, 2003.
Interest expense for the year ended December 31, 2004 increased to
$469,514 from $373,607 for the year ending December 31, 2003, an increase of
approximately 26%. This increase was due the higher balances related to our
borrowings pursuant to the revolving line of credit loans from a related party.
Reorganization item, professional fees related to bankruptcy and
pursuit of claims expense for the year ended December 31, 2004, in the amount of
$1,202,829 represent non-recurring expenses associated with the preparation,
presentation and implementation of the Plan of Reorganization incurred from the
date of acquisition of Electric Machinery Enterprises, Inc. There were no
expenses of this nature during the year ended December 31, 2003.
Majority interest in net income of consolidated joint venture for the
year ended December 31, 2004, in the amount of $430,230 represents the expense
associated with the 30% interest in profits of the joint venture partner in
Peleme, Ltd. incurred from the date of acquisition of Electric Machinery
Enterprises, Inc. There were no expenses of this nature during the year ended
December 31, 2003.
As a result of favorable events in the progress of the sales and use
tax examination, we recorded a gain from discontinued operations during fiscal
2003 in the amount of $19,418 since the activities to which these amounts
related were discontinued in prior years.
Net loss increased by $830,795 to $2,266,989 for the year ended
December 31, 2004 from $1,436,194 for the year ended December 31, 2003. This
increased net loss resulted primarily from the previously discussed items,
specifically the purchase of in progress research and development expenses
associated with the acquisition of WESCO, and the reorganization related
expenses related to the Plan of Reorganization associated with the acquisition
of Electric Machinery Enterprises, Inc.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced recurring net losses since our inception and, as
such, experienced negative operating cash flows through most of 2004. We have
historically funded these negative operating cash flows with proceeds from sales
of common stock, as well as notes and convertible debentures payable.
In December 2000 and again in January 2003, we entered into multiple
revolving line of credit promissory notes with entities related to our Chief
Executive Officer, secured by all of our assets. Each revolving note was a
demand loan, which meant that the lender could demand full repayment of the loan
at any time. The promissory notes related to each revolving line of credit
merely provided for a loan up to a stated amount. There was no obligation on the
part of the related party to make any loans pursuant to these agreements if the
loan balance was less than the stated amount. There was no obligation on the
part of the related parties to make any additional loans.
Historically, the related party lender has periodically agreed to
convert portions of the loan balances into shares of our common stock. During
2004, the related party converted $5,334,010 of these notes into shares of our
common stock.
As of December 31, 2004, we owed $6,672,519 pursuant to these
agreements. Subsequent to December 31, 2004, additional loans were made under
these notes to help secure the outcome of the reorganization of EME. On February
23, 2005 the full balance of notes payable to related parties was converted into
189,643,210 shares of our common stock.
11
Since the acquisition of EME in August of 2004, we are no longer
experiencing negative operating cash flows. Working capital as of March 31, 2005
was approximately $5.3 million and stockholders equity was approximately $16.8
million.
We generated a net income in the fourth quarter of 2004 of $1,096,136,
and an income from operations of $524,234 in the first quarter of 2005. Although
the statement of operations for the three months ended March 31, 2005 reflects a
net loss of $4,553,637, cash flows from operations were $2,081,048.
On March 30, 2005, we closed an agreement with Laurus Funds on a senior
credit facility aggregating up to $8 million. The initial funding under this
agreement was $6.6 million. This transaction allowed us to take advantage of
discounts relative to the settlement of the secured debt in EME's bankruptcy, as
well as provide working capital. Generally Accepted Accounting Principles
require the convertible features of this financing and the options and warrants
that accompany it to be recorded as a non-cash expense in the current period.
The net effect of this accounting is to record a charge to earnings in the
amount of $6,600,000.
As a result of the completion of the various undertakings of 2004, the
acquisition of WESCO, the completion of the CAVD plant in Mobile, Alabama, the
acquisition and reorganization of EME, and the subsequent financing in 2005, we
do not anticipate any additional loans from the related parties referred to
above.
We believe that through aggressive management of our resources and the
funding obtained through the Laurus credit facility, the opportunities developed
over the past few years are becoming available in a real sense.
Electrical contracting through EME provides a strong revenue stream for
funding future growth in all phases of the business. EME has been in business
for over 75 years and has historically been profitable. Our management team
coupled with the years of experience embedded in the operations of EME provides
potential for a solid consistent company. Profitability is being improved by the
introduction of enhanced technology in the bidding process as well as a timelier
monitoring of job progress as work is performed. More efficient data gathering
and processing are providing better information through improved internal
reporting models, affording management better information for decision making.
EME has also developed a strategy to enter the residential marketplace
as an electrical contractor. It is anticipated that EME may have certain
competitive advantages that may allow it to successfully operate profitably in
this market. These services are currently being offered on a small scale to
prove the economic viability of this endeavor.
The hurricane season of 2004, as unfortunate as it was, is providing a
large expanse of work opportunity in the Caribbean Islands. EME has a long
history of providing services in these geographical areas, and management
believes this will be a very strong segment of our business for several years.
We are also evaluating potential target acquisitions with strong
synergies in the electrical contracting business. Management wants to bring a
higher level of service to customers to not only solidify relationships, but to
create a win win scenario of better service at better prices. This will be
accomplished through our ability to assist with the design of the construction
projects, rather than just the installation.
These strategies will afford stability to the electrical contracting
business that is anticipated to help to expand the efforts in the
commercialization of the solid and liquid waste technologies. Several licenses
were sold and letters of intent signed during 2004 setting the stage for the
CAVD technology during 2005.
During the twelve months ended December 31, 2004, we received $100,000
from PEPER Holdings, LLC (PEPER), for a License Contract providing PEPER to
secure the exclusive territory of Ciudad Juarez, Chihuahua, Mexico for 18
months, and the city of Guadalajara, Jalisco, Mexico for 6 months. During this
period, PEPER intends to initiate construction of Catalytic Activated Vacuum
Distillation (CAVD) plants that process rubber tire chips into usable energy
products. The period of the exclusivity allows for environmental, political, and
financial details to be finalized by PEPER. PEPER will purchase the plants from
EFTI and own the plants. EFTI will receive a 15% royalty based on gross profit
and a technical support contract for continuing services during the life of the
plant. The plants will be built by Harmony, LLC, a Turner Industries company
that built the operating plant in Mobile, Alabama.
We have signed a Letter of Intent with EarthClean Energy ("ECE") to
license territories in Canada and for the sale of a CAVD Reactor. The agreement
with ECE is a license for three provinces in Canada: Ontario, Quebec and
Alberta. Pursuant to the agreement, a nonrefundable license fee of $1,000,000 US
will be paid to EFTI within one year. At the signing of the Formal License
Contract, a 10% deposit for the purchase of the first plant will be made with
the balance secured by a Letter of Credit. ECE will own 100% of the plants and
EFTI will receive royalties for continued services during the contract period.
12
We have signed a Letter of Intent with San Vision Technology, Inc.
("SVT") to license the territory of Ocean City, New Jersey. At the signing of a
contract for their first CAVD Reactor, 10% of the plant sale will be paid to
EFTI with the balance secured by a Letter of Credit. SVT will own the CAVD
Reactor(s) and EFTI will receive royalties for continued services during the
contract period.
The Letters of Intent with both EarthClean Energy and San Vision
Technology are dependant upon completed carbon sales contracts by us.
Based upon extensive work with significant companies in the carpet
industry, EFTI is confident that the carpet industry will be a large market for
the carbon by-product of the CAVD process.
Our technology is gaining acceptance in areas where the sale of the
carbon is becoming less important and the benefit of destroying and/or
converting the waste streams into usable by-products without contaminating the
environment, is becoming more important.
While management is confident that the above agreements and market
opportunities will materialize, there can be no assurances.
EFFECTS OF INFLATION
Management does not believe that inflation has had a significant impact
on our financial position or results of operations since our inception.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. We evaluate our estimates and
judgments on an on-going basis. We base our estimates on historical experience
and on assumptions that we believe to be reasonable under the circumstances. Our
experience and assumptions form the basis for our judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from what we anticipate and different
assumptions or estimates about the future could change our reported results. We
believe the following accounting policies are the most critical to us, in that
they are important to the portrayal of our financial statements and they require
our most difficult, subjective or complex judgments in the preparation of our
financial statements:
Revenue Recognition: Revenues from solid waste transactions recognized
during the year ended December 31, 2004 are the result of contracted monthly
minimum draws against sales commissions on the products of a polymer
manufacturing company, and the receipt of license fees granting the exclusive
option to purchase total rights to the CAVD technology for use in certain
geographical areas. License revenue is recognized upon receipt as there are no
future obligations associated with such revenue.
We use the percentage-of-completion method of accounting for contract
revenue from electrical contracts where percentage of completion is computed on
the cost to total cost method. Under this method, contract revenue is recorded
based upon the percentage of total contract costs incurred to date to total
estimated contract costs, after giving effect to the most recent estimates of
costs to complete. Revisions in costs and revenue estimates are reflected in the
period in which the revisions are determined. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are determined
without regard to the percentage-of-completion. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that these
estimates used will change within the near term.
Employee Stock-Based Compensation: We account for compensation costs
associated with stock options issued to employees under the provisions of
Accounting Principles Board Opinion No. 25 ("APB 25") whereby compensation is
recognized to the extent the market price of the underlying stock at the date of
grant exceeds the exercise price of the option granted. Stock-based compensation
to non-employees is accounted for using the fair-value based method prescribed
by Financial Accounting Standard No. 123 ("FAS 123"). The fair-value based
method requires management to make estimates regarding the expected life of the
options and warrants and the expected volatility in our stock price during the
estimated life of the option/warrant.
Impairment of Goodwill and Long-Lived Assets: In accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), and Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144"), we review our non-amortizable long-lived assets,
including intangible assets and goodwill for impairment annually, or sooner
whenever events or changes in circumstances indicate the carrying amounts of
such assets may not be recoverable. Other depreciable or amortizable assets are
reviewed when indications of impairment exist. Upon such an occurrence,
recoverability of these assets is determined as follows. For long-lived assets
that are held for use, we compare the forecasted undiscounted net cash flows to
the carrying amount. If the longlived asset is determined to be unable to
recover the carrying amount, than it is written down to fair value. For
13
long-lived assets held for sale, assets are written down to fair value. Fair
value is determined based on discounted cash flows, appraised values or
management's estimates, depending upon the nature or the assets. Intangibles
with indefinite lives are tested by comparing their carrying amounts to fair
value. Impairment within goodwill is tested using a two step method. The first
step is to compare the fair value of the reporting unit to its book value,
including goodwill. If the fair value of the unit is less than its book value,
we than determine the implied fair value of goodwill by deducting the fair value
of the reporting unit's net assets from the fair value of the reporting unit. If
the book value of goodwill is greater than its implied fair value, we write down
goodwill to its implied fair value. Our goodwill relates to our acquisition of
Electric Machinery Enterprises, Inc.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." The
statement amends Accounting Research Bulletin ("ARB") No. 43. "Inventory
pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. ARB No. 43 previously
stated that these costs must be "so abnormal as to require treatment as
current-period charges." SFAS No. 151 requires that those items are recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overhead to the costs of conversion is based on the normal capacity
of the production facilities. The statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005, with earlier
application permitted for fiscal years beginning after the issue date of the
statement. The adoption of SFAS No. 151 is not expected to have any significant
impact on our current financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets--An Amendment of APB Opinion No. 29." APB Opinion No. 29,
"Accounting For Nonmonetary Transactions," is based on the opinion that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception of nonmonetary assets whose results are not expected to
significantly change the future cash flows of the entity. The adoption of SFAS
No. 153 is not expected to have any impact on our current financial condition or
results of operations.
In December 2004, the FASB revised its SFAS No. 123 ("SFAS No. 123R"),
"Accounting for Stock Based Compensation." The revision establishes standards
for the accounting of transactions in which an entity exchanges its equity
instruments for goods or services, particularly transactions in which an entity
obtains employee services in share-based payment transactions. The revised
statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. That cost is recognized over the period during which
the employee is required to provide service in exchange for the award. The
provisions of the revised statement are effective for financial statements
issued for the first interim or annual reporting period beginning after June 15,
2005, with early adoption encouraged. We account for options issued to employees
under APB 23; however currently has no unvested options outstanding. Adoption of
this standard in 2005 will result in recognition of stock-based compensation
determined using the fair value method for options issued in the future.
14
BUSINESS
We were incorporated in the State of Florida in 1997. We are a
specialized holding company engaged in the research, development and
commercialization of technologies for the production of alternative fuel sources
and the destruction and/or remediation of liquid and solid waste. We are
committed to the development and commercialization of technologies that will
produce economically and environmentally superior products from carbon-rich
solid and liquid materials considered wastes. As part of our efforts, we are
also attempting to develop and commercialize applications of our technologies
for the efficient production of alternative fuels. Additional applications of
our technologies are focused on the environmentally desirable processing,
destruction, purification, and/or remediation of harmful liquid and solid
wastes.
Through our subsidiary Electric Machinery Enterprises, Inc., we perform
services as an electrical contractor and subcontractor in the construction of
commercial and municipal projects primarily located in Florida and the
Caribbean.
SOLID WASTE TECHNOLOGIES - CATALYTIC ACTIVATED VACUUM DISTILLATION PROCESS
("CAVD") REACTORS
We developed the Catalytic Activated Vacuum Distillation Process
Reactor. The CAVD Reactor embodies the results of several years of research and
development with respect to disposal of solid wastes. The CAVD Reactor offers a
unique solution to the problem of disposing of harmful solid waste products in a
manner that allows raw materials from those waste products to be recycled and
reused.
It is anticipated that the CAVD Reactors can be adapted to process a
variety of different kinds of solid wastes. Initially, we focused development of
a CAVD Reactor for the processing of rubber tires. This process provides a means
of disposing of the tires while recovering the constituent raw materials
(carbon, steel, gases and oil).
We are pursuing opportunities for enhancing the return on the CAVD
Reactors through developing alternative uses for the carbon recovered during the
processing of the tires as well as exploring opportunities for processing other
solid wastes. License fees received in the amount of $100,000 represent the only
revenues recognized to date.
ELECTRIC MACHINERY ENTERPRISES
Through our EME operations, we perform electrical contracting and
subcontracting services for commercial and municipal projects located primarily
in Florida and the Caribbean. We have extensive expertise in performing
electrical contracting services for water, sewer, and power generating
facilities.
EME, and its predecessors, have been in business for over 75 years. We
acquired EME after EME had sought protection from creditors under Chapter 11 of
the United States Bankruptcy Code. In August of 2004, we acquired the stock of
EME in exchange for 40 million shares of our common stock. The Bankruptcy Court
subsequently approved the plan of reorganization for EME and that entity has
successfully emerged from bankruptcy.
LIQUID WASTE TECHNOLOGIES
We have developed technologies for the treatment of liquid waste
products. The technologies involve the use of high temperature plasma through
which the liquid waste products are passed. The harmful properties contained in
the liquid waste products are broken down at the molecular level as they pass
through the plasma and a clean burning gas is produced.
HYBRID FUEL SYSTEMS, INC.
Hybrid Fuel Systems, Inc. ("Hybrid Fuel") is a publicly traded company
engaged in the business of converting a wide range of medium and heavy-duty
diesel engines through its patented technology that it estimates can replace up
to 80% of the diesel fuel used with clean-burning natural gas. We, along with
and Hybrid Fuel, are considering the viability of utilizing various waste stream
gases in developing alternative fuels. Hybrid Fuel is also working with us to
apply the CAVD technology to the production of biodiesel fuels. Hybrid Fuel is
affiliated with our Chairman.
In February of 2005, we purchased 7,500,000 shares of Hybrid Fuel's
common stock for $300,000. Thus far during calendar 2005, Hyrbid Fuel's shares
have been trading at prices ranging from 40 to 90 cents per share.
15
ACTIVATED CARBON PRODUCTS
We have performed extensive research to evaluate and develop
alternative technologies for the manufacture of activated carbon products. These
efforts have included research and development intended to produce activated
carbon having characteristics for removing impurities from water that are
superior to other products currently on the market.
INTELLECTUAL PROPERTIES
We have performed extensive research and development on various
technologies focused on deriving solutions for liquid and solid waste problems
and in creating alternative fuels. Our efforts have been conducted through the
work performed by our employees and consultants. We have developed the
technology for the CAVD Reactor.
Management believes that we own all of the intellectual rights to
commercialize and further develop our liquid and solid waste technologies.
We engaged outside legal counsel to review our history of development
of our liquid waste technologies and the contractual arrangements entered into
by us with respect to such technologies. Legal counsel has advised that it
believes that we currently possesses all of the intellectual property rights to
commercialize our liquid waste technologies and to further develop these
technologies in additional applications.
Legal counsel has also reviewed in detail all aspects of the claims and
allegations made by a former consultant with respect to the underwater carbon
arc technology embodied in our technologies. Legal counsel also reviewed our
consulting agreements with the former consultant and entities related to this
individual.
Based upon its review of these agreements and the relevant law, it is
the opinion of outside legal counsel that the former consultant, or entities
related to him, neither own nor control any US patents that are relevant to our
technologies, and have no legal standing to assert any claims as to patent
infringement or misappropriation of any trade secrets.
The former consultant and an entity affiliated with the former
consultant are involved in legal proceedings that were initiated by us to
resolve issues of ownership.
Management believes that we have taken appropriate steps to protect our
intellectual property rights. However, the steps taken might not prove
sufficient to prevent misappropriation of our technology rights. Third-party
development of similar technologies using different discoveries remain a risk
that could limit our legal protection. The laws of certain foreign countries
might not protect our services or intellectual property rights to the same
extent as do the laws of the United States.
Third parties could claim infringement by us with respect to current or
future uses. As the number of entrants into the market increases, the
possibility of an infringement claim against us might increase, and the
possibility either exists that we could, now or in the future, inadvertently
infringe on a third-party's patent. In addition, because patent applications can
take many years to allow, it is possible that we could, now or in the future,
infringe upon a third-party's patent application now pending of which we are
unaware. Any infringement claim, whether meritorious or not, could consume a
significant amount of management's time and attention, could result in costly
litigation, cause service delays or require us to enter into royalty or
licensing agreements which might or might not be available on commercially
acceptable terms, if at all. As a result, any claim of infringement against us
could have a material adverse effect upon our business, financial condition or
results of operations.
