UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended - September 30, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
------------------ -----------------
Commission File Number 0-23897
EARTHFIRST TECHNOLOGIES, INCORPORATED
-------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 59-3462501
- ------------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2515 E Hanna Ave., Tampa, Florida 33610
---------------------------------------
(Address of principal executive offices)
(813) 238-5010
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
12, 13 or 15 (d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No X
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of December 7, 2007: 611,791,246 shares $ .0001 par value common
stock.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
EXPLANATORY NOTE
As set forth in a Form 8-K filed on October 9, 2007, the Company's independent
auditors resigned on October 2, 2007. The reports of Aidman Piser on the
Company's financial statements for the past two fiscal years, did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope, or accounting principles, except that substantial
doubt was raised as to the Company's ability to continue as a going concern. In
connection with the audits of the Company's financial statements for each of the
two fiscal years ended December 31, 2006 and 2005, and in the subsequent interim
periods, there were no disagreements with Aidman Piser on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Aidman Piser,
would have caused Aidman Piser to make reference to the matter in their report.
The Company is in the process of selecting new auditors, but has not yet made a
final determination. Accordingly, there is currently no auditor to conduct the
review required by Rule 10-01(d) of Regulation S-X.
The Company understands that the staff of the Securities and Exchange Commission
(the "staff") has taken the position that this report is deficient because the
interim financial statements contained in this report have not been reviewed by
an independent registered public accountant as required by Rule 10-01(d) of
Regulation S-X. Pursuant to the position taken by the staff, the Company is
deemed not to be current in its filings required under the Securities Exchange
Act of 1934, as amended. The Company understands that completion of a review of
its interim financial statements and the filing of an amendment will make this
report current, although it will not be deemed timely for purposes of the rules
governing eligibility to use registration statements on Forms S-2 and S-3. When
the review is complete, the Company will file an amendment to this report which
will include the required certifications of the Company's Chief Executive
Officer and Acting Chief Financial Officer as required by Sections 302 and 906
of the Sarbanes-Oxley Act.
NOTE ON FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this document, and
the Company's Form 10-KSB, as well as some statements in periodic press releases
and some oral statements of Company officials during presentations about the
Company are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (the Act). The words believes,
anticipates, plans, expects, intends, estimates, and similar expressions in this
report are intended to identify forward-looking statements. In addition, any
statements concerning future financial performance, ongoing business strategies
or prospects, and possible future Company actions, which may be provided by
management, are also forward-looking statements as defined by the Act. Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to materially differ from any future results, performance, or
achievements expressed or implied by such forward-looking statements and to vary
significantly from reporting period to reporting period. Such factors include,
among others, those listed under Item 1 of the Form 10-KSB and other factors
detailed from time to time in the Company's other filings with the Securities
and Exchange Commission. Although management believes that the assumptions made
and expectations reflected in the forward-looking statements are reasonable,
there is no assurance that the underlying assumptions will, in fact, prove to be
correct or that actual future results will not be different from the
expectations expressed in this report.