RESEARCH AND DEVELOPMENT
Research and development costs incurred in 2004 and 2003 aggregated
$2,474,949 and $345,057, respectively, and are centered around the
aforementioned technologies. The CAVD plant completion in mid 2004 allowed
development to switch from the plant process to the products produced by the
plant. Extensive tests were done on the physical and chemical properties of the
carbon, oil, and gas. Application tests were completed at the customers'
location to assure product acceptance, feasibility, and compliance.
In addition, the CAVD plant was tested for applications involving other
solid waste streams. Carpet remediation was the main application tested in 2004.
COMPETITION
There are competitors seeking to develop efficient means of recycling
and disposing of various forms of solid and liquid wastes, as well as the
production of alternative fuels. The effect of numerous federal and state
environmental regulations has been to encourage the originators of the waste, as
well as governmental entities and entrepreneurial enterprises, to seek to
develop more effective and efficient solutions. Some of these competitors have
significant financial resources with which to pursue solutions to these
problems. We have limited resources and will likely need substantial infusions
of capital in order to effectively commercialize our technologies. There are no
assurances that even if such financial resources can be obtained that our
technology will be financially successful.
16
EMPLOYEES
As of December 31, 2004, we had 275 full-time employees. Management
considers its relations with our employees to be satisfactory. None of the
employees is represented by a union.
DESCRIPTION OF PROPERTY
Our executive offices are located at 2515 E. Hanna Ave., Tampa,
Florida. This location is also occupied by EME. This lease obligation was
assumed pursuant to EME's reorganization plan for a period of two years, at
which time we have the option to re-evaluate. We lease and rent the real
property, building, and all other improvements at this location from Hanna
Properties Corp., a related party affiliated with the President of EME. This
property consists of 29,680 sq. ft. of office space, 80,320 sq. ft. of warehouse
space and 26,992 sq. ft. of garage and workshop space. Monthly rental including
sales tax, but excluding real estate taxes and insurances is $52,133.
We own approximately 25 acres of land located at 1603 Grove Avenue,
Haines City, Florida. This property houses various office, warehousing and
manufacturing buildings.
LEGAL PROCEEDINGS
We are involved in litigation with Ruggero Maria Santilli ("Santilli"),
The Institute for Basic Research, Inc. ("IBR"), and Hadronic Press, Inc.
("Hadronic") concerning certain aspects of our liquid waste technologies. The
matters contemplated above will be referred to as the "Hadronic Suit." Hadronic
claims to own the intellectual property rights to one or more aspects of our
liquid waste technologies.
Management continues to believe that we own all of the intellectual
property rights necessary to commercialize and further develop our liquid and
solid waste technologies without resorting to a license from any third parties.
During 2004, we attempted to reach agreement with Santilli and his
related parties to resolve the differences between the parties. As of this date,
the parties are continuing their efforts to resolve their differences.
The litigation described above does not involve the technology we are
developing in connection with our efforts for the processing of used automotive
tires.
We are also involved in disputes with vendors for various alleged
obligations associated with operations that were discontinued in prior years.
Several disputes involve deficiency balances associated with lease obligations
for equipment acquired by us for our contract manufacturing and BORS Lift
operations that were discontinued during calendar 2000. The machinery and
equipment associated with many of these obligations has been sold with the
proceeds paid to the vendor or the equipment has been returned to the vendor.
Several of the equipment leasing entities claim that balances on the leases are
still owed.
The Florida Department of Revenue has conducted an examination of our
Florida Sales and Use Tax Returns from our inception through June 30, 2001.
Included in the balance of accrued expenses and other current
liabilities is our estimate of the amount at which the matters contemplated
above will ultimately be resolved. Approximately $1.1 million of the balance is
attributable to the disputed matters contemplated above.
OTHER LITIGATION AND DISPUTES
We have other litigation and disputes that arise in the ordinary course
of our business. We have accrued amounts for which we believe all of our
disputes will ultimately be settled.
17
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our executive officers and
directors as of May 24, 2005:
Name Age Positions
John D. Stanton............. 56 Chairman of the Board of Directors
Jaime Jurado................ 70 Vice Chairman
Leon Toups.................. 66 President and Chief Executive Officer
Nicholas R. Tomassetti...... 69 Director
Dr. David E. Crow........... 60 Director
Frank W. Barker, Jr......... 49 Chief Financial Officer
John D. Stanton assumed the role of Chairman of the Board of Directors,
President and Chief Executive Officer on May 15, 2000 in connection with the
acquisition of SAC-1. On July 30, 2001, Mr. Stanton brought in James V. Mahoney
to assume the role of President and Chief Executive Officer but resumed these
roles upon Mr. Mahoney's resignation in August 2002 until the appointment of
Leon H. Toups as President on October 9, 2003. From 1987 through the present,
Mr. Stanton has served as the President and Chief Executive Officer of Florida
Engineered Construction Products, Corporation. Since the early 1990's, Mr.
Stanton has been, and continues to be, involved in turn-around management for
financially distressed companies, providing both management guidance and
financing. In 1981, Mr. Stanton assumed the role of Chief Financial Officer for
Florida Engineered Construction Products, Corporation, a privately held
manufacturer of residential and commercial construction products, located in
Tampa, Florida. Mr. Stanton worked as an auditor with the international
professional services firm that is now known as Ernst & Young, LLP from 1973
through 1981. Mr. Stanton, a Vietnam veteran of the United States Army,
graduated from the University of South Florida with a Bachelors Degree in
Marketing and Accounting in 1972, and with an MBA in 1973. Mr. Stanton earned
the designation of Certified Public Accountant in 1974 and was a Sells Award
winner in the CPA examination.
Jaime Jurado joined the Board of Directors with the acquisition of EME. Mr.
Jurado began working with EME in 1957 after serving as an electronics specialist
in the United States Army. Mr. Jurado became president of EME in 1977 and has
served in that capacity ever since. Through Mr. Jurado's leadership, EME grew
from $1,000,000 in annual sales to more than $90,000,000 in 1998, and has helped
to establish a niche in the Caribbean, Central and South American Markets.
Leon H Toups was our co-founder in 1997 and served as Chairman, President and
CEO until 2000. We were subsequently sold and Mr. Toups served as Executive VP
for Research and Development and as an advisor to the Chairman through the end
of 2001. On October 9, 2003, Mr. Toups accepted the position of President. From
1980 to present, Mr. Toups has served as President and Chairman of an
operational consulting firm working with entrepreneurial enterprises. Prior
thereto, from 1973 to 1980, Mr. Toups was employed by Chromalloy American
Corporation, where he served in several capacities, first as President of
Chromalloy Natural Resources Company, a diversified oil and gas division, and
then as President, COO, as well as Board Member and as a member of the Executive
Committee of Chromalloy American. Chromalloy was an international conglomerate
with over a billion dollars in sales in the industry segments of oil and gas,
textile/apparel, consumer products, metal coating, transport-marine and farm and
industrial equipment. Chromalloy employed approximately 35,000 people worldwide
and traded on the New York Stock Exchange. Mr. Toups' other past associations
include Boeing Corporation from 1970 through 1973, NASA from 1965 through 1970
and the US Air Force from 1962 through 1964. Mr Toups holds the following
degrees: BS Mechanical Engineering, Georgia Tech; MS Mechanical Engineering,
Georgia Tech; MS Aerospace Engineering, University of Florida; and an EAA from
MIT which he attended on a NASA Hugh Dryden Fellowship.
Nicholas R. Tomassetti joined the Board of Directors effective August 1, 2001.
Mr. Tomassetti has served as the President and Chief Operating Officer of Airbus
Industrie of North America, Inc. Mr. Tomassetti's former business associations
include serving as Vice President and General Manager of Twin-Jet Business
Development for McDonnell Douglas Corporation and Vice President of Pratt &
Whitney's Commercial Engine Business Organization. Mr. Tomassetti served with
Pratt & Whitney for over 30 years during which time he held various positions
including Vice President, Commercial Engine Organization and Vice President
Sales and Service, Commercial Products Division. In 1987, Mr. Tomassetti was
tapped to serve as President for the International Aero Engines, a five nation
consortium formed to develop and market the LAE V2500 aircraft engine. Mr.
Tomassetti earned a degree in Engineering from the General Motors Institute and
a Master's Degree in Engineering from MIT.
Dr. David E. Crow first joined us through an appointment to our Technical
Advisory Board in 2002 after he left his position as Senior Vice President -
Engineering for UTC-Pratt & Whitney. Dr. Crow was responsible for all technical
aspects of commercial and military gas turbine and rocket products. Dr. Crow
spent some time working at G.M. Research improving automotive gas turbine
combustors to meet stricter emission standards. Much of his career has been
devoted to improving advanced combustion technology with special emphasis on the
fluid dynamic characteristics of gases under pressure and at higher
temperatures. His work has lead to a number of patents and special honorary
recognitions. Dr. Crow earned a Bachelors Degree in Mechanical Engineering form
the University of Missouri-Rolla, a Masters Degree from Rensselaer Polytechnic
Institute, and his PhD Degree from the University of Missouri-Rolla.
18
Frank W. Barker, Jr. is a Certified Public Accountant licensed to practice in
the State of Florida, and has been in practice since 1978. He was co-founder of
the accounting firm of Peel, Barker, Schatzel & Wells, PA in 1979, and went on
to form the consulting firm of Frank W. Barker, Jr., CPA in 1993. Mr. Barker has
been providing assistance to us as an independent consultant since May of 2000.
From 1993 until the present Mr. Barker has also been providing services as an
independent consultant to various other entities in connection with their design
and implementation of reorganization strategies. Mr. Barker received a B.A. in
Accounting and Finance from the University of South Florida, Tampa, Florida in
1978.
AUDIT COMMITTEE
Our Board of Directors currently does not have an Audit Committee.
CODE OF ETHICS
We have adopted a Code of Ethics and have posted our Code of Ethics on
our internet web site at http://www.earthfirsttech.com. Our Code of Ethics
applies to all our employees and those doing business with our Company and
specifically applies to our Chief Executive Officer, Chief Financial Officer and
all persons serving in similar capacities.
19
EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning compensation paid to our Chief Executive Officer and our four most
highly paid executive officers (the "Named Executive Officers") whose total
annual salary and bonus for services rendered in all capacities for the year
ended December 31, 2004 was $100,000 or more.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS PAYOUTS
------------------------- ------------------------------ --------------------------
RESTRICTED SECURITIES
NAME AND STOCK UNDERLYING LTIP OTHER
PRINCIPAL POSITION YEAR SALARY BONUS AWARD OPTIONS PAYOUTS COMP
- ------------------------------- ---- -------- --------- -------------- ---------- ----------- ---------
James V. Mahoney, Chief 2004 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
Executive Officer and 2003 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
President (1) 2002 $251,203 $ -0- $ -0- -0- -0- -0-
John D. Stanton, Chairman of 2004 $ 1,000 $ -0- $ -0- -0- $ -0- $ -0-
the Board, Chief Executive 2003 $ 1,000 $ -0- $ -0- -0- $ -0- $ -0-
Officer and Chief Financial 2002 $ 1,000 $ -0- $ -0- -0- $ -0- $ -0-
Officer (2)
Jaime Jurado, Vice Chairman 2004 $ 64,764 $ -0- $ -0- -0- $ -0- $ -0-
(3)
Leon H. Toups, Chief Executive 2004 $132,000 $ -0- $ -0- -0- $ -0- $ -0-
Officer and 2003 $ -0- $ -0- $ -0- -0- $ -0- $ -0-
President (2)(4)
(1) Mr. Mahoney assumed the role of Chief Executive Officer and President
effective July 30, 2001. Prior to this date, Mr. Mahoney was not employed
by us. Mr. Mahoney resigned his position as the Chief Executive Officer
and President on or about August 6, 2002. Compensation for 2002 includes
$33,755 paid to Mr. Mahoney's consulting company after his resignation for
services rendered to us.
(2) Mr. Stanton assumed the role of Chief Executive Officer and President as
of May 16, 2000. Prior to this date, Mr. Stanton was not employed by us.
Effective August 1, 2001, Mr. Stanton relinquished the role of Chief
Executive Officer and President retaining his role as the Chairman of the
Board of Directors. Mr. Stanton resumed his role as Chief Executive
Officer and President upon Mr. Mahoney's resignation in August 2002. Mr.
Stanton relinquished the role of President on October 9, 2003 with the
appointment of Leon H. Toups and relinquished the role of Chief Executive
Officer and Chief Financial Officer on May 11, 2005 with the appointment
of Leon Toups and Frank W. Barker, Jr.
(3) Mr. Jurado assumed the position of Vice Chairman of EFTI after the
acquisition of EME. Mr. Jurado also holds the position of President of
EME. The compensation stated is that amount incurred from the date of
acquisition.
(4) Mr. Toups assumed the role of President effective October 9, 2003, and on
March 1, 2004 commenced receiving annual compensation of $150,000. Prior
to that date, Mr. Toups received compensation from other entities
associated with Mr. Stanton. Mr. Toups assumed the additional role of
Chief Executive Officer on May 11, 2005.
No stock options were issued during calendar 2004 or 2003 to any of the
individuals identified in the table above. The following table sets forth, for
the individuals named in the Summary Compensation Table above, certain
information concerning stock options granted during 2001. We have never issued
stock appreciation rights. Options were granted at an exercise price above the
fair market value of the common stock at the date of grant. The term of the
options is five and ten years from the date of grant.
20
Options Percentage Exercise Market Expiration Potential
Granted Of Total or base Price on Date Realizable Value
Options Price Per Date of At Assumed Rates
Granted Share Grant Rate of Stock Price
In 2001 ($/Sh) Appreciation For
Option Term (1)
Name 5% 10%
John D. Stanton 466,200 6% $.2145 $.195 April 2006 $127,600 $161,100
1,533,800 20% $ .195 $.195 April 2011 $463,847 $775,529
(1) The dollar amounts under this column are the result of calculations at the
5% and 10% rates set by the Commission and therefore are not intended to
forecast possible future appreciation, if any, of the stock price of our common
stock. If the price of our stock were in fact to appreciate at the assumed 5% or
10% annual rate for the term of the option, a $1,000 investment in the Common
Stock would be worth $1,276 and $1,611, respectfully, at the end of the 5-year
term and $1,629 and $2,594, respectively, at the end of the 10-year term.
The following table sets forth, for the individual named in the Summary
Compensation Table, certain information concerning the options exercised during
fiscal 2004 and the number of shares subject to exercisable and unexercisable
stock options as of December 31, 2004. The values for "in-the-money" options are
calculated by determining the difference between the fair market value of the
securities underlying the options as of December 31, 2004 ($.12 per share) and
the exercise price of the options.
Name Number of Shares Value Unexercised Options at
Acquired on exercise realized December 31, 2004
Exercisable (1) Unexercisable
John D. Stanton None $ 0 2,000,000 -0-
(1) None of the options were "in-the-money" at December 31, 2004.
Employment Agreements
On December 30, 2003, we entered into an Employment Agreement with
Gene Salerno to serve as Vice-President of our Applied Tech Consulting Division.
The initial term of the agreement is for a period of 3 years and continues on a
month to month basis unless notice to terminate the agreement is timely
provided. Mr. Salerno is to receive compensation at the rate of $100,000 per
year. Mr. Salerno is entitled to commissions equal to 5% of the Net Revenues on
all sales of carbon which he personally generates on behalf of us and which we
accepted.
CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have never had a disagreement with our accountants on accounting or
financial disclosure.
21
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock trades on The National Association of Securities
Dealers ("NASD") OTC Bulletin Board (the "Bulletin Board") under the trading
symbol "EFTI". The following table sets forth, for the periods indicated, the
range of high and low closing bid quotations as reported by the Bulletin Board
for each quarter during the last two fiscal years.
High Low
--------- --------
Fiscal Year Ended December 31, 2003
First Quarter $ 0.11 $ .04
Second Quarter .06 .03
Third Quarter .15 .04
Fourth Quarter .19 .05
Fiscal Year Ended December 31, 2004
First Quarter .19 .10
Second Quarter .34 .17
Third Quarter .24 .11
Fourth Quarter .17 .12
Fiscal Year Ended December 31, 2005
First Quarter .26 .12
Number of Stockholders
On May 24, 2005, the last reported sales price for our shares on the
Bulletin Board was $.165 per share. On May 24, 2005, we had approximately 472
stockholders of record. We estimate that there are approximately 2500 beneficial
owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock and it is not
expected that any such dividends will be paid in the foreseeable future. We
currently intend to retain any future earnings for use in our business. The
payment of any future dividends on our common stock will be determined by the
Board of Directors in light of future conditions then existing, including our
financial condition, funding requirements for activities, future prospects,
restrictions in financing agreements, business conditions and other factors
deemed relevant by our Board.
22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership
of our common stock as of May 24, 2005 by each person known to us to own
beneficially more than 5% of our outstanding common stock, by each person who is
a director, by each person listed in the Summary Compensation Table and by all
directors and officers as a group.
The information reflected in the following table was furnished by the
persons listed therein. The calculations of the percent of shares beneficially
owned are based on 491,413,360 shares of common stock outstanding on May 24,
2005 plus, with respect to each such person, the number of additional shares
that will be outstanding upon exercise of the warrants and options exercisable
within sixty (60) days set forth herein.
Name and Address of Beneficial Owner Beneficial Percentage
Ownership of Class
John D. Stanton 268,795,260(1) 54.70%
P.O. Box 24567
Tampa, Florida 33623
Leon H.Toups 16,786,949 3.42%
418 Harbor View Lane
Largo, Florida 33770
Jaime Jurado 39,377,897(2) 8.02%
2515 E Hanna Ave
Tampa, Florida 33610
Nicholas R. Tomassetti 1,000,000(3) .20%
853 Vanderbilt Beach Rd.
Naples, Florida 34108
David E Crow 600,000 .13%
2515 E Hanna Ave
Tampa, Florida 33610
Frank W. Barker, Jr 1,500,000 .30%
10396 57th Way North
Pinellas Park, Florida 33782
Ralph W. Hughes Revocable 32,016,719 6.52%
Family Trust
P.O. Box 24567 Tampa, Florida 33623
All Officers and Directors (Six persons) 328,060,106 66.76%
(1) Includes options to purchase 2,000,000 shares of Common Stock at prices
ranging from $.195 to $.2145 per share. Includes all shares owned by
entities with which Mr. Stanton is affiliated.
(2) Includes 12,688,949 shares owned by spouse.
(3) Includes options to purchase 100,000 shares of Common Stock at an exercise
price of $.20 per share granted in 2001.
23
SELLING SHAREHOLDERS
This prospectus only covers the 115,179,135 shares of common stock
issued or to be issued to the investor who is a party to those certain
convertible secured notes, warrants and options. The following table lists
certain information with respect to the selling stockholders as follows: (i) the
selling stockholder's name, (ii) the number of outstanding shares of common
stock beneficially owned by the selling stockholder prior to this offering;
(iii) the number of shares of common stock to be beneficially owned by the
selling stockholder after the completion of this offering assuming the sale of
all of the shares of the common stock offered by the selling stockholder; and
(iv) if one percent or more, the percentage of outstanding shares of common
stock to be beneficially owned by the selling stockholder after the completion
of this offering assuming the sale of all of the shares of common stock offered
by each selling stockholder. Except as noted, none of the selling stockholders
have had any position, office, or other material relationship with us or any of
our predecessors or affiliates within the past three years.
The selling stockholders may sell all, or none of their shares in this
offering. See "Plan of Distribution."
- -----------------------------------------------------------------------------------------------------------------------------------
Total
Total Shares of Percentage Percentage
Common Stock of Common Shares of Beneficial of Common
Issuable Upon Stock, Common Stock Beneficial Percentage of Ownership Stock Owned
Conversion of Assuming Included in Ownership Common Stock After the After
Name Notes, Warrants Full Prospectus Before the Owned Before Offering Offering
and/or Options Conversion Offering* Offering* (3) (3)
- -----------------------------------------------------------------------------------------------------------------------------------
Laurus Master Fund, Ltd. 76,786,090 18.99% Up to 30,268,966(1) 4.99% -- --
115,179,135
shares of
common stock
- -----------------------------------------------------------------------------------------------------------------------------------
* These columns represent the aggregate maximum number and percentage of shares
that the selling stockholders can own at one time (and therefore, offer for
resale at any one time) due to their 4.99% limitation.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholders has sole or shared voting power or investment power and
also any shares, which the selling stockholders has the right to acquire within
60 days. The actual number of shares of common stock issuable upon the
conversion of the secured convertible notes is subject to adjustment depending
on, among other factors, the future market price of the common stock, and could
be materially less or more than the number estimated in the table.
(1) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued or
issuable upon conversion of the secured convertible notes and exercise of the
related warrants by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under the
Securities Act of 1933. However the selling stockholder has contractually agreed
to restrict its ability to convert their secured convertible notes or exercise
their warrants and receive shares of our common stock such that the number of
shares of common stock held by them in the aggregate and their affiliates after
such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of common stock as determined in accordance with Section
13(d) of the Exchange Act. Accordingly, the number of shares of common stock set
forth in the table for the selling stockholder exceeds the number of shares of
common stock that the selling stockholder could own beneficially at any given
time through their ownership of the secured convertible notes, options and the
warrants. In that regard, the beneficial ownership of the common stock by the
selling stockholder set forth in the table is not determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended.
(2) Assumes that all securities registered will be sold.
24
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 15, 2000, we executed Revolving Line of Credit Promissory
Notes and a related Security Agreement with an entity related to our Chairman,
who is also a principal stockholder. Additional Promissory Notes have been
entered into between us and several of our subsidiaries and affiliates and
entities related to Mr. Stanton on January 28, 2003 that have a similar Security
Agreement. All Promissory Notes are payable on demand. The promissory note
executed by us bears interest at the rates of 9.9% and 10% per annum. As of
December 31, 2004, the balance owed to entities related to Mr. Stanton was
$6,672,519. Although these advances are due on demand, the stockholder and
parties related thereto has agreed to not demand payment prior to January 1,
2006 or has subsequently converted portions thereof to equity. As such, these
liabilities are classified as long-term in the accompanying balance sheet.
FECP Corporation and other entities related to Mr. Stanton have paid for
various administrative services as well as other purchases on our behalf. The
cost of these services and purchases have been added to the balance of the
Promissory Notes. In addition, the cost of insurance coverage for us that has
been paid by FECP Corporation has also been included in the balance of the
Promissory Notes.
25
DESCRIPTION OF SECURITIES TO BE REGISTERED
Common Stock
We are authorized to issue up to 500,000,000 shares of common stock,
par value $.0001. As of May 24, 2005, there were 491,413,360 shares of common
stock outstanding. Holders of the common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. Holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefor. Upon the
liquidation, dissolution, or winding up of our company, the holders of common
stock are entitled to share ratably in all of our assets which are legally
available for distribution after payment of all debts and other liabilities and
liquidation preference of any outstanding common stock. Holders of common stock
have no preemptive, subscription, redemption or conversion rights. The
outstanding shares of common stock are validly issued, fully paid and
nonassessable.
On May 24, 2004, the stockholders of our company holding a majority of
the outstanding shares of common stock approved an amendment to our Articles of
Incorporation to increase the number of authorized shares of common stock from
500,000,000 to 750,000,000 shares.
On April 29, 2005, we filed a preliminary information statement
disclosing the increase with the Securities and Exchange Commission and on May
25, 2005 we filed a definitive information statement. We will amend our Articles
of Incorporation to increase the authorized common stock 20 days after the
mailing of the definitive information statement to stockholders.
Transfer Agent and Registrar
We have appointed Continental Stock Transfer & Trust Company, 17
Battery Place, New York, New York 10004, as transfer agent for our shares of
Common Stock.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our bylaws provide for the indemnification of our directors to the
fullest extent permitted by the Florida Business Corporation Act. Our bylaws
further provide that our Board of Directors has sole discretion to indemnify our
officers and other employees. We may limit the extent of such indemnification by
individual contracts with our directors and executive officers, but have not
done so. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under our bylaws or otherwise. We are not, however, required to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our Board of Directors by a majority vote of a
quorum of disinterested Board members that (a) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (b) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
26
PLAN OF DISTRIBUTION
The selling stockholders, or their pledgees, donees, transferees, or
any of their successors in interest selling shares received from a named selling
stockholder as a gift, partnership distribution or other non-sale-related
transfer after the date of this prospectus (all of whom may be selling
stockholders) may sell the common stock offered by this prospectus from time to
time on any stock exchange or automated interdealer quotation system on which
the common stock is listed or quoted at the time of sale, in the
over-the-counter market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices or at prices otherwise
negotiated. The selling stockholders may sell the common stock by one or more of
the following methods, without limitation:
o Block trades in which the broker or dealer so engaged will attempt
to sell the common stock as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
o An exchange distribution in accordance with the rules of any stock
exchange on which the common stock is listed;
o Ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o Privately negotiated transactions;
o In connection with short sales of company shares;
o Through the distribution of common stock by any selling stockholder
to its partners, members or stockholders;
o By pledge to secure debts of other obligations;
o In connection with the writing of non-traded and exchange-traded
call options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options;
o Purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; or
o In a combination of any of the above.
These transactions may include crosses, which are transactions in which
the same broker acts as an agent on both sides of the trade. The selling
stockholders may also transfer the common stock by gift. We do not know of any
arrangements by the selling stockholders for the sale of any of the common
stock.
The selling stockholders may engage brokers and dealers, and any
brokers or dealers may arrange for other brokers or dealers to participate in
effecting sales of the common stock. These brokers or dealers may act as
principals, or as an agent of a selling stockholder. Broker-dealers may agree
with a selling stockholder to sell a specified number of the stocks at a
stipulated price per share. If the broker-dealer is unable to sell common stock
acting as agent for a selling stockholder, it may purchase as principal any
unsold shares at the stipulated price. Broker-dealers who acquire common stock
as principals may thereafter resell the shares from time to time in transactions
in any stock exchange or automated interdealer quotation system on which the
common stock is then listed, at prices and on terms then prevailing at the time
of sale, at prices related to the then-current market price or in negotiated
transactions. Broker-dealers may use block transactions and sales to and through
broker-dealers, including transactions of the nature described above. The
selling stockholders may also sell the common stock in accordance with Rule 144
or Rule 144A under the Securities Act, rather than pursuant to this prospectus.
In order to comply with the securities laws of some states, if applicable, the
shares of common stock may be sold in these jurisdictions only through
registered or licensed brokers or dealers.
From time to time, one or more of the selling stockholders may pledge,
hypothecate or grant a security interest in some or all of the shares owned by
them. The pledgees, secured parties or person to whom the shares have been
hypothecated will, upon foreclosure in the event of default, be deemed to be
selling stockholders. The number of a selling stockholder's shares offered under
this prospectus will decrease as and when it takes such actions. The plan of
distribution for that selling stockholder's shares will otherwise remain
unchanged. In addition, a selling stockholder may, from time to time, sell the
shares short, and, in those instances, this prospectus may be delivered in
connection with the short sales and the shares offered under this prospectus may
be used to cover short sales.
To the extent required under the Securities Act, the aggregate amount
of selling stockholders' shares being offered and the terms of the offering, the
names of any agents, brokers, dealers or underwriters, any applicable commission
and other material facts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or a post-effective amendment to the
registration statement of which this prospectus is a part, as appropriate. Any
underwriters, dealers, brokers or agents participating in the distribution of
the common stock may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a selling stockholder and/or purchasers of
selling stockholders' shares, for whom they may act (which compensation as to a
particular broker-dealer might be less than or in excess of customary
commissions). Neither we nor any selling stockholder can presently estimate the
amount of any such compensation.
27
The selling stockholders and any underwriters, brokers, dealers or
agents that participate in the distribution of the common stock may be deemed to
be "underwriters" within the meaning of the Securities Act, and any discounts,
concessions, commissions or fees received by them and any profit on the resale
of the securities sold by them may be deemed to be underwriting discounts and
commissions. If a selling stockholder is deemed to be an underwriter, the
selling stockholder may be subject to certain statutory liabilities including,
but not limited to Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act. Selling stockholders who are deemed underwriters within
the meaning of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The SEC staff is of a view that selling
stockholders who are registered broker-dealers or affiliates of registered
broker-dealers may be underwriters under the Securities Act. We will not pay any
compensation or give any discounts or commissions to any underwriter in
connection with the securities being offered by this prospectus.
A selling stockholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with that selling
stockholder, including, without limitation, in connection with distributions of
the common stock by those broker-dealers. A selling stockholder may enter into
option or other transactions with broker-dealers, who may then resell or
otherwise transfer their common stock. A selling stockholder may also loan or
pledge the common stock offered hereby to a broker-dealer and the broker-dealer
may sell the common stock offered by this prospectus so loaned or upon a default
may sell or otherwise transfer the pledged common stock offered by this
prospectus.
The selling stockholders and other persons participating in the sale or
distribution of the common stock will be subject to applicable provisions of the
Exchange Act, and the rules and regulations under the Exchange Act, including
Regulation M. This regulation may limit the timing of purchases and sales of any
of the common stock by the selling stockholders and any other person. The
anti-manipulation rules under the Exchange Act may apply to sales of common
stock in the market and to the activities of the selling stockholders and their
affiliates. Regulation M may restrict the ability of any person engaged in the
distribution of the common stock to engage in market-making activities with
respect to the particular common stock being distributed for a period of up to
five business days before the distribution. These restrictions may affect the
marketability of the common stock and the ability of any person or entity to
engage in market-making activities with respect to the common stock.
We cannot assure you that the selling stockholders will sell all or any
portion of the common stock offered by this prospectus. In addition, we cannot
assure you that a selling stockholder will not transfer the shares of our common
stock by other means not described in this prospectus.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o the broker or dealer receive from the investor a written agreement
to the transaction, setting forth the identity and quantity of the
penny stock to be purchased.
In order to approve a person's account for transactions in penny
stocks, the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
28
TERMS OF SECURED CONVERTIBLE NOTES
To obtain funding for general corporate purposes we entered into
agreements with Laurus, pursuant to which we sold convertible debt, an option
and a warrant to purchase our common stock to Laurus in a private offering
pursuant to exemption from registration under Section 4(2) of the Securities Act
of 1933, as amended. The securities being sold to Laurus include the following:
o a secured convertible minimum borrowing note and a secured revolving
note with an aggregate principal amount not to exceed $5,000,000;
o a secured convertible term note with a principal amount of
$3,000,000;
o a common stock purchase warrant to purchase 11,162,790 shares of our
common stock, at a purchase price of $0.23 for the first 5,581,395
shares and $0.28 for any additional shares, exercisable for a period
of seven years; and
o an option to purchase 24,570,668 shares of our common stock, at a
purchase price equal to $0.01 per share, exercisable for a period of
six years
At the closing of the foregoing financing from Laurus, on March 31,
2005, we received $3,000,000 in connection with the convertible term note. In
addition, we are permitted to borrow an amount based upon our eligible accounts
receivable and inventory, pursuant to the convertible minimum borrowing note and
the revolving note. Accordingly at the closing, we received an additional
$3,600,000 for an aggregate of $6,600,000 in financing from Laurus.
We must pay certain fees in the event the facility is terminated prior
to expiration. Our obligations under the notes are secured by all of our assets,
including but not limited to inventory, accounts receivable and a pledge of the
stock of Electric Machinery Enterprises, Inc., EarthFirst Resources, Inc., World
Environmental Solutions Company, Inc., EarthFirst Investments, Inc., EM
Enterprise Resources, Inc. and EME Modular Structures, Inc., our active
subsidiaries. The notes mature on March 30, 2008. Annual interest on the
convertible minimum borrowing note and the revolving note is equal to the "prime
rate" published in The Wall Street Journal from time to time, plus 2.0%,
provided, that, such annual rate of interest may not be less than 7.0%, subject
to certain downward adjustments resulting from certain increases in the market
price of our common stock. Annual interest on the convertible term note is equal
to the "prime rate" published in The Wall Street Journal from time to time, plus
2.5%, subject to certain downward adjustments resulting from certain increases
in the market price of our common stock.
The principal amount of the secured convertible term note is repayable
at the rate of $100,000 per month together with accrued but unpaid interest,
commencing on October 1, 2005. Such amounts may be paid, at the holder's option
(i) in cash with a 2% premium; or (ii) in shares of common stock, assuming the
shares of common stock are registered under the Securities Act of 1933. If paid
in shares of common stock the number of shares to be issued shall equal the
total amount due, divided by $0.19. If the average closing price of the common
stock for five consecutive trading days prior to an amortization date is equal
to or greater than $.209, we may require the holder to convert into common stock
an amount of principal, accrued interest and fees due under the term note equal
to a maximum of 25% of the aggregate dollar trading volume of the common stock
for the 22 consecutive trading days prior to a notice of conversion. We may
redeem the term note in cash by paying the holder 125% of the principal amount,
plus accrued interest during the first year of the note, 115% of the principal
amount, plus accrued interest during the second year of the note and 110% of the
principal amount, plus accrued interest thereafter. The holder of the term note
may require us to convert all or a portion of the term note, together with
interest and fees thereon at any time. The number of shares to be issued shall
equal the total amount to be converted, divided by $0.19.
The principal amount of the secured convertible minimum borrowing note,
together with accrued interest thereon is payable on April 1, 2005. The secured
convertible minimum borrowing note may be redeemed by us in cash by paying the
holder 103% of the principal amount, plus accrued interest during the first year
of the note, 102% of the principal amount, plus accrued interest during the
second year of the note and 101% of the principal amount, plus accrued interest
thereafter. The holder of the term note may require us to convert all or a
portion of the term note, together with interest and fees thereon at any time.
The number of shares to be issued shall equal the total amount to be converted,
divided by $0.19.
Upon an issuance of shares of common stock below the fixed conversion
price, the fixed conversion price of the notes will be reduced accordingly. The
conversion price of the secured convertible notes may be adjusted in certain
circumstances such as if we pay a stock dividend, subdivide or combine
outstanding shares of common stock into a greater or lesser number of shares, or
take such other actions as would otherwise result in dilution.
120% of the full principal amount of the convertible notes are due upon
default under the terms of convertible notes. Laurus has contractually agreed to
restrict its ability to convert the convertible notes would exceed the
difference between the number of shares of common stock beneficially owned by
the holder or issuable upon exercise of the warrant and the option held by such
holder and 9.99% of the outstanding shares of our common stock.
29
A complete copy of the Securities Purchase Agreement and related
documents are filed with the SEC as exhibits to our Form SB-2 relating to this
prospectus.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Our financial statements as of December 31, 2004, and for each of the
years in the two year period then ended, have been included herein in reliance
upon the report of Aidman, Piser & Company, P.A., independent registered public
accounting firm, appearing elsewhere herein, and upon authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of common stock being
offered by this prospectus, and reference is made to such registration
statement. This prospectus constitutes the prospectus of EarthFirst
Technologies, Incorporated, filed as part of the registration statement, and it
does not contain all information in the registration statement, as certain
portions have been omitted in accordance with the rules and regulations of the
Securities and Exchange Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
30
INDEX TO FINANCIAL STATEMENTS
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
For the Period Ended March 31, 2005 and March 31, 2004
Condensed Consolidated Balance Sheets as of March 31 2005
(Unaudited) and December 31, 2004................................F-2
Condensed Consolidated Statements of Operations (Unaudited).........F-3
Condensed Consolidated Statements of Operations (Unaudited).........F-4
Condensed Consolidated Statements of Stockholders' Equity as of
March 31, 2005 (unaudited) and December 31, 2004.................F-6
Notes to Condensed Consolidated Financial Statements)...............F-7
For the Years Ended December 31, 2004 and December 31, 2003
Report of Independent Registered Public Accounting Firm............F-12
Consolidated Balance Sheets as of December 31, 2004)...............F-13
Consolidated Statement of Operations...............................F-14
Consolidated Statements of Stockholders' Equity (Deficit)..........F-15
Consolidated Statement of Cash Flows...............................F-16
Notes to Consolidated Financial Statements.........................F-18
F-1
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2005 December 31,
(Unaudited) 2004
------------ ------------
Current assets:
Cash $ 6,639,765 $ 1,482,383
Accounts receivable - net 5,700,077 8,511,692
Cost and estimated earnings in excess of
billings on uncompleted contracts 1,236,719 986,269
Inventory 1,391,827 1,400,635
Prepaid expenses and other current assets 223,519 75,034
------------ ------------
Total current assets 15,191,907 12,456,013
Property and equipment, net 4,107,426 4,340,490
Investments - at cost 300,000
Intangible assets 15,323,152 15,323,152
Loan costs and discounts 390,290
Other assets 276,897 571,603
------------ ------------
$ 35,589,672 $ 32,691,258
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt $ 71,786 $ 151,898
Secured revolving note payable 2,600,000
Secured convertible term note payable 600,000
Liabilities subject to compromise 500,000
Liabilities not subject to compromise 1,850,000
Accounts payable and accrued expenses 4,804,583 6,111,140
Billings in excess of cost and estimated
earnings on uncompleted contracts 1,742,696 1,047,565
Current maturities of notes payable, related parties 715,122
------------ ------------
Total current liabilities 9,819,065 10,375,725
------------ ------------
Secured revolving note payable, non current 1,000,000
Secured convertible term note payable, non current 2,400,000
Liabilities subject to compromise - non current 3,393,359 3,394,208
Liabilities not subject to compromise - non current 4,199,866
Other liabilities 959,400 1,081,802
Notes payable, related parties, less current maturities 6,697,519
Long term debt, less current maturities 120,785
------------ ------------
Total liabilities 17,571,824 25,869,905
Majority interest 1,200,000 1,254,025
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $.0001, 500,000,000 shares authorized, 491,413,360
shares and 301,770,150 shares issued and outstanding
at March 31, 2005 and December 31, 2004 49,141 30,177
Additional paid-in capital 72,580,376 56,795,183
Accumulated deficit (54,543,609) (49,989,972)
------------ ------------
18,085,908 6,835,388
Less treasury stock (1,950,000 shares at cost) (1,268,060) (1,268,060)
------------ ------------
Total stockholders' equity: 16,817,848 5,567,328
------------ ------------
$ 35,589,672 $ 32,691,258
============ ============
See notes to condensed consolidated financial statements.