FORM 10-QSB
EARTHFIRST TECHNOLOGIES, INCORPORATED
TABLE OF CONTENTS
PAGE
PART I. Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2007 (Unaudited)
and December 31, 2006..................................................................... 1
Condensed Consolidated Statements of Operations for the three months and
the nine months ended September 30, 2007 and 2006 (Unaudited)............................. 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2007 and 2006 (Unaudited)............................................. 3
Condensed Consolidated Statement of Stockholders' Equity (Deficit) for
the nine months ended September 30, 2007 (Unaudited)...................................... 4
Notes to Unaudited Condensed Consolidated Financial Statements............................ 5-18
Item 2 - Management's Discussion and Analysis or Plan of Operation.......................................... 19-28
Item 3 - Controls and Procedures............................................................................ 28
PART II. Other Information
Item 1. - Legal proceedings................................................................................. 29
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds....................................... 30
Item 3. - Defaults upon Senior Securities................................................................... 31
Item 4. - Submission of Matters to a Vote of Security Holders............................................... 31
Item 5. - Other Information................................................................................. 31
Item 6. - Exhibits and Reports on Form 8-K.................................................................. 31
Signatures.................................................................................................. 32
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2007 December 31,
(Unaudited) 2006
-------------- ------------
Current assets:
Cash $ 247,538 $ 115,000
Accounts receivable - net 3,884,269 8,649,533
Cost and estimated earnings in excess of
billings on uncompleted contracts - 1,692,063
Inventory 2,154,148 2,745,543
Prepaid expenses and other current assets 96,153 101,599
----------------- ------------------
Total current assets 6,382,108 13,303,738
Property and equipment, net 4,055,778 4,746,416
Goodwill 6,000,000
Loan costs and discounts 141,292 353,230
Other assets 663,151 263,775
----------------- ------------------
$ 11,242,329 $ 24,667,159
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 655,756 $ 23,064
Secured convertible notes payable 6,624,159 4,393,812
Accounts payable and accrued expenses 9,439,381 11,256,232
Billings in excess of cost and estimated
earnings on uncompleted contracts 783,356 2,662,655
----------------- ------------------
Total current liabilities 17,502,652 18,335,763
Secured convertible notes payable, non current - 315,340
Derivative liabilities 973,287 1,005,596
Notes payable, related parties 4,083,394 4,561,660
----------------- ------------------
Total liabilities 22,559,333 24,218,359
Minority interest - 118,820
Commitments and contingencies (Note 10) - -
Stockholders' equity (deficit):
Common stock, par value $.0001, 750,000,000 shares authorized,
611,791,246 and 604,260,294 shares issued and outstanding 61,179 60,426
Additional paid-in capital 89,134,627 87,816,914
Accumulated deficit ( 100,512,810) ( 87,547,360)
----------------- ------------------
Total stockholders' equity (deficit): ( 11,317,004) 329,980
---------------- ------------------
$ 11,242,329 $ 24,667,159
================= ==================
See notes to condensed consolidated financial statements.
1
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30 September 30
2007 2006 2007 2006
------------- ------------- ------------- -------------
Revenue $ 3,901,009 $ 8,746,062 $ 18,254,491 $ 33,086,463
Cost of sales 4,244,392 9,095,169 15,572,527 30,231,008
------------- ------------- ------------- -------------
Gross profit ( 343,383) ( 349,107) 2,681,964 2,855,455
Selling, general and administrative expenses 1,947,322 2,885,000 6,603,239 7,908,306
Impairment of goodwill 6,000,000 6,000,000
Research and development expenses 91,697 400,509 336,043 595,803
------------- ------------- ------------- -------------
Loss from operations before reorganization item,
income taxes and majority and minority interest ( 8,382,402) ( 3,634,616) ( 10,257,318) ( 5,648,654)
------------ ------------ ------------ ------------
Other income (expense):
Gain on extinguishment of debt, bankruptcy - - - 81,020
Claims recovery - - - 1,100,000
Miscellaneous income 95,458 19,949 121,153 193,369
Derivative gain (loss) 562,970 279,280 32,309 3,906,048
Interest expense ( 268,604) ( 738,729) ( 2,584,242) ( 2,956,378)
------------ ------------ ------------ ------------
Income (loss) before reorganization item, income taxes
and minority interest ( 7,992,578) ( 4,074,116) ( 12,688,098) ( 3,324,595)
Reorganization item, professional fees related to
bankruptcy and pursuit of claims ( 14,601) ( 130,030) ( 277,352) ( 377,727)
------------ ------------ ------------ ------------
Income (loss) before income taxes and
minority interest ( 8,007,179) ( 4,204,146) ( 12,965,450) ( 3,702,322)
Provision for income taxes - - - -
------------- ------------- --------------------------------
Income (loss) before minority interest ( 8,007,179) ( 4,204,146) ( 12,965,450) ( 3,702,322)
Minority interest - 237,695 - ( 93,526)
------------- ------------- ------------- ------------
Net Income (loss) ($ 8,007,179) ($ 3,966,451) ($12,965,450) ($ 3,795,848)
------------- ------------- ============ ============
Net Income (loss) per common share/basic and diluted ($ .01) ($ .01) ($ .02) ($ .01)
============ ============= ============= ============
Weighted average shares outstanding
basic and fully diluted 609,436,174 602,375,424 606,798,686 599,817,547
============= ============= ============= =============
See notes to condensed consolidated financial statements.