F-2
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
Three Months Ended
March 31,
2005 2004
------------- -------------
Revenue $ 8,168,099 $ 15,000
Cost of sales 6,247,451
------------- -------------
Gross profit 1,920,648 15,000
Selling, general and administrative expenses 1,203,087 137,915
Research and development expenses 193,327 1,908,547
------------- -------------
Income (loss) from operations before
reorganization item, income
taxes and majority interest 524,234 (2,031,462)
Other income (expense):
Gain on extinguishment of debt, bankruptcy 2,178,568
Loss on disposal of assets (3,031)
Miscellaneous income 33,294
Interest expense (79,430) (51,399)
Interest expense - beneficial conversion (6,600,000)
------------- -------------
Income (loss) before reorganization item,
income taxes and majority interest (3,946,365) (2,082,861)
Reorganization item, professional
fees related to bankruptcy and
pursuit of claims (323,661)
------------- -------------
Loss before income taxes
and majority interest (4,270,026) (2,082,861)
Income tax benefit
------------- -------------
Loss before majority interest (4,270,026) (2,082,861)
Majority interest (145,975)
------------- -------------
Loss from continuing operations (4,416,001) (2,082,861)
Loss on disposal of discontinued operations (137,636)
------------- -------------
Net Loss $ (4,553,637) $ (2,082,861)
============= =============
Net Loss per common share $ (.01) $ (.01)
============= =============
Weighted average shares outstanding 379,734,581 227,479,823
============= =============
See notes to condensed consolidated financial statements.
F-3
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- -----------
Cash flows from operating activities:
Net income (loss) $(4,553,637) $(2,082,861)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Expenses funded through stock issuance 1,800,000
Beneficial conversion 6,600,000
Depreciation 77,342 2,245
Gain on cancellation of debt (2,178,568)
Loss on disposal of discontinued operations 137,636
Loss on disposal of assets 18,086
Increase (decrease) in cash due to changes in:
Current assets 2,716,194
Current liabilities (736,005) 862,591
----------- -----------
Net cash flows from operating activities 2,081,048 581,975
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (1,635,000)
Purchase of marketable securities (300,000)
----------- -----------
Net cash flows from investing activities (300,000) (1,635,000)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable, related party 1,791,516 1,049,496
Repayment of long-term debt (2,896,077)
Proceeds from Laurus credit facility 4,480,895
----------- -----------
Net cash flows from financing activities 3,376,334 1,049,496
----------- -----------
Increase (decrease) in cash 5,157,382 (3,529)
Cash, beginning of period 1,482,383 3,529
----------- -----------
Cash, end of period $ 6,639,765 $ --
=========== ===========
F-4
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
During 2005, the Company:
o Converted $9,204,157 of related party debt to 189,643,210 shares of common
stock
o Loan costs of $390,290 funded through proceeds of Laurus credit facility
o Retired secured creditor in the amount of $1,676,967 through proceeds of
Laurus credit facility
o Reduced accounts payable in the amount of $51,848 through proceeds of Laurus
credit facility
o $1,109,408.74 of third party accounts payable and accrued expenses assumed by
related party (converted to related party debt)
During 2004, the Company:
o Converted $3,934,010 of related party debt to 49,175,125 shares of common
stock
o Converted $1,400,000 of related party debt to 10,000,001 shares of common
stock
o Issued 15,000,000 shares of common stock in acquisition of the remaining 30%
interest in a joint venture, the principal asset of which consisted of
approximately $1,800,000 of in progress research and development, which is
required to be expensed immediately.
o Issued 40,000,000 shares of common stock in exchange for the stock of
Electric Machinery Enterprises, Inc. having net assets as follows:
Cash $ 3,174,317
Accounts receivable and other assets 11,460,476
Property and equipment 2,023,364
Other assets 390,289
Value of goodwill associated with acquisition 15,323,152
Accounts payable and other current liabilities (6,540,682)
Related party borrowings (4,199,926)
Liabilities subject to compromise (14,540,195)
Majority interest in Cayman joint venture (823,795)
-------------
Value of common stock issued $ 6,267,000
-------------
See notes to condensed consolidated financial statements.
F-5
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Accumulated Treasury
Shares Amount Paid-in Capital Deficit Stock Total
------------ ------------ --------------- ------------ ------------ ------------
Balances, December 31, 2004 301,770,150 $ 30,177 $ 56,795,183 $(49,989,972) $ (1,268,060) $ 5,567,328
------------ ------------ ------------ ------------ ------------ ------------
Conversion of notes payable,
related party to stock 189,643,210 18,964 9,185,193 -- -- 9,204,157
Beneficial conversion 6,600,000 -- -- 6,600,000
Net income -- -- -- (4,553,637) -- (4,553,637)
------------ ------------ ------------ ------------ ------------ ------------
Balances March 31, 2005 (unaudited) 491,413,360 $ 49,141 $ 72,580,376 $(54,543,609) $ (1,268,060) $ 16,817,848
============ ============ ============ ============ ============ ============
See notes to condensed consolidated financial statements.
F-6
1. Nature of business, basis of presentation and summary of significant
accounting policies:
Nature of business:
EarthFirst Technologies, Incorporated, a Florida Corporation formed in
1997, is a specialized holding company owning subsidiaries engaged in
researching, developing and commercializing technologies for the
production of alternative fuel sources and the destruction and/or
remediation of liquid and solid waste, and in supplying electrical
contracting services internationally.
The Company's solid waste division, operated through World Environmental
Solutions Company, Inc. (WESCO), a wholly owned subsidiary, remained
focused on the demonstration and marketing of its first "Solid Waste
Remediation Plant" in Mobile, Alabama. This unit is known as the
"Catalytic Activated Vacuum Distillation Process ("CAVD") Reactor". This
plant processes rubber tires extracting carbon and other raw materials for
resale. This process efficiently disposes of the tires in an
environmentally friendly way that allows raw materials from those waste
products to be recycled and reused.
The Company anticipates providing additional CAVD plants to customers in
various industries. The Company will bring proven technology in
replicating its production plants and distribution network for the
disposal of the by-products produced in the process.
The Company has developed technologies for the treatment of liquid waste
products. The technology involves the use of high temperature plasma
through which the liquid waste products are passed. The harmful properties
contained in the liquid waste products are broken down at the molecular
level as they pass through the plasma and a clean burning gas is produced.
Through its Electric Machinery Enterprises, Inc. subsidiary (EME), the
Company performs services as an electrical contractor and subcontractor in
the construction of commercial and municipal projects primarily located in
Florida and the Caribbean.
Basis of presentation:
The interim financial statements of EarthFirst Technologies, Incorporated
and its subsidiaries ("EarthFirst" or the "Company") that are included
herein are unaudited and have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-QSB. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations, although we believe the
disclosures which have been made are adequate to make the information
presented not misleading. In the opinion of management, these interim
financial statements include all the necessary adjustments to fairly
present the results of the periods presented. The interim financial
statements should be read in conjunction with the audited financial
statements for the year ended December 31, 2004 included in the Company's
Annual Report on Form 10-KSB for the year then ended. The interim results
reflected in the accompanying financial statements are not necessarily
indicative of the results of operations for any other interim period or
for a full fiscal year.
Variable Interest Entity:
During 2004, the Company entered into a joint venture to operate Peleme,
Ltd. (an EME affiliated Cayman company) to perform work in the Cayman
Islands. The Shareholder Agreement provides for EME's 40% ownership
interest; however, it entitles EME to 70% of the net profit of this
project and EME is responsible for 100% of the financial support pursuant
to the agreement. In accordance with SFAS Interpretation no. 46R, the
Company has accounted for this investment as a variable interest entity
and the accompanying financial statements include the assets and
liabilities of Peleme and the majority interest in this entity.
Accordingly, the joint venture financial statements have been combined
with those of the Company.
Principles of Consolidation:
The financial statements include the consolidated accounts of EarthFirst
Technologies Incorporated and all of its subsidiaries (including the
variable interest entity discussed above) (collectively, the "Company").
All significant intercompany transactions and accounts have been
eliminated.
Cash and cash equivalents:
Cash and cash equivalents are comprised of highly liquid instruments with
original maturities of three months or less. The Company maintains its
financial instruments in a variety of high-credit quality financial
institutions. The cash balance includes no cash equivalents at March 31,
2005.
F-7
Accounts Receivable and Customer Concentrations:
Accounts receivable are customer obligations due under normal trade terms.
Retainage on construction contracts, which aggregate $712,203 and are
included in accounts receivable, are contractual obligations of the
customer that are withheld from progress billings until project
completion. The Company performs continuing credit evaluations of its
customers' financial condition and does not require collateral.
Senior management reviews receivables on a monthly basis to determine if
any amounts may become uncollectible. Any contract receivable balances
that are determined to be uncollectible, along with a general reserve, are
included in the allowance for doubtful accounts. After all reasonable
attempts to collect a receivable have failed, the receivable is written
off against the allowance. Based on the information available, the Company
believes the allowance for doubtful accounts of $200,000 is adequate as of
March 31, 2005.
Accounts receivables from one customer accounted for 27% of the Company's
trade accounts receivable balance at March 31, 2005. In addition, revenues
from this one customer represented approximately 73% of all offshore sales
and approximately 45% of total sales in 2005. This Construction contract
is performed in the Cayman Islands.
Inventory:
Inventory, which consists primarily of electrical and construction
supplies, is stated at the lower of cost of market, determined by the
first-in, first-out method. The Company takes a complete physical
inventory at year end.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets,
which range from 5-7 years for machinery, computer equipment, office
equipment and furniture. Leasehold improvements are amortized over the
shorter of the term of the lease or the useful life of the asset.
Depreciation relating to the CAVD Reactor will commence when the reactor
begins revenue generating operations.
Impairment of goodwill and long-lived assets:
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), and Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), the Company reviews its
non-amortizable long-lived assets, including intangible assets and
goodwill for impairment annually, or sooner whenever events or changes in
circumstances indicate the carrying amounts of such assets may not be
recoverable. Other depreciable or amortizable assets are reviewed when
indications of impairment exist. Upon such an occurrence, recoverability
of these assets is determined as follows. For long-lived assets that are
held for use, the Company compares the forecasted undiscounted net cash
flows to the carrying amount. If the long-lived asset is determined to be
unable to recover the carrying amount, than it is written down to fair
value. For long-lived assets held for sale, assets are written down to
fair value. Fair value is determined based on discounted cash flows,
appraised values or management's estimates, depending upon the nature or
the assets. Intangibles with indefinite lives are tested by comparing
their carrying amounts to fair value. Impairment within goodwill is tested
using a two step method. The first step is to compare the fair value of
the reporting unit to its book value, including goodwill. If the fair
value of the unit is less than its book value, the Company than determines
the implied fair value of goodwill by deducting the fair value of the
reporting unit's net assets from the fair value of the reporting unit. If
the book value of goodwill is greater than its implied fair value, the
Company writes down goodwill to its implied fair value. The Company's
goodwill relates to the acquisition of Electric Machinery Enterprises,
Inc.
Income taxes:
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and federal income tax basis
of assets and liabilities that will result in taxable income or deductible
amounts in the future, based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized
F-8
Revenue recognition:
Revenues recognized from solid waste transactions during 2004 are the
result of contracted monthly minimum draws against sales commissions on
the products of a polymer manufacturing company, and the receipt of
license fees granting the exclusive option to purchase total rights to the
CAVD technology for use in certain geographical areas. License revenue is
recognized upon receipt as there are no future obligations associated with
such revenue. There are no revenues recognized from solid waste
transactions during the quarter ended March 31, 2005.
The Company uses the percentage-of-completion method of accounting for
contract revenue from electrical contracts where percentage of completion
is computed on the cost to total cost method. Under this method, contract
revenue is recorded based upon the percentage of total contract costs
incurred to date to total estimated contract costs, after giving effect to
the most recent estimates of costs to complete. Revisions in costs and
revenue estimates are reflected in the period in which the revisions are
determined. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined without regard to
the percentage-of-completion. Because of the inherent uncertainties in
estimating costs, it is possible that the estimates used will change.
Contract Claims
As of March 31, 2005 the Company has certain contracts and claims in
various stages of negotiation, arbitration and litigation in the
approximate amount of $9,000,000. The Company is attempting to resolve
these matters, and expects to be successful in recovering these amounts.
However, as in all matters in litigation, the outcome is not certain and
amounts recovered, if any, could be materially different than expected.
These amounts, which are not carried as assets on the balance sheet, will
be recorded as revenue when such claims are settled.
Fair value of financial instruments:
At March 31, 2005, the carrying amount of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, and notes payable
approximate fair value based either on the short term nature of the
instruments or on the related interest rate approximating the current
market rate.
In February of 2005, the Company purchased 7,500,000 shares of Hybrid Fuel
Systems, Inc. common stock for $300,000. Thus far during calendar 2005,
Hybrid Fuel's shares have been trading at prices ranging from 40 to 90
cents per share. This investment is carried on the balance sheet at cost.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures. Actual
results could differ from those estimates. Net income (loss) per share:
The basic net income (loss) per common share is computed by dividing the
net income (loss) by the weighted average number of common shares
outstanding.
Diluted net income (loss) per common share is computed by dividing the net
income (loss) by the weighted average number of common shares outstanding
plus potential dilutive securities (common stock options and warrants).
For the three months ended March 31, 2005 and 2004, potential dilutive
securities had an anti-dilutive effect and were not included in the
calculation of diluted net loss per common share.
Recent accounting pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." The
statement amends Accounting Research Bulletin ("ARB") No. 43, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. ARB No. 43
previously stated that these costs must be "so abnormal as to require
treatment as current-period charges. "SFAS No. 151 requires that those
items are recognized as current-period charges regardless of whether they
meet the criterion of "so abnormal." In addition, this statement requires
that allocation of fixed production overhead to the costs of conversion
are based on the normal capacity of the production facilities. The
statement is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005, with earlier application permitted for
fiscal years beginning after the issue date of the statement. The adoption
of SFAS No. 151 is not expected to have any significant impact on the
Company's current financial condition or results of operations.
F-9
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--An Amendment of APB Opinion No. 29." APB Opinion No. 29,
"Accounting For Nonmonetary Transactions," is based on the opinion that
exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception of nonmonetary assets whose results
are not expected to significantly change the future cash flows of the
entity. The adoption of SFAS No. 153 is not expected to have any impact on
the Company's current financial condition or results of operations.
In December 2004, the FASB revised its SFAS No. 123 ("SFAS No. 123R"),
"Accounting for Stock Based Compensation." The revision establishes
standards for the accounting of transactions in which an entity exchanges
its equity instruments for goods or services, particularly transaction in
which an entity obtains employee services in share-based payment
transactions. The revised statement requires a public entity to measure
the cost of employee services received to exchange for an award to equity
instruments based on the grant-date fair value of the award. The cost is
recognized over the period during which the employee is required to
provide service in exchange for the award. The provisions of the revised
statement are effective for financial statements issued for the first
interim or annual reporting period beginning after June 15, 2005, with
early adoption encouraged. The Company accounts for options issued to
employees under APB 25; however currently has no unvested options
outstanding. Adoption of this standard in 2005 will result in recognition
of stock-based compensation determined using the fair value method for
options issued in the future.
2. Laurus Credit Facility
On March 30, 2005, EarthFirst Technologies, Incorporated (the "Company")
entered into agreements with Laurus Master Funds, Ltd, a Cayman Islands
corporation ("Laurus"), pursuant to which the Company sold convertible
debt, an option and a warrant to purchase common stock of the Company to
Laurus in a private offering pursuant to exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended. The securities
being sold to Laurus include the following:
o a secured convertible minimum borrowing note and a secured revolving
note with an aggregate principal amount not to exceed $5,000,000;
o a secured convertible term note with a principal amount of
$3,000,000;
o a common stock purchase warrant to purchase 11,162,790 shares of
common stock of the Company, at a purchase price of $0.23 for the
first 5,581,395 shares and $0.28 for any additional shares,
exercisable for a period of seven years; and
o an option to purchase 24,570,668 shares of common stock of the
Company, at a purchase price equal to $0.01 per share, exercisable
for a period of six years.
At the closing of the foregoing financing from Laurus, on March 31, 2005,
the Company received $3,000,000 in connection with the convertible term
note. In addition, the Company is permitted to borrow an amount based upon
its eligible accounts receivable and inventory, pursuant to the
convertible minimum borrowing note and the revolving note. Accordingly at
the closing, the Company received an additional $3,600,000 for an
aggregate of $6,600,000 in financing from Laurus.
The Company must pay certain fees in the event the facility is terminated
prior to expiration. The Company's obligations under the notes are secured
by all of the assets of the Company, including but not limited to
inventory, accounts receivable and a pledge of the stock of Electric
Machinery Enterprises, Inc., EarthFirst Resources, Inc., World
Environmental Solutions Company, Inc., EarthFirst Investments, Inc., EM
Enterprise Resources, Inc. and EME Modular Structures, Inc., the active
subsidiaries of the Company. The notes mature on March 30, 2008. Annual
interest on the convertible minimum borrowing note and the revolving note
is equal to the "prime rate" published in The Wall Street Journal from
time to time, plus 2.0%, provided, that, such annual rate of interest may
not be less than 7.0%, subject to certain downward adjustments resulting
from certain increases in the market price of the Company's common stock.
Annual interest on the convertible term note is equal to the "prime rate"
published in The Wall Street Journal from time to time, plus 2.5%, subject
to certain downward adjustments resulting from certain increases in the
market price of the Company's common stock.
The principal amount of the secured convertible term note is repayable at
the rate of $100,000 per month together with accrued but unpaid interest,
commencing on October 1, 2005. Such amounts may be paid, at the holder's
option (i) in cash with a 2% premium; or (ii) in shares of common stock,
assuming the shares of common stock are registered under the Securities
Act of 1933. If paid in shares of common stock the number of shares to be
issued shall equal the total amount due, divided by $0.19. If the average
closing price of the common stock for five consecutive trading days prior
to an amortization date is equal to or greater than $.209, the Company may
require the holder to convert into common stock an amount of principal,
accrued interest and fees due under the term note equal to a maximum of
25% of the aggregate dollar trading volume of the common stock for the 22
consecutive trading days prior to a notice of conversion. The Company in
cash may redeem the term note by paying the holder 125% of the principal
amount, plus accrued interest during the first year of the note, 115% of
the principal amount, plus accrued interest during the second year of the
note and 110% of the principal amount, plus accrued interest thereafter.
The holder of the term note may require the Company to convert all or a
portion of the term note, together with interest and fees thereon at any
time. The number of shares to be issued shall equal the total amount to be
converted, divided by $0.19.
F-10
The principal amount of the secured convertible minimum borrowing note,
together with accrued interest thereon is payable on April 1, 2005. The
secured convertible minimum borrowing note may be redeemed by the Company
in cash by paying the holder 103% of the principal amount, plus accrued
interest during the first year of the note, 102% of the principal amount,
plus accrued interest during the second year of the note and 101% of the
principal amount, plus accrued interest thereafter. The holder of the term
note may require the Company to convert all or a portion of the term note,
together with interest and fees thereon at any time. The number of shares
to be issued shall equal the total amount to be converted, divided by
$0.19.
Upon an issuance of new shares of common stock below the fixed conversion
price, the fixed conversion price of the notes will be reduced
accordingly. The conversion price of the secured convertible notes may be
adjusted in certain circumstances such as if we pay a stock dividend,
subdivide or combine outstanding shares of common stock into a greater or
lesser number of shares, or take such other actions as would otherwise
result in dilution.
120% of the full principal amount of the convertible notes are due upon
default under the terms of convertible notes. Laurus has contractually
agreed to restrict its ability to convert the convertible notes would
exceed the difference between the number of shares of common stock
beneficially owned by the holder or issuable upon exercise of the warrant
and the option held by such holder and 4.99% of the outstanding shares of
common stock of the Company.
The Company is obligated to file a registration statement registering the
resale of shares of the Company's common stock issuable upon conversion of
the convertible notes, exercise of the warrant and exercise of the option.
If the registration statement is not filed by May 30, 2005, or declared
effective within 60 days thereafter, or if the registration is suspended
other than as permitted, in the registration rights agreement between the
Company and Laurus, the Company is obligated to pay Laurus certain fees
and the obligations may be deemed to be in default.
The Company paid a fee at closing to Laurus Capital Management LLC, the
manager of the Laurus Master Funds, Ltd., equal to 3.6% of the total
maximum funds to be borrowed under the Company's agreements with Laurus.
3. Satisfaction of all Secured Debt
On March 31, 2005, with the closing of the Laurus Credit Facility, the
Company was able to take advantage of discounts available through the
approved reorganization plan for its wholly owned subsidiary, EME., and
completely satisfy all remaining obligations associated with the secured
debt, resulting in a gain on extinguishment of debt in the amount of
$2,178,568.
4. Sale of Subsidiary
On March 23, 2005, the Company closed on the sale of EM Enterprises
General Contractors, Inc., a subsidiary of EME for $900,000. Pursuant to
the "EMEGC Stock Sale Agreement, the transaction has been accounted for
with an effective date of January 1, 2005. The proceeds of the sale went
to the secured creditor as a part of accomplishing the satisfaction of the
secured debt.
5. Contracts in Progress
Uncompleted contracts are summarized as follows:
Costs incurred on uncompleted contracts $ 10,293,454
Estimated earnings on uncompleted contracts 1,420,719
------------
11,714,173
Less billings to date (12,220,150)
------------
$ (505,977)
The components of this amount are included on the balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
Uncompleted contracts $ 1,236,719
Billings in excess of costs and estimated earnings on
uncompleted contracts (1,742,696)
-----------
$ (505,977)
F-11
6. Property, Plant and Equipment
Property, plant and equipment consisted of the following at March 31,
2005:
Land $ 52,244
Buildings 1,267,139
Leasehold improvements 825,429
Equipment 2,080,767
Vehicles 902,705
Furniture, fixtures and other 150,898
-----------
5,279,182
Less accumulated depreciation (3,416,893)
-----------
1,862,289
Construction in process 2,245,137
-----------
$ 4,107,426
===========
Construction in process represents the costs of constructing the Company's
first CAVD reactor in Mobile, Alabama. This reactor is anticipated to be
placed in service in the second quarter of 2005.
7. Notes Payable / Credit Facility
Notes payable consisted of the following at March 31, 2005:
Promissory note payable to vendor in lieu of payment on administrative
claim, no accrued interest; bi monthly payments of $7,500, with final
payment of $25,638 by January 1, 2006 63,138
Installment notes payable to a bank and finance company, with Monthly
payments of approximately $1,372 including interest monthly payments of
approximately $8,157 including interest, from
5.33% to 15%, secured by equipment 8,648
-----------
$ 71,786
Less current maturities (71,786)
-----------
Notes payable - non-current portion $ - 0 -
===========
Credit facilities payable consisted of the following at March 31, 2005:
Secured Revolving Note, Laurus, including a Convertible Minimum
Borrowing Note component of $ 1,000,000 secured by all of the
assets of the Company, including but not limited to inventory,
accounts receivable and a pledge of the stock of all of its
subsidiaries, bearing interest at prime plus 2.0%
(7.75% at March 31, 2005) $ 3,600,000
-----------
Secured Convertible Term Note, Laurus, secured by all of the assets
of the Company, including but not limited to inventory, accounts
receivable and a pledge of the stock of all of its subsidiaries, due
in 30 monthly installments of $100,000 plus interest at prime plus
2.5% (8.25% at March 31, 2005) commencing October 1, 2005 3,000 000
-----------
6,600,000
Less current maturities (3,200,000)
-----------
Credit facilities payable - non-current $ 3,400,000
===========
F-12
Future maturities of notes payable are as follows:
Years ending March 31,
2005 $ 71,786
2006 - 0 -
-----------
$ 71,786
Future maturities of credit facilities payable are as follows:
Years ending March 31,
2005 $ 3,200,000
2006 1,200,000
2007 1,200,000
2008 1,000,000
-----------
$ 6.600.000
===========
8. EME Bankruptcy and Plan of Reorganization Obligations
On May 29, 2003, ("Petition Date"), Electric Machinery Enterprises, Inc.
(the "Debtor") filed a petition or relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Middle
District of Florida ("the Bankruptcy Court"). Under Chapter 11, certain
claims against the debtor in existence prior to the filing of the
petitions for relief under the Bankruptcy Code were stayed while the
Debtor continued business operations as Debtor-In-Possession. The
remaining balances of these claims as of March 31, 2005, are reflected in
the balance sheet as liabilities subject to compromise and accounts
payable.
The Plan of Reorganization (the "Plan") filed on behalf of Electric
Machinery Enterprises, Inc. was confirmed by the Bankruptcy Court on
December 9, 2004. The plan provides for the restructure of debt, and
orderly discharge of pre-petition priority and administrative claims. The
restructured obligations under the Plan as of March 31, 2005 consisted of
the following:
Administrative debt
Costs and legal expenses for the administration of
the reorganization case $ 197,989
Priority claims pre-petition
Federal and state priority tax claims 24,874
Unsecured debt
75% of liability from settlement of lawsuit 3,075,000
75% of pre-petition accounts payable 318,359
-----------
$ 3,616,222
The Plan of Reorganization Obligations are included in the balance
sheet in the following categories:
Current liabilities:
Accounts payable and accrued expenses $ 222,863
Liabilities subject to compromise - non current 3,393,359
-----------
$ 3,616,222
===========
The administrative debt and priority claims are to be paid out of normal
operations and are anticipated to be paid within the year. The settlement
amount of $3,075,000, included in unsecured debt can be paid off for
$2,275,000 if paid within one year. The intent of management is to
discount this amount further, and pay it off as quickly as possible. The
pre-petition accounts payable required a $500,000 payment to the
bankruptcy trustee in January 2005, which was made, with the balance paid
off as quickly as possible; however there are no specific payment terms
beyond this $500,000.
9. Commitments and Contingencies
Lease obligations:
The Company leases vehicles under noncancellable operating leases for
periods up to four years. In addition, the Company conducts its operations
in a facility leased from a related corporation owned by stockholders of
Electric Machinery Enterprises, Inc.
F-13
The total rent expense for the three months ended March 31, 2005 was
approximately $173,762, of which approximately $166,262 was for the
facility leased from a related corporation.
Approximate future minimum rentals on noncancellable leases at March 31,
2005 are as follows:
Year ending March 31,
2005 $ 733,226
2006 559,106
--------------
$ 1,292,332
Legal proceedings:
The Company is involved in litigation with Ruggero Maria Santilli
("Santilli"), The Institute for Basic Research, Inc. ("IBR"), and Hadronic
Press, Inc. ("Hadronic") concerning certain aspects of the Company's
liquid waste technologies.
The matters contemplated above will be referred to as the "Santilli Suit"
and the "Hadronic Suit". Hadronic claims to own the intellectual property
rights to one or more aspects of the Company's liquid waste technologies.
Management continues to believe that the Company owns all of the
intellectual property rights necessary to commercialize and further
develop its liquid and solid waste technologies without resorting to a
license from any third parties.
During 2004, the Company has attempted to reach agreement with Santilli
and his related parties to resolve the differences between the parties. As
of this date, the parties are continuing their efforts to resolve their
differences.
The litigation described above does not involve the technology the Company
is developing in connection with its efforts for the processing of used
automotive tires.
The Company is also involved in disputes with vendors for various alleged
obligations associated with operations that were discontinued in prior
years. Several disputes involve deficiency balances associated with lease
obligations for equipment acquired by the Company for its contract
manufacturing and BORS Lift operations that were discontinued during
calendar 2000. The machinery and equipment associated with many of these
obligations has been sold with the proceeds paid to the vendor or the
equipment has been returned to the vendor. Several of the equipment
leasing entities claim that balances on the leases are still owed.
The Florida Department of Revenue (the "DOR") has conducted an examination
of the Company's Florida Sales and Use Tax Returns from its inception
through June 30, 2001.
The Company has other litigation and disputes that arise in the ordinary
course of its business. The Company has accrued amounts for which it
believes all of its disputes will ultimately be settled.
10. Retirement Plan
The Company adopted a 401(k) savings plan effective January 1, 1997. The
Plan covers all employees who are at least 18 years of age with one or
more years of service. The Company did not make any discretionary
contributions for the three months ended March 31, 2005 or 2004.
11. Employee Stock Ownership Plan and Trust
On December 12, 2004, Electric Machinery Enterprises, Inc. ("EME")
terminated the EME Employee Stock Ownership Plan (the "Plan"). All
employees who were not fully vested became 100% vested as of December 12,
2004. Participants of the Plan are to be distributed stock of EarthFirst
Technologies, Inc. that is held in the EME Employee Stock Ownership Trust
on their behalf. EME has no obligation for the repurchase of the stock
distributed to the participants of the Plan because the shares are
publicly traded and as such, there is a market available in which the
participants may sell their shares.
12. Variable Interest Entity
During 2004, the Company entered into a joint venture to operate Peleme,
Ltd. (a Cayman company) to perform work in the Cayman Islands. The
Shareholder Agreement provides for EME's 40% ownership interest; however,
it entitles Electric Machinery to 70% of the net profit of this project
and EME is responsible for 100% of the financial support pursuant to the
agreement.
F-14
13. Related party transactions:
Material related party transactions that have been entered into by the
Company that are not otherwise in these notes are summarized below:
Notes payable, related parties consisted of two notes payable to an entity
controlled by the Company's Chief Executive Officer (John Stanton) (also a
principal stockholder) pursuant to revolving lines of credit secured by
all of the assets of EarthFirst. During the three months ended March 31,
2005, this entity assumed $1,109,408.74 of the Company's third party
accounts payable and accrued expenses resulting in a similar increase in
amounts due to related party. To the extent that the related entity did
not honor these liabilities, the Company remains contingently liable on
such amounts. Management does not expect any of these claims to be
asserted against the Company as Mr. Stanton has affirmatively indicated he
and/or the related entity that assumed the liabilities will honor and/or
otherwise resolve any such amounts with the third party creditors.
On February 23, 2005, the entire remaining balance of amounts due under
these notes in the amount of $9,204,157 was converted into 189,643,210
shares of the Company's common stock. As of March 31, 2005 there are no
remaining amounts due to related parties.
The Company leases and rents the real property, building, and all other
improvements located at 2515 E Hanna Avenue, Tampa, Florida 33610 from
Hanna Properties Corp., a related party affiliated with the President of
EME. This property consists of 29,680 sq. ft. of office space, 80,320 sq.
ft. of warehouse space and 26,992 sq. ft. of garage and workshop space.
Monthly rental including sales tax, but excluding real estate taxes and
insurances is $52,133. This lease obligation was assumed pursuant to EME's
reorganization plan for a period of two years, at which time EarthFirst
has the option to re-evaluate. This location is the corporate headquarters
of EarthFirst Technologies Incorporated and its subsidiaries.
14. Stockholders equity:
On April 29, 2005, the Company filed schedule 14c preliminary information
statement to inform the stockholders of record that the Articles of
Incorporation are going to be amended restating the authorized limit of
common stock the Company may issue from 500,000,000 to 750,000,000 shares.
On January 26, 2004, the Company finalized a letter of understanding
("LOU") with World Environmental Solutions Company, LLC ("WESCO"),
Harmony, LLC and Turner Industries ("Harmony/Turner") wherein the Company
agreed to form a new LLC ("Holdings") to commercialize certain Solid Waste
Technology. Pursuant to the LOU, Holdings agreed to fund $50,000 in
engineering costs and provide management and expertise to create an
operational plant. The agreement further specifies that Harmony, LLC and
Turner Industries (Company whose Chairman is related to the President of
the Company) agree to a cost plus construction contract to build the Solid
Waste Remediation Plant and to maintain the capability to build four
additional plants in the near term with a total of 43 plants projected
within a 5 year period.
On January 30, 2004, the Company and WESCO entered into a separate
agreement whereby in exchange for 70% of Holdings (bringing the Company's
ownership to 100% of this new joint venture holding company) the Company
issued 15,000,000 shares of the Company's stock in exchange for certain
solid waste technology owned by WESCO ("Solid Waste"). This transaction
was valued at the common stock trading market value of $0.12 per share on
the date of the agreement. Future stock issuances to the principals of
WESCO contemplated under the agreement are as follows:
Upon sale of first 13 reactors 5 million common
shares Upon sale of 13 additional reactors 5 million common shares
15. Subsequent Events
On April 29, 2005, the Company filed Schedule 14C, preliminary information
statement in connection with certain actions to be taken pursuant to the
written consent of the stockholders of the Company holding a majority of
the outstanding shares of common stock in lieu of a special meeting.
This information statement was filed for the purpose of amending the
articles of incorporation to increase the number of authorized shares of
common stock to 750,000,000.
16. 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 most of 2004.
The Company has historically funded these negative operating cash flows
with proceeds from sales of common and preferred stock, as well as notes
and convertible debentures payable.
F-15
In December 2000 and again in January 2003, the Company entered into
multiple revolving line of credit promissory notes with entities related
to the Company's Chief Executive Officer, secured by all of the assets of
the Company. Each revolving note was a demand loan, which meant that the
lender could demand full repayment of the loan at any time. The promissory
notes related to each revolving line of credit merely provided for a loan
up to a stated amount. There was no obligation on the part of the related
party to make any loans pursuant to these agreements if the loan balance
was less than the stated amount. There was no obligation on the part of
the related parties to make any additional loans.
Historically, the related party lender has periodically agreed to convert
portions of the loan balances into shares of the Company's common stock.
During 2004, the related party converted $5,334,010 of these notes into
shares of the Company's common stock.
As of December 31, 2004, the Company owed $6,672,519 pursuant to these
agreements. Subsequent to December 31, 2004, additional loans were made
under these notes to help secure the outcome of the reorganization of EME.
On February 23, 2005 the full balance of notes payable to related parties
was converted into 189,643,210 shares of the Company's common stock.
Since the acquisition of EME in August of 2004, the Company is no longer
experiencing negative operating cash flows. Working capital as of March
31, 2005 was approximately $5.3 million and stockholders equity was
approximately $16.8 million.
The Company generated a net income in the fourth quarter of 2004 of
$1,096,136, and a net operating profit of $524,234 in the first quarter of
2005. Although the statement of operations for the three months ended
March 31, 2005 reflects a net loss of $4,553,637, cash flows from
operations were $2,081,048.
On March 30, 2005, the Company closed an agreement with Laurus Funds on a
senior credit facility aggregating up to $8 million. The initial funding
under this agreement was $6.6 million. This transaction allowed the
Company to take advantage of discounts relative to the settlement of the
secured debt in EME's bankruptcy, as well as provide working capital.
Generally Accepted Accounting Principles require the convertible features
of this financing and the options and warrants that accompany it to be
recorded as a non-cash expense in the current period. The net effect of
this accounting is to record a charge to earnings in the amount of
$6,600,000.