2
EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------------------------
2007 2006
----------------- ------------------
Cash flows from operating activities:
Net income (loss) ($ 12,965,450) ($ 3,795,848)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities:
Share based compensation 393,566 -
Intangible asset impairment 6,000,000 -
Expenses funded through issuance of stock 156,000 37,500
Minority interest in joint venture ( 43,820) 93,526
Derivative (gain) loss ( 32,309) ( 3,906,048)
Amortization of debt discount 1,915,007 2,287,076
Depreciation and amortization 900,472 377,962
Gain on cancellation of debt - ( 81,020)
Increase (decrease) in cash due to changes in:
Current assets 7,428,796 ( 1,967,403)
Current liabilities ( 3,696,150) 4,151,584
---------------- ------------------
Net cash flows from operating activities 56,112 ( 2,802,671)
----------------- -----------------
Cash flows from investing activities:
Acquisition of property and equipment ( 3,000) ( 214,981)
---------------- -----------------
Net cash flows from investing activities ( 3,000) ( 214,981)
----------------- ------------------
Cash flows from financing activities:
Proceeds from note payable, related party - 3,263,874
Proceeds from notes payable 993,418 -
Distribution to minority interest in consolidated subsidiary ( 75,000) ( 101,739)
Repayment of note payable, related party ( 478,266) -
Repayment of long-term debt ( 360,726) ( 907,053)
---------------- -----------------
Net cash flows from financing activities 79,426 2,255,082
----------------- ------------------
Increase (decrease) in cash 132,538 ( 762,570)
Cash, beginning of period 115,000 1,202,480
----------------- ------------------
Cash, end of period $ 247,538 $ 439,910
================= ==================
Supplemental schedule of non-cash financing and investing activities:
During 2007, the Company
o Issued 1,950,000 shares of common stock, as partial satisfaction of a
judgment.
o Acquired $768,900 of inventory as a capital contribution from the
principal stockholder
During 2006, the Company:
o Issued 700,000 shares of common stock, as a cashless exercise of an
option to purchase 1,000,000 common shares.
o Issued 5,013,601 shares of common stock as a cashless exercise of an
option to purchase 5,570,668 common shares.
See notes to condensed consolidated financial statements.
3
EARTHFIRST TECHNOLOGIES, INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
Common Stock Additional Accumulated
Shares Amount Paid-in Capital Deficit Total
------------ --------------------- -------------------- ----------------------- ------------
Balances, December 31, 2006 604,260,294 $ 60,426 $87,816,914 ($ 87,547,360) 329,980
Stock issued as partial satisfaction
of judgment 1,950,000 195 155,805 156,000
Share based compensation 5,580,952 558 393,008 393,566
Contribution of inventory by principal
stockholder 768,900 768,900
------------ --------------------- -------------------- ----------------------- ------------
Net loss (12,965,450) (12,965,450)
------------ --------------------- -------------------- ----------------------- ------------
Balances September 30, 2007 (unaudited) 611,791,246 $ 61,179 $89,134,627 ($100,512,810) ($11,317,004)
=========== =================== =================== ===================== ============
See notes to condensed consolidated financial statements.