As a result of the completion of the various undertakings of 2004, the
acquisition of WESCO, the completion of the CAVD plant in Mobile, Alabama,
the acquisition and reorganization of EME, and the subsequent financing in
2005, the Company does not anticipate any additional loans from the
related parties referred to above.
The Company believes that through aggressive management of the resources
within the Company and the funding obtained through the Laurus credit
facility, the opportunities developed over the past few years are becoming
available in a real sense.
Electrical contracting through EME provides a strong revenue stream for
funding future growth in all phases of the business. EME has been in
business for over 75 years and has historically been profitable. The
EarthFirst management team coupled with the years of experience embedded
in the operations of EME provides potential for a solid consistent
company. Profitability is being improved by the introduction of enhanced
technology in the bidding process as well as a timelier monitoring of job
progress as work is performed. More efficient data gathering and
processing are providing better information through improved internal
reporting models, affording management better information for decision
making.
EME has also developed a strategy to enter the residential marketplace as
an electrical contractor. It is anticipated that EME may have certain
competitive advantages that may allow it to successfully operate
profitably in this market. These services are currently being offered on a
small scale to prove the economic viability of this endeavor.
The hurricane season of 2004, as unfortunate as it was, is providing a
large expanse of work opportunity in the Caribbean islands. EME has a long
history of providing services in these geographical areas, and management
believes this will be a very strong segment of the Company's business for
several years.
The Company is also evaluating potential target acquisitions with strong
synergies in the electrical contracting business. Management wants to
bring a higher level of service to customers to not only solidify
relationships, but to create a win win scenario of better service at
better prices. This will be accomplished through the Company's ability to
assist with the design of the construction projects, rather than just the
installation.
F-16
These strategies will afford stability to the electrical contracting
business that is anticipated to help to expand the efforts in the
commercialization of the solid and liquid waste technologies. Several
licenses were sold and letters of intent signed during 2004 setting the
stage for the CAVD technology during 2005.
During the twelve months ended December 31, 2004, the Company received
$100,000 from PEPER Holdings, LLC (PEPER), for a License Contract
providing PEPER to secure the exclusive territory of Ciudad Juarez,
Chihuahua, Mexico for 18 months, and the city of Guadalajara, Jalisco,
Mexico for 6 months. During this period, PEPER intends to initiate
construction of Catalytic Activated Vacuum Distillation (CAVD) plants that
process rubber tire chips into usable energy products. The period of the
exclusivity allows for environmental, political, and financial details to
be finalized by PEPER. PEPER will purchase the plants from EFTI and own
the plants. EFTI will receive a 15% royalty based on gross profit and a
technical support contract for continuing services during the life of the
plant. The plants will be built by Harmony, LLC, a Turner Industries
company that built the operating plant in Mobile, Alabama
The Company has signed a Letter of Intent with EarthClean Energy ("ECE")
to license territories in Canada and for the sale of a CAVD Reactor. The
agreement with ECE is a license for three provinces in Canada: Ontario,
Quebec and Alberta. Pursuant to the agreement, a nonrefundable license fee
of $1,000,000 US will be paid to EFTI within one year. At the signing of
the Formal License Contract, a 10% deposit for the purchase of the first
plant will be made with the balance secured by a Letter of Credit. ECE
will own 100% of the plants and EFTI will receive royalties for continued
services during the contract period.
The Company has signed a Letter of Intent with San Vision Technology, Inc.
("SVT") to license the territory of Ocean City, New Jersey. At the signing
of a contract for their first CAVD Reactor, 10% of the plant sale will be
paid to EFTI with the balance secured by a Letter of Credit. SVT will own
the CAVD Reactor(s) and EFTI will receive royalties for continued services
during the contract period.
The Letters of Intent with both EarthClean Energy and San Vision
Technology are dependant upon completed carbon sales contracts by the
Company.
Based upon extensive work with significant companies in the carpet
industry, EFTI is confident that the carpet industry will be a large
market for the carbon by-product of the CAVD process.
Our technology is gaining acceptance in areas where the sale of the carbon
is becoming less important, and the benefit of destroying and/or
converting the waste streams into usable by-products without contaminating
the environment, is becoming more important.
While management is confident that the above agreements and market
opportunities will materialize, there can be no assurances.
F-17
Report of Independent Registered Public Accounting Firm
Board of Directors
EarthFirst Technologies, Incorporated
Tampa, Florida
We have audited the accompanying consolidated balance sheet of EarthFirst
Technologies, Incorporated and Subsidiaries (the "Company"), as of December 31,
2004, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years ended December 31, 2004 and 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis of designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
EarthFirst Technologies, Incorporated and Subsidiaries, at December 31, 2004,
and the consolidated results of their operations and their cash flows for the
years ended December 31, 2004 and 2003 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Aidman, Piser & Company, P.A.
March 18, 2005
Tampa, Florida
F-18
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
Current assets:
Cash $ 1,482,383
Accounts receivable - less $200,000 allowance for doubtful accounts 8,511,692
Cost and estimated earnings in excess of billings on uncompleted contracts 986,269
Inventory 1,400,635
Prepaid expenses and other current assets 75,034
------------
Total current assets 12,456,013
Property and equipment, net 4,340,490
Goodwill 15,323,152
Other assets 571,603
------------
$ 32,691,258
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt $ 151,898
Liabilities subject to compromise 500,000
Liabilities not subject to compromise 1,850,000
Accounts payable and accrued expenses 6,111,140
Billings in excess of cost and estimated earnings on uncompleted contracts 1,047,565
Current maturities of notes payable, related parties 715,122
------------
Total current liabilities 10,375,725
Liabilities subject to compromise - Non current 3,394,208
Liabilities not subject to compromise - Non current 4,199,866
Other liabilities 1,081,802
Notes payable, related parties, less current maturities 6,697,519
Long term debt, less current maturities 120,785
------------
Total liabilities 25,869,905
Majority interest in consolidated joint venture 1,254,025
Commitments and contingencies (note 15) --
Stockholders' equity:
Common stock, par value $.0001, 500,000,000 shares authorized,
301,770,150 shares issued and outstanding 30,177
Additional paid-in capital 56,795,183
Accumulated deficit (49,989,972)
------------
6,835,388
Less: treasury stock (1,950,000 shares at cost) (1,268,060)
------------
Total stockholders' equity 5,567,328
------------
$ 32,691,258
============
See notes to consolidated financial statements.
F-19
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
Revenue $ 15,314,892 $ --
Cost of sales 11,209,802 --
------------- -------------
Gross profit 4,105,090 --
Selling, general and administrative expenses 3,425,839 651,948
Research and development expenses 2,474,949 345,057
Settlement expense -- 280,000
------------- -------------
Loss from operations before reorganization item, income taxes and majority interest (1,795,698) (1,277,005)
Other income (expense):
Gain on extinguishment of debt, bankruptcy 1,298,068 195,000
Miscellaneous income (expense), net 333,214
Interest expense (469,514) (373,607)
------------- -------------
Loss before reorganization item, income taxes and majority interest (633,930) (1,455,612)
Reorganization item, professional fees related to bankruptcy and pursuit of claims (1,202,829) --
------------- -------------
Loss before income taxes and majority interest (1,836,759) (1,455,612)
Income tax benefit -- --
------------- -------------
Loss before majority interest (1,836,759) (1,455,612)
Majority interest in net income of consolidated joint venture (430,230) --
------------- -------------
Loss from continuing operations (2,266,989) --
Discontinued operations -- 19,418
------------- -------------
Net loss $ (2,266,989) $ (1,436,194)
============= =============
Loss per common share, basic and diluted:
Continuing operations $ (.01) $ (.01)
Discontinued operations -- --
------------- -------------
Net loss $ (.01) $ (.01)
============= =============
Weighted average shares outstanding, basic and diluted 264,319,455 186,936,602
============= =============
See notes to consolidated financial statements.
F-20
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2004 AND 2003
Common Stock Additional
----------------------------- Paid-in Accumulated Treasury
Shares Amount Capital Deficit Stock Total
----------- ------------ ------------ ------------ ------------ ------------
Balances, January 186,821,024 $ 18,682 $ 42,996,889 $(46,286,789) $ (1,268,060) $ (4,539,278)
1, 2003
Issuance of stock 174,000 17 9,118 -- -- 9,135
as partial payment
to settle dispute
Capital -- -- 356,744 -- -- 356,744
contribution
Issuance of stock 600,000 60 42,840 -- -- 42,900
to acquire
business
Net loss -- -- -- (1,436,194) -- (1,436,194)
----------- ------------ ------------ ------------ ------------ ------------
Balances, December 187,595,024 18,759 43,405,591 (47,722,983) (1,268,060) (5,566,693)
31, 2003
Conversion of 49,175,125 4,918 3,929,092 -- -- 3,934,010
notes payable,
related party to
stock
Conversion of 10,000,001 1,000 1,399,000 -- -- 1,400,000
notes payable,
related party to
stock
Issuance of stock 15,000,000 1,500 1,798,500 -- -- 1,800,000
to acquire WESCO
Issuance of stock 40,000,000 4,000 6,263,000 -- -- 6,267,000
to acquire EME
Net loss -- -- -- (2,266,989) -- (2,266,989)
----------- ------------ ------------ ------------ ------------ ------------
Balances December
31, 2004 301,770,150 $ 30,177 $ 56,795,183 $(49,989,972) $ (1,268,060) $ 5,567,328
=========== ============ ============ ============ ============ ============
notes to consolidated financial statements.
F-21
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
Cash flows from operating activities:
Net loss $(2,266,989) $(1,436,194)
Adjustments to reconcile net loss to net cash flows from operating activities:
Majority interest in net income of consolidated joint venture 430,230 --
Intangible asset impairment 142,900 --
Depreciation and amortization 77,342 15,081
In-process research and development expensed at acquisition 1,800,000 --
Gain on extinguishment of debt, bankruptcy (1,298,068) (195,000)
Loss on disposal of asset -- 33,300
Increase (decrease) in cash due to changes in:
Accounts receivable (1,047,553) --
Cost and estimated earnings in excess of billings on uncompleted contracts 620,585 --
Inventory 336,520 --
Prepaid expenses and other assets 395,980 --
Accounts payable and accrued expenses (2,636,730) 110,483
Billings in excess of cost and estimated earnings on uncompleted contracts (225,119) --
Accrued interest on related party payables 244,571 373,607
----------- -----------
Net cash flows from operating activities (3,426,331) (1,098,723)
----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment (2,376,545) --
Cash acquired in business acquisition 3,174,317 --
Cash paid for business acquisition -- (50,000)
----------- -----------
Net cash flows from investing activities 797,772 (50,000)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable related party 4,107,413 1,152,252
----------- -----------
Net cash flows from financing activities 4,107,413 1,152,252
----------- -----------
Net change in cash 1,478,854 3,529
Cash, beginning of year 3,529 --
----------- -----------
Cash, end of year $ 1,482,383 $ 3,529
=========== ===========
F-22
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2004 AND 2003
Supplemental schedule of cash flow information
2004 2003
-------- -------
Cash paid during the year for interest $123,632 $ --
======== =======
Cash paid during the year for income taxes $ -- $ --
======== =======
Supplemental schedule of non-cash financing and investing activities
During 2004, the Company
o Converted $3,934,010 of related party debt to 49,175,125 shares of common
stock
o Converted $1,400,000 of related party debt to 10,000,001 shares of common
stock
o Issued 15,000,000 shares of common stock in acquisition of the remaining
30% interest in a joint venture, the principal asset of which consisted of
approximately $1,800,000 of in progress research and development, which is
required to be expensed immediately.
o Issued 40,000,000 shares of common stock in exchange for the stock of
Electric Machinery Enterprises, Inc. having net assets as follows:
Cash $ 3,174,317
Accounts receivable and other current assets 11,460,476
Property and equipment 2,023,364
Other assets 390,289
Value of goodwill associated with acquisition 15,323,152
Accounts payable and other current liabilities (6,540,682)
Related party borrowings (4,199,926)
Liabilities subject to compromise (14,540,195)
Majority interest in Cayman joint venture (823,795)
------------
Value of common stock issued $ 6,267,000
============
During 2003, the Company
o Settled $83,000 in disputed claims against the Company in exchange for
174,000 shares of common stock valued at $9,135 and $73,865 of other
consideration that was funded by related party advances.
o Acquired the business assets of Applied Tech Consulting, Inc. in exchange
for $50,000 in cash and 600,000 shares of common stock valued at $42,900
and an obligation to fund a remaining $50,000 in 2004.
o Repaid $450,000 in related party notes payable via a transfer of land with
a cost basis of $93,256. The $356,744 differential between the cost basis
of the land and the note obligation relieved has been recorded as a
non-cash capital contribution.
F-23
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. Nature of business, basis of presentation and summary of significant
accounting policies:
Basis of presentation:
The financial statements of EarthFirst Technologies, Incorporated and its
subsidiaries ("EarthFirst" or "the Company") that are included herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America, and include all the necessary adjustments to fairly
present the results of the periods presented.
On August 20, 2004, the Company acquired the stock of Electric Machinery
Enterprises, Inc. ("EME") in exchange for 40,000,000 shares of the Company's
common stock. The Company acquired EME after EME had sought protection from
creditors under Chapter 11 of the United States Bankruptcy Code ("the Bankruptcy
Code"). EME is located in Tampa, Florida, and is an electrical contractor
engaged primarily in the electrical-related construction of industrial and
commercial buildings primarily in Florida and the Caribbean. EME's construction
contracts are typically twelve months or less, but may involve a longer duration
of time depending upon the nature and size of the construction project. Through
one of its subsidiaries, E.M. Enterprises General Contractors, Inc. ("EMEGC"),
EME was involved in the construction of towers used in the cellular telephone
industry. Through a second subsidiary, EME Modular Structures, Inc. ("EMEMS"),
EMEMS was engaged in the construction of concrete modular buildings. EMEGC was
sold subsequent to December 2004 (See Note 17). On December 9, 2004, EME's plan
of reorganization was confirmed by the bankruptcy court and, as such, EME
emerged from bankruptcy on that date.
Variable Interest Entity
During 2004, the Company entered into a joint venture to operate Peleme, Ltd.
(an EME affiliated Cayman company) to perform work in the Cayman Islands. The
Shareholder Agreement provides for EME's 40% ownership interest; however, it
entitles EME to 70% of the net profit of this project and EME is responsible for
100% of the financial support pursuant to the agreement. Accordingly, the joint
venture financial statements have been combined with those of the Company.
Nature of business:
EarthFirst is a research-based enterprise committed to the development and
commercialization of technologies that will produce economically and
environmentally superior products from carbon-rich solid and liquid materials
considered wastes. As part of its efforts, the Company is also attempting to
develop and commercialize applications of its technologies for the efficient
production of alternative fuels. Additional applications of the Company's
technologies are focused on the environmentally desirable processing,
destruction, purification, and/or remediation of harmful liquid and solid
wastes.
Through its subsidiary EME, the Company performs services as an electrical
contractor and subcontractor in the construction of commercial and municipal
projects primarily located in Florida and the Caribbean.
Through the Company's solid waste division, efforts remain focused on the
demonstration and marketing of its first "Solid Waste Remediation Plant" in
Mobile, Alabama. This unit is known as the "Catalytic Activated Vacuum
Distillation Process ("CAVD") Reactor". This plant processes rubber tires
extracting carbon and other raw materials for resale. This process efficiently
disposes of the tires in an environmentally friendly that allows raw materials
from those waste products to be recycled and reused.
F-24
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
The Company anticipates providing additional CAVD plants to customers in various
industries. The Company will bring proven technology in replicating its
production plants and distribution network for the disposal of the by-products
produced in the process.
The Company has developed technologies for the treatment of liquid waste
products. The technology involves the use of high temperature plasma through
which the liquid waste products are passed. The harmful properties contained in
the liquid waste products are broken down at the molecular level as they pass
through the plasma and a clean burning gas is produced.
Principles of Consolidation:
The financial statements include the consolidated accounts of EarthFirst
Technologies Incorporated and all of its subsidiaries (including the variable
interest entity discussed above) (collectively, the "Company"). All significant
intercompany transactions and accounts have been eliminated.
In connection with its acquisition of EME, the Company acquired an investment in
Peleme, Ltd., an EME affiliated Cayman Islands Company. The agreement provides
for a 40% ownership interest with 70% share of profits or losses; however EME is
responsible for 100% of the financial support pursuant to the agreement. In
accordance with SFAS Interpretation no. 46R, the Company has accounted for this
investment as a variable interest entity and the accompanying financial
statement include the assets and liabilities of Peleme and the majority interest
in this entity, with results of operations from the date of acquisition.
Cash and cash equivalents:
Cash and cash equivalents are comprised of highly liquid instruments with
original maturities of three months or less. The Company maintains its financial
instruments in a variety of high-credit quality financial institutions. The cash
balance includes no cash equivalents at December 31, 2004.
Accounts Receivable and Customer Concentrations:
Accounts receivable are customer obligations due under normal trade terms.
Retainage on construction contracts, which aggregate $521,261 and are included
in accounts receivable, are contractual obligations of the customer that are
withheld from progress billings until project completion. The Company performs
continuing credit evaluations of its customers' financial condition and does not
require collateral.
Senior management reviews receivables on a monthly basis to determine if any
amounts may become uncollectible. Any contract receivable balances that are
determined to be uncollectible, along with a general reserve, are included in
the allowance for doubtful accounts. After all reasonable attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Based on the information available, the Company believes the allowance for
doubtful accounts of $200,000 is adequate as of December 31, 2004.
Accounts receivables from one customer accounted for 25% of the Company's trade
accounts receivable balance at December 31, 2004. In addition, revenues from
this one customer represented approximately 80% of all offshore sales and
approximately 36% of total sales in 2004. This Construction contract is
performed in the Cayman Islands. There were no receivables or revenue
concentrations in 2003.
Inventory:
Inventory, which consists primarily of electrical and construction supplies, is
stated at the lower of cost of market, determined by the first-in, first-out
method. The Company takes a complete physical inventory at year end.
F-25
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets, which range
from 5-7 years for machinery, computer equipment, office equipment and
furniture. Leasehold improvements are amortized over the shorter of the term of
the lease or the useful life of the asset. Depreciation relating to the CAVD
Reactor will commence when the reactor begins revenue generating operations.