4
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
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
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 commercialization of its "Solid Waste Remediation Plant" in
Mobile, Alabama. This unit is known as the "Catalytic Activated Vacuum
Distillation Process ("CAVD") Reactor". This plant can process rubber tires
on a demonstration basis extracting carbon and other raw materials for
resale. This process efficiently disposes of the tires in an
environmentally compliant manner that allows raw materials from those waste
products to be recycled and reused. This process also requires
significantly less energy and causes significantly less CO2 emissions to
produce certain of its by-products than standard commercial methods.
The Company seeks to provide additional CAVD plants to customers in various
industries. The Company expects to bring proven technology in replicating
its production plants and distribution network for the disposal of the
by-products produced in the process. To date, no revenues have been
generated through the solid waste division.
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.
No revenues have been generated through liquid waste product treatments.
The Company's biofuels division, operated through SolarDiesel Corporation,
a wholly owned subsidiary, is primarily focused on facilitating commercial
scale production and distribution of biofuels produced from palm oil, soy
and rapeseed in the US, Latin America, the Caribbean, Europe and Asia, as
well as other bio-refined products. Because bio-refinery products are made
from vegetable based feedstock, they release almost no CO2 on a lifecycle
basis. To date, only a small percentage of the Company's total revenue have
been generated from biofuel sales. Further, increased biodiesel feedstock
prices for soy, palm and other traditional feedstock's have made it
impractical to proceed with this project at this time. To this end, the
Company is currently seeking to renegotiate its agreements, including its
lease obligations, with respect to its biofuels operations.
Through its Electric Machinery Enterprises, Inc. subsidiary (EME), the
Company performs services as an electrical contractor and subcontractor in
the construction of commercial, residential and municipal projects
primarily located in Florida and the Caribbean. These operations have been
5
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
substantially effected by cash flow difficulties and the Company is
currently reviewing what steps should be taken in this subsidiary to
curtail the substantial losses being incurred. Substantially all of the
Company's revenues were generated by EME in 2007 and 2006.
Basis of presentation:
The interim condensed consolidated 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. The December 31, 2006 condensed balance sheet
data was derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles in the
United States of America. 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, 2006 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.
Accounts Receivable, allowance for doubtful accounts, customer
concentrations and foreign revenues:
Accounts receivable are customer obligations due under normal trade terms.
Retainage on construction contracts, which aggregate $1,614,553 at
September 30, 2007, and are included in accounts receivable, are
contractual obligations of the customer that are withheld from progress
billings until project completion and are generally collected within one
year. The Company performs continuing credit evaluations of its customers'
financial condition and does not require collateral.
Senior management reviews receivables on a weekly 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 $3,043,254 is adequate as of September
30, 2007. However, actual write-offs could exceed this estimate.
6
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
Accounts receivables from five customers accounted for approximately 75% of
the Company's trade accounts receivable balance at September 30, 2007.
Included in the balances pertaining to these five customers is an amount of
approximately $2,200,000 from EBR Holding Limited for a project in Exuma,
the Bahamas. This project was ceased due to lack of funding near the end of
2006, and a bad debt expense deduction was taken at that time. The Company
received communication in July 2007 that a receiver has been appointed for
the purpose of selling the project. It is the hope of the Company, that the
buyer will require our services to complete the project which had been
estimated at approximately $12,000,000. The Company has filed all
documentation with the receiver to substantiate our position.
Contract Claims
As of September 30, 2007 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. The
Company does not record contract claims until such claims are realized
pursuant to guidance in Statement of Position 81-1 Accounting for
Performance Construction-Type and Certain Production-Type Contracts. The
guidance states that "recognition of amounts of additional contract revenue
relating to claims is appropriate only if it is probable that the claim
will result in additional contract revenue and if the amount can be
reliably estimated." Those two requirements are satisfied by the existence
of all of the conditions described in the pronouncement. All of the
conditions were not present so these claims are considered to be contingent
gains and will be recorded when realized. These amounts, which are not
carried as assets on the balance sheet, will be recorded as revenue when
such claims are settled.