Impairment of goodwill and long-lived assets:
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), and Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), the Company reviews its
non-amortizable long-lived assets, including intangible assets and goodwill for
impairment annually, or sooner whenever events or changes in circumstances
indicate the carrying amounts of such assets may not be recoverable. Other
depreciable or amortizable assets are reviewed when indications of impairment
exist. Upon such an occurrence, recoverability of these assets is determined as
follows. For long-lived assets that are held for use, the Company compares the
forecasted undiscounted net cash flows to the carrying amount. If the long-lived
asset is determined to be unable to recover the carrying amount, than it is
written down to fair value. For long-lived assets held for sale, assets are
written down to fair value. Fair value is determined based on discounted cash
flows, appraised values or management's estimates, depending upon the nature or
the assets. Intangibles with indefinite lives are tested by comparing their
carrying amounts to fair value. Impairment within goodwill is tested using a two
step method. The first step is to compare the fair value of the reporting unit
to its book value, including goodwill. If the fair value of the unit is less
than its book value, the Company than determines the implied fair value of
goodwill by deducting the fair value of the reporting unit's net assets from the
fair value of the reporting unit. If the book value of goodwill is greater than
its implied fair value, the Company writes down goodwill to its implied fair
value. The Company's goodwill relates to the acquisition of Electric Machinery
Enterprises, Inc.
Income taxes:
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and federal income tax basis of assets and
liabilities that will result in taxable income or deductible amounts in the
future, based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized
Revenue recognition:
Revenues from solid waste transactions recognized during the year ended December
31, 2004 are the result of contracted monthly minimum draws against sales
commissions on the products of a polymer manufacturing company, and the receipt
of license fees granting the exclusive option to purchase total rights to the
CAVD technology for use in certain geographical areas. License revenue is
recognized upon receipt as there are no future obligations associated with such
revenue.
The Company uses the percentage-of-completion method of accounting for contract
revenue from electrical contracts where percentage of completion is computed on
the cost to total cost method. Under this method, contract revenue is recorded
based upon the percentage of total contract costs incurred to date to total
estimated contract costs, after giving effect to the most recent estimates of
costs to complete. Revisions in costs and revenue estimates are reflected in the
period in which the revisions are determined. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are determined
without regard to the percentage-of-completion. Because of the inherent
uncertainties in estimating costs, it is possible that the estimates used will
change.
F-26
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
1. Nature of business, basis of presentation and summary of significant
accounting policies (continued):
Contract Claims
As of December 31, 2004 the Company has certain contracts and claims in various
stages of negotiation, arbitration and litigation in the approximate amount of
$9,000,000. The Company is attempting to resolve these matters, and expects to
be successful in recovering these amounts. However, as in all matters in
litigation, the outcome is not certain and amounts recovered, if any, could be
materially different than expected. These amounts, which are not carried as
assets on the balance sheet, will be recorded as revenue when such claims are
settled.
Fair value of financial instruments:
At December 31, 2004, the carrying amount of cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses, and notes payable approximate
fair value based either on the short term nature of the instruments or on the
related interest rate approximating the current market rate
Use of estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
Net loss per share:
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 years ended December 31,
2004 and 2003, potential dilutive securities had an anti-dilutive effect and
were not included in the calculation of diluted net loss per common share.
Recent accounting pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." The statement
amends Accounting Research Bulletin ("ARB") No. 43, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. ARB No. 43 previously stated that these
costs must be "so abnormal as to require treatment as current-period charges.
"SFAS No. 151 requires that those items are recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this statement requires that allocation of fixed production overhead to the
costs of conversion are based on the normal capacity of the production
facilities. The statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, with earlier application permitted
for fiscal years beginning after the issue date of the statement. The adoption
of SFAS No. 151 is not expected to have any significant impact on the Company's
current financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--An Amendment of APB Opinion No. 29." APB Opinion No. 29, "Accounting For
Nonmonetary Transactions," is based on the opinion that exchanges of nonmonetary
assets should be measured based on the fair value of the assets exchanged. SFAS
No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
of nonmonetary assets whose results are not expected to significantly change the
future cash flows of the entity. The adoption of SFAS No. 153 is not expected to
have any impact on the Company's current financial condition or results of
operations.
F-27
In December 2004, the FASB revised its SFAS No. 123 ("SFAS No. 123R"),
"Accounting for Stock Based Compensation." The revision establishes standards
for the accounting of transactions in which an entity exchanges its equity
instruments for goods or services, particularly transaction in which an entity
obtains employee services in share-based payment transactions. The revised
statement requires a public entity to measure the cost of employee services
received to exchange for an award to equity instruments based on the grant-date
fair value of the award. The cost is recognized over the period during which the
employee is required to provide service in exchange for the award. The
provisions of the revised statement are effective for financial statements
issued for the first interim or annual reporting period beginning after June 15,
2005, with early adoption encouraged. The Company accounts for options issued to
employees under APB 25; however currently has no unvested options outstanding.
Adoption of this standard in 2005 will result in recognition of stock-based
compensation determined using the fair value method for options issued in the
future.
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 most of 2004. The
Company has historically funded these negative operating cash flows with
proceeds from sales of common and preferred stock, as well as notes and
convertible debentures payable.
F-28
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
In December 2000 and again in January 2003, the Company entered into multiple
revolving line of credit promissory notes with entities related to the Company's
Chief Executive Officer, secured by all of the assets of the Company. Each
revolving note is a demand loan, which means the lender can demand full
repayment of the loan at any time. The promissory notes related to each
revolving line of credit merely provided for a loan up to a stated amount. There
is no obligation on the part of the related party to make any loans pursuant to
these agreements if the loan balance is less than the stated amount. There is no
obligation on the part of the related parties to make any additional loans.
During 2004, the Company continued to rely almost entirely on additional loans
made by the related parties pursuant to these notes in order to finance its
operations. The amounts received during 2004 and 2003 from these sources totaled
approximately $4,100,000 and $1,150,000 respectively.
Historically, the related party lender has periodically agreed to convert
portions of the loan balances into shares of the Company's common stock. During
2004, the related party converted $5,334,010 of these notes into shares of the
Company's common stock as explained in Note 9. There is no obligation on the
part of the related parties to convert any additional portion of the outstanding
balance on these notes.
As of December 31, 2004, the Company owed $6,672,519 pursuant to these
agreements (included in Notes payable, related party). Although these advances
are due on demand, the stockholder and parties related thereto agreed to not
demand payment prior to January 1, 2006. Subsequent to December 31, 2004, as
discussed in Note 17, the outstanding balances pertaining to these notes have
been converted to equity.
Since the acquisition of EME, the Company is no longer experiencing negative
operating cash flows. Working capital as of December 31, 2004 was $2.1 million
and stockholders equity was $5.6 million. The Company generated a net income in
the fourth quarter of 2004 of $1,096,136.
On March 30, 2005, the Company closed an agreement with Laurus Funds on a senior
credit facility aggregating up to $8 million. The initial funding under this
agreement was $6.6 million. Details of this arrangement are available on Form
8-K, filed with the Securities Exchange Commission on April 6, 2005.
As a result of the completion of the various undertakings of 2004, the
acquisition of WESCO, the completion of the CAVD plant in Mobile, Alabama, the
acquisition and reorganization of EME, and the subsequent financing in 2005, the
Company does not anticipate any additional loans from the related parties
referred to above.
During the twelve months ended December 31, 2004, the Company received $100,000
from PEPER Holdings, LLC (PEPER), for a License Contract providing PEPER to
secure the exclusive territory of Ciudad Juarez, Chihuahua, Mexico for 18
months, and the city of Guadalajara, Jalisco, Mexico for 6 months. During this
period, PEPER intends to initiate construction of Catalytic Activated Vacuum
Distillation (CAVD) plants that process rubber tire chips into usable energy
products. The period of the exclusivity allows for environmental, political, and
financial details to be finalized by PEPER.
PEPER will purchase the plants from EFTI and own the plants. EFTI will receive a
15% royalty based on gross profit and a technical support contract for
continuing services during the life of the plant. The plants will be built by
Harmony, LLC, a Turner Industries company that built the operating plant in
Mobile, Alabama
The Company has signed a Letter of Intent with EarthClean Energy ("ECE") to
license territories in Canada and for the sale of a CAVD Reactor. The agreement
with ECE is a license for three provinces in Canada: Ontario, Quebec and
Alberta. Pursuant to the agreement, a nonrefundable license fee of $1,000,000 US
will be paid to EFTI within one year. At the signing of the Formal License
Contract, a 10% deposit for the purchase of the first plant will be made with
the balance secured by a Letter of Credit. ECE will own 100% of the plants and
EFTI will receive royalties for continued services during the contract period.
The Company has signed a Letter of Intent with San Vision Technology, Inc.
("SVT") to license the territory of Ocean City, New Jersey. At the signing of a
contract for their first CAVD Reactor, 10% of the plant sale will be paid to
EFTI with the balance secured by a Letter of Credit. SVT will own the CAVD
Reactor(s) and EFTI will receive royalties for continued services during the
contract period.
While management is confident that the above agreements will materialize, there
can be no assurances.
F-29
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
The obtaining of final agreements pursuant to these letters of intent requires,
among other things, that the Company conclude contract(s) for the sale of the
carbon by-product.
The agreement with Chateau Energy, Inc. for an exclusive license to a specific
geographical area in southern California has expired. Chateau has not renewed
this agreement at this time, as a carbon sales contract has not yet been
obtained, and they were obligated for extensive permitting fees going forward.
This agreement will be revisited upon the obtaining of a carbon sales contract.
3. Business combination and intangibles:
EME -- 2004
As discussed in Note 1, on August 20, 2004 the Company acquired 100% of the
outstanding stock of EME in exchange for the issuance of 40,000,000 shares of
the Company's common stock in a transaction accounted for as a purchase.
Accordingly, the results of EME are included in the accompanying consolidated
financial statements only from the acquisition date through December 31, 2004.
The recorded cost of this acquisition was based upon the fair market value of
the Company acquired based on an independent valuation. An intangible asset for
goodwill has been recorded in the amount of $ 15,323,152. Generally accepted
accounting principles do not allow the amortization of goodwill, but instead
require an annual evaluation of the amount for impairment.
WESCO -- 2004
In January 2004, the Company acquired a 100% interest in World Environmental
Solutions Company ("WESCO") through the issuance of 15,000,000 shares of stock
and the assumption of $725,000 in obligations. The acquisition price was
allocated to the assets acquired and the liabilities assumed based on their
estimated fair values. (The fair value of the stock was determined based on the
trading price of the stock).
In connection with its acquisition of WESCO, the Company determined that $1.8
million of the acquisition price qualifies as purchased in-process research and
development (principally associated with the Catalytic Activated Vacuum
Distillation process), and as such, this amount was expensed as research and
development expense on the acquisition date.
The fair values of assets acquired and liabilities assumed in connection with
these acquisitions, which have been accounted for as purchases, are as follows:
EME WESCO
Cash $ 3,174,317
Accounts receivable 7,464,139
Costs and earnings in excess of billings 1,606,854
Inventory 1,737,155
Prepaid expenses and other current assets 652,328
Property and equipment 2,023,364 $ 725,000
Construction in process
Goodwill 15,323,152
Purchased in-process research and development 1,800,000
Other assets 390,289 --
----------- -----------
Total assets acquired 32,371,598 2,525,000
Less current liabilities assumed 11,409,920 725,000
Less long-term debt assumed 14,694,678
----------- -----------
$ 6,267,000 $ 1,800,000
=========== ===========
F-30
Proforma results of operations for the years ended December 31, 2004 and 2003 as
though these acquisitions had taken place at January 1, 2003 are as follows:
Years Ended
December 31,
2004 2003
Revenue $ 40,046,786 $ 48,513,910
============ ============
Net loss $ (1,578,082) $(11,098,583)
============ ============
Net loss per share $ (.01) $ (.06)
============ ============
ATC - 2003
On December 30, 2003, the Company entered into an agreement to acquire customer
contacts that comprises the business of Applied Tech Consulting, Inc. ("ATC").
Consideration for the purchase was as follows:
ATC
Cash paid at closing $ 50,000
Cash payment due March 2004 50,000
600,000 shares of restricted stock 42,900
--------
$142,900
========
The purchase was allocated to goodwill. There were no tangible assets acquired.
Results of operations as if the acquisition had occurred on January 1, 2003
would not differ significantly from those reflected in the accompanying
consolidated statements of operations. The goodwill associated with this
acquisition was deemed to be impaired at December 31, 2004 and written off. The
impairment charge of $142,900 is included in miscellaneous income (expense) in
the accompanying 2004 consolidated statement of operations.
F-31
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
4. EME Bankruptcy and Plan of Reorganization Obligations
On May 29, 2003, ("Petition Date"), Electric Machinery Enterprises, Inc. (the
"Debtor") filed a petition for relief under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court for the Middle District of Florida ("the
Bankruptcy Court"). Under Chapter 11, certain claims against the Debtor in
existence prior to the filing of the petitions for relief under the Bankruptcy
Code were stayed while the Debtor continued business operations as
Debtor-In-Possession. These claims are reflected in the balance sheet as
liabilities subject to compromise, and liabilities not subject to compromise.
The Plan of Reorganization (the "Plan") filed on behalf of Electric Machinery
Enterprises, Inc. was confirmed by the Bankruptcy Court on December 9, 2004. The
plan provides for the restructure of debt, and orderly discharge of pre-petition
priority and administrative claims. The restructured obligations under the Plan
as of December 31, 2004 consisted of the following:
Secured debt:
Line of credit bank loans secured by accounts receivable, inventory and equipment $ 4,711,860
Mortgage and installment notes payable to bank, secured by real estate and vehicles 1,338,005
Administrative debt
Costs and legal expenses for the administration of the reorganization case 229,922
Priority claims pre-petition
Federal and state priority tax claims 124,622
Unsecured debt
75% of liability from settlement of lawsuit 3,075,000
75% of pre-petition accounts payable 819,209
-----------
$10,298,618
===========
The Plan of Reorganization Obligations are included in the balance sheet in the
following categories:
Current liabilities:
Liabilities subject to compromise $ 500,000
Liabililties not subject to compromise 1,850,000
Accounts payable and accrued expenses 354,544
Liabilites subject to compromise - non current 3,394,208
Liabilites not subject to compromise - non current 4,199,866
-----------
$10,298,618
===========
On March 31, 2005, the Company took advantage of discounts available through the
reorganization plan and closed on a new loan completely satisfying all
obligations associated with the secured debt. The administrative debt and
priority claims are to be paid out of normal operations and are anticipated to
be paid within the year. The settlement amount of $3,075,000, included in
unsecured debt can be paid off for $2,275,000 if paid within one year. The
intent of management is to discount this amount further, and pay it off as
quickly as possible. The pre-petition accounts payable require a $500,000
payment to the bankruptcy trustee in January 2005 with the balance paid off as
quickly as possible; however there are no specific payment terms beyond this
$500,000. The Company has made the January payment.
F-32
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
5. Contracts in Progress
Uncompleted contracts are summarized as follows:
Costs incurred on uncompleted contracts $ 21,954,396
Estimated earnings on uncompleted contracts 5,795,021
-------------
27,749,417
Less billings to date (27,810,713)
-------------
$ (61,296)
=============
The components of this amount are included on the balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts $ 986,269
Billings in excess of costs and estimated earnings on uncompleted contracts (1,047,565)
------------
$ (61,296)
============
6. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31, 2004:
Land $ 52,244
Buildings 1,267,139
Leasehold improvements 825,429
Equipment 2,357,491
Vehicles 1,389,889
Furniture, fixtures and other 127,850
------------
6,020,042
Less accumulated depreciation (3,924,689)
------------
2,095,353
------------
Construction in process 2,245,137
------------
$ 4,340,490
============
Construction in process represents the costs of constructing the Company's first
CAVD reactor in Mobile, Alabama. This reactor is anticipated to be placed in
service in the second quarter of 2005.
F-33
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
7. Long Term Debt
Long-term debt consisted of the following at December 31, 2004:
Promissory note payable to vendor in lieu of payment on administrative Claim, no accrued interest; bi monthly $ 90,637
payments of $ 7,500, with final Payment of $ 25,638 by January 1, 2006
Installment notes payable to various banks and finance companies, monthly payments of approximately $8,157 182,046
including interest, from 5.33% to 15%, secured by equipment -----------
272,683
Less current maturities (151,898)
-----------
$ 120,785
===========
Future maturities of long-term debt are as follows:
Year ending December 31,
2005 $ 151,898
2006 37,741
2007 30,359
2008 30,693
2009 21,992
-------------
$ 272,683
=============
8. Income Taxes
Deferred tax assets and liabilities consist of the following at December 31,
2004:
2004
Net operating loss carryover $ 18,630,000
Timing difference associated with allowance for doubtful accounts, accrued expenses and other items 1,259,000
Deferred tax asset valuation allowance (19,889,000)
------------
Deferred tax asset --
Deferred tax liability --
------------
Net $ --
============
F-34
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
Income tax (expense) benefit consists of the following:
2004 2003
Current: $ -- $ --
------------ ------------
Deferred:
Benefit of net operating loss carryover 884,000 545,000
Acquisition adjustment 4,484,000
Change in deferred tax asset valuation allowance (5,368,000) (545,000)
------------ ------------
$ -- $ --
============ ============
The expected income tax benefit at the statutory tax rate differed from income
taxes in the accompanying financial statements of operations as follows:
Percentage of loss before
income taxes
Statutory tax rate 35% 35%
State tax, net of federal benefit 4% 4%
Acquisition adjustment 198% --
Change in deferred tax asset valuation allowance (237)% (39)%
----- -----
Effective tax rate in accompanying statement of operations 0% 0%
===== =====
The Company has net operating loss carryovers of approximately $42,600,000 at
December 31, 2004. The net operating loss carryovers principally expire from
2018 through 2024.
9. Related party transactions:
Material related party transactions that have been entered into by the Company
that are not otherwise in these notes are summarized below:
Notes payable, related parties consisting of two notes payable to an entity
controlled by the Company's Chief Executive Officer (John Stanton) (also a
principal stockholder) pursuant to revolving lines of credit secured by all of
the assets of EarthFirst. Interest is at 10%. The amount outstanding at December
31, 2004, including interest was $6,672,519. The notes are payable on demand.