During the first quarter of 2006, the Company recognized $1,100,000 in
revenue for amounts that were collected in relation to such claims. This
claim recovery is included in other income in the accompanying statement of
operations for the nine months ended September 30, 2006.
Net income (loss) per share:
The Company computes income (loss) per share under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." The statement requires
presentation of two amounts; basic and diluted loss per share. Basic loss
per share is computed by dividing the income or loss available to common
stockholders by the weighted average common shares outstanding. Diluted
earnings per share would include all common stock equivalents unless
anti-dilutive. The Company has not included the following outstanding
options and warrants, or convertible debentures as common stock equivalents
as of September 30, 2007 because the effect would be anti-dilutive.
Shares issuable upon exercise of outstanding options 15,533,800
Shares issuable upon exercise of outstanding warrants 29,562,790
Shares issuable upon conversion of debentures 33,726,060
----------
Total 78,822,650
==========
7
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
2. Management's plans regarding liquidity and capital resources:
The Company has historically funded any negative operating cash flows with
proceeds from sales of stock, as well as notes, convertible debentures and
related party loans. Commencing with the Company's acquisition of EME in
late 2004, the Company restructured many of EME's liabilities with funding
provided by the Laurus credit facility discussed in Note 4 as well as
additional related party loans.
As discussed in Note 8, in January 2006, the Company secured a $5,000,000
line of credit with an entity related to the Company's Chairman and Chief
Executive Officer. Approximately $900,000 of this credit facility remains
available at September 30, 2007.
The Company experienced significant losses and negative cash flows from
operations during 2006 as a result of bad debt expense of approximately
$2,800,000, a loss on a negotiated settlement on a contract in the
Caribbean of approximately $1,000,000, and several jobs not realizing the
profitability originally estimated, all of which have caused the Company
difficulty in meeting cash requirements. In evaluating the factors that
caused these 2006 negative results of operations, the Company in 2007 has
taken steps seeking to improve operating results in the contracting segment
by improving the quality of job estimating and implementation, as well as
reducing selling, general and administrative overhead. However, cash flow
difficulties have substantially impaired the ability of this subsidiary to
operate and the Company is currently reviewing what steps should be taken
in this subsidiary to curtail the substantial losses being incurred.
While the Company believed that anticipated revenues earned during 2007
accompanied by its restructuring efforts would ultimately be sufficient to
bring profitability and a positive operating cash flow back to the Company,
the age of certain accounts payable with large suppliers has created an
inability to purchase materials and has limited the Company's ability to
procure new jobs. Although our gross profit percentage significantly
increased for the nine months ended September 30, 2007, our volume has
significantly decreased. As such, the Company continues to experience cash
flow difficulties and is delinquent on payment of many of its trade
creditors, its secured convertible notes (see note 4) and a $100,000
unsecured note payable (see note 7). Accordingly, the Company will have to
raise additional capital to operate. There can be no assurance that such
capital will be available, or that it will be available on satisfactory
terms.
As described in the report of our independent registered public accountants
for the year ended December 31, 2006, as reported in our form 10KSB for
2006, the foregoing factors raise substantial doubt as to the ability of
the Company to continue as a going concern.
8
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
3. Inventory
Inventory consists of the following at September 30, 2007:
Electrical and construction supplies $ 1,262,567
B-100, biodiesel fuel 122,681
Water filtration equipment 768,900
-----------
$ 2,154,148
===========
4. Goodwill
Goodwill as of December 31, 2006 was $6,000,000, and consisted solely of
the amount resulting from the acquisition on August 20, 2004 of Electric
Machinery Enterprises, Inc.