Interest expense associated with notes payable, related party for the years
ended December 31, 2004 and 2003 was $300,743 and $373,607, respectively. On
February 4, 2004, $3,934,010 of amounts due under these notes were converted
into 49,175,125 shares of the Company's common stock. On August 20, 2004,
$1,400,000 of amounts due under these notes were converted into 10,000,001
shares of the Company's common stock. The conversion rate per share was
determined under contracted terms based on a 20% discount of the closing bid
price of the Company's common stock, 20 business days prior to the conversion
notice.
F-35
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
Accrued bonuses payable to a related party formerly affiliated with EME and now
a current shareholder of EFTI, in the amount of $715,122 , are presented as
current maturities of notes payable, related parties.
Also included in notes payable, related parties is a reimbursement due in the
amount of $25,000.
The Company leases and rents the real property, building, and all other
improvements located at 2515 E Hanna Avenue, Tampa, Florida 33610 from Hanna
Properties Corp., a related party affiliated with the President of EME. This
property consists of 29,680 sq. ft. of office space, 80,320 sq. ft. of warehouse
space and 26,992 sq. ft. of garage and workshop space. Monthly rental including
sales tax, but excluding real estate taxes and insurances is $52,133. This lease
obligation was assumed pursuant to EME's reorganization plan for a period of two
years, at which time EarthFirst has the option to re-evaluate. This location is
the corporate headquarters of EarthFirst Technologies Incorporated and its
subsidiaries.
10. Stockholders equity:
On April 30, 2004, the Company filed Articles of Amendment to the Articles of
Incorporation of EarthFirst Technologies Incorporated restating the authorized
limit of common stock the Company may issue from 250,000,000 to 500,000,000
shares.
On January 26, 2004, the Company finalized a letter of understanding ("LOU")
with World Environmental Solutions Company, LLC ("WESCO"), Harmony, LLC and
Turner Industries ("Harmony/Turner") wherein the Company agreed to form a new
LLC ("Holdings") to commercialize certain Solid Waste Technology. Pursuant to
the LOU, Holdings agreed to fund $50,000 in engineering costs and provide
management and expertise to create an operational plant. The agreement further
specifies that Harmony, LLC and Turner Industries (Company whose Chairman is
related to the President of the Company) agree to a cost plus construction
contract to build the Solid Waste Remediation Plant discussed earlier as well as
four additional plants in the near term with a total of 43 plants projected
within a 5 year period.
On January 30, 2004, the Company and WESCO entered into a separate agreement
whereby in exchange for 70% of Holdings (bringing the Company's ownership to
100% of this new joint venture holding company) the Company issued 15,000,000
shares of the Company's stock in exchange for certain solid waste technology
owned by WESCO ("Solid Waste"). This transaction was valued at the common stock
trading market value of $0.12 per share on the date of the agreement.
Future stock issuances to the principals of WESCO contemplated under the
agreement are as follows:
Upon sale of first 13 reactors 5 million common shares
Upon sale of 13 additional reactors 5 million common shares
F-36
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
Stock Options:
In 2001, the Board of Directors approved the 2001 Equity Incentive Plan. The
total number of shares to which options may be granted under the plan is
20,000,000 shares. Generally the option price is fixed at no less than 100% of
the fair market value of the shares at the date the option is granted and expire
on the earlier of three months after termination of employment or ten years from
the date of grant.
A summary of the status of the Company's outstanding stock options as of
December 31, 2004 and 2003, and the changes during the years ending on those
dates, is presented below:
Shares Weighted
Average
Exercise Price
Options outstanding, January 1, 2003 9,330,000 $ .32
Options granted in 2003 -- --
Options expired in 2003 (80,000) .28
---------- ----------
Options outstanding, December 31, 2003 9,250,000 .32
Options granted in 2004 -- --
Options cancelled in 2004 (2,000,000) 1.00
---------- ----------
Options outstanding, December 31, 2004, all of which are exercisable 7,250,000 $ .13
========== ==========
The following table summarizes information for options outstanding and
exercisable at December 31, 2004.
Options Outstanding and Exercisable
Range of Number Weighted Avg. Weighted Avg.
Prices Remaining Life Exercise Price
$ .05-.21 7,250,000 5.76 years $ .13
============ ========== ========== ===========
Weighted average grant date fair values are as follows:
Number of Exercise Grant date
Options Price fair value
Exercise price:
Equals market 6,783,800 $ .12 $ .12
Exceeds market 466,200 $ .21 $ .20
Less than market -- $ -- $ --
---------
7,250,000
=========
F-37
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
10. Stockholders' equity - (continued):
Common stock warrants:
There were no warrants granted during 2004 or 2003. During 2004, warrants to
acquire 3,800,000 shares of common stock at $.40 per share expired.
Stock issuances for services:
During 2003, the Company issued shares of unregistered common stock to settle
certain disputes. The shares issued have been valued at prices that approximate
trading prices at the time of settlement.
11. Segment reporting:
Effective with the Company's acquisition of Electric Machinery Enterprises,
Inc., the Company has identified its operating segments as research and
development in the area of solid and liquid waste disposal, and contracting.
Segment information for the twelve months ended December 31, 2004 is as follows:
Waste Disposal Contracting Total
Revenue $ 140,000 $15,174,892 $15,314,892
Cost of Sales 11,209,802 11,209,802
----------- ----------- -----------
Gross Margin 140,000 3,965,090 4,105,090
Selling, General and Administrative 1,063,682 2,362,157 3,425,839
Research and Development 2,474,949 -- 2,474,949
12. Retirement Plan
EME adopted a 401(k) savings plan effective January 1, 1997. The Plan covers all
employees who are at least 18 years of age with one or more years of service.
There were no discretionary contributions for the years ended December 31, 2004
or 2003.
13. Employee Stock Ownership Plan and Trust
On December 12, 2004, Electric Machinery Enterprises, Inc. ("EME") terminated
the EME Employee Stock Ownership Plan (the "Plan"). All employees who were not
fully vested became 100% vested as of December 12, 2004. Participants of the
Plan are to be distributed stock of EarthFirst Technologies, Inc. that is held
in the EME Employee Stock Ownership Trust on their behalf. EME has no obligation
for the repurchase of the stock distributed to the participants of the Plan
because the shares are publicly traded and as such, there is a market available
in which the participants may sell their shares.
14. Loss per common share:
The following table reconciles the numerators and denominators of the basic and
diluted net loss per share computations.
Year Ended December 31,
2004 2003
------------ ------------
Net loss - (numerator) (2,266,989) (1,436,194)
============ ============
Basic:
Weighted average shares outstanding (denominator) 264,319,455 186,936,602
------------ ------------
Loss per common share - basic $ (0.01) $ (0.01)
============ ============
Diluted:
Weighted average shares outstanding 264,319,455 186,936,602
Effect of dilutive options -- --
------------ ------------
Adjusted weighted average shares (denominator) 264,319,455 186,936,602
------------ ------------
Loss per common share - diluted $ (0.01) $ (0.01)
============ ============
The effects of all stock options have been excluded from Common Stock
equivalents because their effect would be anti-dilutive.
F-38
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
15. Commitments and Contingencies
Lease obligations:
The Company leases vehicles and certain other pieces of office equipment under
noncancellable operating leases for periods up to four years. In addition, the
Company conducts its operations in a facility leased from a related corporation
owned by stockholders of Electric Machinery Enterprises, Inc.
The total rent expense for the twelve months ended December 31, 2004 was
approximately $247,709, of which approximately $228,012 was for the facility
leased from a related corporation.
Approximate future minimum rentals on noncancellable leases at December 31, 2004
are as follows:
Year ending December 31
2005 $ 733,226
2006 732,868
-----------
$ 1,466,094
===========
Legal proceedings:
The Company is involved in litigation with Ruggero Maria Santilli ("Santilli"),
The Institute for Basic Research, Inc. (IBR"), and Hadronic Press, Inc.
("Hadronic") concerning certain aspects of the Company's liquid waste
technologies. The matters contemplated above will be referred to as the
"Santilli Suit" and the "Hadronic Suit". Hadronic claims to own the intellectual
property rights to one or more aspects of the Company's liquid waste
technologies.
Management continues to believe that the Company owns all of the intellectual
property rights necessary to commercialize and further develop its liquid and
solid waste technologies without resorting to a license from any third parties.
During 2004, the Company has attempted to reach agreement with Santilli and his
related parties to resolve the differences between the parties. As of this date,
the parties are continuing their efforts to resolve their differences.
The litigation described above does not involve the technology the Company is
developing in connection with its efforts for the processing of used automotive
tires.
The Company is also involved in disputes with vendors for various alleged
obligations associated with operations that were discontinued in prior years.
Several disputes involve deficiency balances associated with lease obligations
for equipment acquired by the Company for its contract manufacturing and BORS
Lift operations that were discontinued during calendar 2000. The machinery and
equipment associated with many of these obligations has been sold with the
proceeds paid to the vendor or the equipment has been returned to the vendor.
Several of the equipment leasing entities claim that balances on the leases are
still owed.
The Florida Department of Revenue (the "DOR") has conducted an examination of
the Company's Florida Sales and Use Tax Returns from its inception through June
30, 2001.
Included in the balance of Accrued expenses and other current liabilities is the
Company's estimate of the amount at which the matters contemplated above will
ultimately be resolved. Approximately $1.1 million of the balance is
attributable to the disputed matters contemplated above.
F-39
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
16. Quarterly information (unaudited):
March June September December
-------------- ------------ -------------- ---------------
2004
Revenues $ 15,000 $ 115,000 $ 3,376,936 $ 11,807,956
Net income (loss) $ (2,082,861) $ (436,844) $ (843,420) $ 1,096,136
Earning (loss) per share, basic $ (.009) $ (.002) $ (.003) $ .004
Earning (loss) per share, diluted $ (.009) $ (.002) $ (.003) $ .004
March June September December
-------------- ------------ -------------- ---------------
2003
Revenues $ -- $ -- $ -- $ --
Net income (loss) $ (333,919) $ (427,971) $ (477,029) $ (497,275)
Earning (loss) per share $ (.00) $ (0.00) $ (.01) $ (.00)
Note that EME was acquired August 20, 2004.
17. Subsequent Events
Subsequent to December 31, 2004, the Company's principal shareholder converted
the balance of related party debt to equity. This transaction was accomplished
in March of 2005, and resulted in the issuance 189,393,210 restricted shares of
common stock.
Subsequent to December 31, 2004, the Company completed the sale of the stock of
EMEGC, a wholly owned subsidiary of EME. This transaction was consummated in
March 2005. The sale price of $900,000 was applied directly to the balance
outstanding to the secured creditor in EME's reorganization plan.
On March 31, 2005, the Company closed on a of senior credit facility aggregating
up to eight million dollars. Detailed information regarding the structure of the
funding is included in the Company's Form 8-K filing on April 6, 2005. The
investor is New York based Laurus Master Fund, LTD, an institutional fund that
specializes in direct investments to growing, small and micro-cap companies. The
initial funding under the facility was approximately $6.6 million.
The Company plans to utilize approximately 50 percent of the facility to satisfy
Plan of Reorganization obligations of its subsidiary, Electric Machinery
Enterprises, Inc. The secured creditor has been completely satisfied through
this financing. The remaining funds will be used for growth and working capital.
F-40
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Articles of Incorporation, as amended, provide to the fullest extent
permitted by Florida law, our directors or officers shall not be personally
liable to us or our shareholders for damages for breach of such director's or
officer's fiduciary duty. The effect of this provision of our Articles of
Incorporation, as amended, is to eliminate our right and our shareholders
(through shareholders' derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior), except under certain situations defined by statute. We
believe that the indemnification provisions in its Articles of Incorporation, as
amended, are necessary to attract and retain qualified persons as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses
payable by the Registrant in connection with the offering described in this
registration statement. All of the amounts shown are estimates except the
Securities and Exchange Commission registration fee:
Securities and Exchange Commission Registration Fee $ 1,705.59
Accounting Fees and Expenses $ 10,000*
Legal Fees and Expenses $ 45,000*
Miscellaneous $ 5,000*
Total $61,705.59*
*Estimated
ITEM 6. RECENT SALES OF UNREGISTERED SECURITIES
To obtain funding for general corporate purposes we entered into
agreements with Laurus Master Funds, Ltd, a Cayman Islands corporation
("Laurus"), pursuant to which we sold convertible debt, an option and a warrant
to purchase our common stock to Laurus in a private offering pursuant to
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended. The securities being sold to Laurus include the following:
o a secured convertible minimum borrowing note and a secured revolving
note with an aggregate principal amount not to exceed $5,000,000;
o a secured convertible term note with a principal amount of
$3,000,000;
o a common stock purchase warrant to purchase 11,162,790 shares of our
common stock, at a purchase price of $0.23 for the first 5,581,395
shares and $0.28 for any additional shares, exercisable for a period
of seven years; and
o an option to purchase 24,570,668 shares of our common stock, at a
purchase price equal to $0.01 per share, exercisable for a period of
six years
At the closing of the foregoing financing from Laurus, on March 31, 2005,
we received $3,000,000 in connection with the convertible term note. In
addition, we are permitted to borrow an amount based upon our eligible accounts
receivable and inventory, pursuant to the convertible minimum borrowing note and
the revolving note. Accordingly at the closing, we received an additional
$3,600,000 for an aggregate of $6,600,000 in financing from Laurus.
II-1
ITEM 27. EXHIBITS
Exhibit Description
- ------- -----------
3.1 Articles of Amendment to Articles of Incorporation filed with the
Florida Secretary of State on April 30, 2004 (*****)
3.2 By-Laws of the Company. (*)
3.3 Articles of Amendment to Articles of Incorporation filed with the
Florida Secretary of State on November 24, 1998. (**)
3.4 Articles of Amendment to Articles of Incorporation filed with the
Florida Secretary of State on March 30, 1999. (**)
3.5 Articles of Amendment to Articles of Incorporation filed with the
Florida Secretary of State on June 26, 2000. (***)
3.6 Articles of Amendment to Articles of Incorporation filed with the
Florida Secretary of State on February 28, 2001. (***)
4.1 Security and Purchase Agreement, dated as of March 30, 2005, by
and among Laurus Master Fund, Ltd. and EarthFirst Technologies,
Incorporated. (****)
4.2 Security Agreement, dated as of March 30, 2005, between Laurus
Master Fund, Ltd., EarthFirst Technologies, Incorporated,
Electric Machinery Enterprises, Inc., EarthFirst Resources, Inc.,
World Environmental Solutions Company, Inc., EarthFirst
Investments, Inc., EM Enterprise Resources, Inc. and EME Modular
Structures, Inc. (****)
4.3 Master Security Agreement, dated as of March 30, 2005, by
EarthFirst Technologies, Incorporated, Electric Machinery
Enterprises, Inc., EarthFirst Resources, Inc., World
Environmental Solutions Company, Inc., EarthFirst Investments,
Inc., EM Enterprise Resources, Inc. and EME Modular Structures,
Inc., in favor of Laurus Master Fund, Ltd. (****)
4.4 Guaranty, dated as of March 30, 2005, by EarthFirst Technologies,
Incorporated, Electric Machinery Enterprises, Inc., EarthFirst
Resources, Inc., World Environmental Solutions Company, Inc.,
EarthFirst Investments, Inc., EM Enterprise Resources, Inc. and
EME Modular Structures, Inc., in favor of Laurus Master Fund,
Ltd. (****)
4.5 Secured Revolving Note issued to Laurus Master Fund, Ltd., dated
March 30, 2005. (****)
4.6 Secured Convertible Minimum Borrowing Note issued to Laurus
Master Fund, Ltd., dated March 30, 2005. (****)
4.7 Secured Convertible Term Note issued to Laurus Master Fund, Ltd.,
dated March 30, 2005. (****)
4.8 Common Stock Purchase Warrant issued to Laurus Master Fund, Ltd.
(****)
4.9 Option issued to Laurus Master Fund, Ltd., dated March 30, 2005.
(****)
4.10 Registration Rights Agreement, dated as of March 30, 2005, by and
between Laurus Master Fund, Ltd. and EarthFirst Technologies,
Incorporated. (****)
4.11 Stock Pledge Agreement, dated as of March 30, 2005, by and
between Laurus Master Fund, Ltd., EarthFirst Technologies,
Incorporated, Electric Machinery Enterprises, Inc., EarthFirst
Resources, Inc., World Environmental Solutions Company, Inc.,
EarthFirst Investments, Inc., EM Enterprise Resources, Inc. and
EME Modular Structures, Inc. (****)
21.1 Subsidiaries of the small business issuer+
5.1 Opinion of Sichenzia Ross Friedman Ference LLP+
23.1 Consent of Sichenzia Ross Friedman Ference LLP (contained in
Exhibit 5.1).
23.2 Consent of Aidman, Piser & Company, P.A. +
24.1 Power of Attorney (included on signature page).
* Previously filed as Exhibits to, and incorporated by reference from, the
Registrant's 1997 Form 10-KSB on March 11, 1998.
** Previously filed as Exhibits to, and incorporated by reference from, the
Registrant's 1999 Form 10-KSB on May 12, 2000.
*** Previously filed as Exhibits to, and incorporated by reference from, the
Registrant's 2000 Form 10-KSB on April 16, 2001. **** Previously filed as
Exhibits to, and incorporated by reference from, the Registrant's Form 8-K
on April 6, 2005.
***** Previously filed as Exhibits to, and incorporated by reference from, the
Registrant's 2004 Form 10-KSB on April 15, 2005.
+ Filed herewith.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
II-2
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions,
or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tampa, State of Florida, on this 25th day of May
2005.
EARTHFIRST TECHNOLOGIES, INCORPORATED
By: /s/ Leon Toups
-------------------------------------
Leon Toups
Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Leon Toups his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and any
subsequent registration statements pursuant to Rule 462 of the Securities Act of
1933 and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorney-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Leon Toups Chief Executive Officer and President May 27, 2005
- -----------------------------
Leon Toups
/s/ Frank W. Barker, Jr Chief Financial Officer May 27, 2005
- -----------------------------
Frank W. Barker, Jr
/s/ John Stanton Chairman of the Board of Directors May 27, 2005
- -----------------------------
John Stanton
/s/ Jaime Jurado Vice Chairman of the Board of Directors May 27, 2005
- -----------------------------
Jaime Jurado
/s/ Nicholas R. Tomassetti Director May 27, 2005
- -----------------------------
Nicholas R. Tomassetti
/s/ Dr. David E. Crow Director May 27, 2005
- -----------------------------
Dr. David E. Crow
II-4