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 of
Disposal of Long-Lived Assets" (SFAS No. 144'), the Company reviews the
carrying amount of the goodwill associated with the acquisition of EME for
impairment annually, or sooner whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. This amount is
tested by comparing its carrying amount to fair value. Impairment of
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 then
determines the implied fair value of goodwill by deducting the fair value
of the reporting unit's net assets, exclusive of goodwill, from the fair
value of the reporting unit to determine the implied value of goodwill. If
the book value of goodwill is greater than its implied fair value, the
Company writes down goodwill to its implied fair value. As of September 30,
2007, the Company has determined that the implied fair value was less than
its book value and has recorded an impairment charge of $6,000,000.
4. Secured Convertible Notes Payable
The following table reflects balances of the secured convertible notes with
Laurus Master Fund, Ltd. at September 30, 2007:
---------------------------------------------------------------------------------------- ---------------------
Face value $1,300,000 Secured Convertible Term Note, variable rate of prime plus 2.5%
(10.25% at September 30, 2007), due in stated monthly payments of $100,000 through
March 30, 2008. $ 1,300,000
---------------------------------------------------------------------------------------- ---------------------
Face value $1,000,000 Secured Convertible Minimum Note, variable rate of prime plus
2%, subject to 7% floor (9.75% at September 30, 2007), due at maturity on March 30,
2008. 1,000,000
---------------------------------------------------------------------------------------- ---------------------
Face value $4,324,159 Secured Convertible Revolving Note, variable rate of prime plus
2%, subject to 7% floor (9.75% at September 30, 2007), due at maturity on March 30,
2008. 4,324,159
---------------------------------------------------------------------------------------- ---------------------
6,624,159
---------------------------------------------------------------------------------------- ---------------------
Less current maturities ( 6,624,159)
---------------------------------------------------------------------------------------- ---------------------
$ --
---------------------------------------------------------------------------------------- =====================
9
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
Subsequent to December 31, 2006, the Company defaulted on certain terms of
the Laurus credit facility in that it ceased making principal and interest
payments on a monthly basis. On April 18, 2007, the Company made an
interest payment in the amount of $123,985, and pursuant to correspondence
received on that date, the Company was no longer in payment default, and
Laurus agreed to defer the past due principal payments while working
together on a plan acceptable to both parties. At September 30, 2007, the
Company is delinquent in interest payments in the amount of approximately
$291,326.
On October 2, 2007 the Company entered into a Forbearance Agreement
("Agreement") with Laurus Master Fund Ltd. The purpose of this Agreement
was to obtain a waiver of any possible pre-existing defaults, extend the
term of the Laurus financing arrangement through 12/31/08 and to clearly
define the principal and interest obligations of the Company through Loan
Maturity.
On November 8, 2007, the Company received notice from LV Administrative
Services, Inc. as agent for Laurus Master Fund, Ltd., that the Company had
defaulted on the terms of the Forbearance Agreement, and that Laurus had
elected to accelerate all obligations owed to Laurus by the Company.
On November 21, 2007, the Company was served with a lawsuit in the United
States District Court for the Middle District of Florida entitled Laurus
Master Fund, Ltd. v. EarthFirst Technologies, Incorporated ("EarthFirst") ,
et al. Case # 8 07 CV 2723-T27EA. In its complaint Laurus is seeking relief
against EarthFirst and certain of its subsidiaries, not including
SolarDiesel Corporation ("SolarDiesel"). In Count I Laurus seeks to recover
damages in excess of a claimed $8,500,000 for the Company's alleged breach
of loan and forbearance agreements. In Counts II and III, Laurus seeks to
foreclose on all collateral pledged to Laurus by EarthFirst and certain of
its subsidiaries, except SolarDiesel. If successful, Laurus could force the
judicial sale of all EarthFirst and certain of its subsidiaries (not
including SolarDiesel's) assets to satisfy its indebtedness, and if any
balance remained, seek to obtain a deficiency judgment for this balance. If
successful, Laurus could also seek to obtain a money judgment in the full
amount of its indebtedness, unpaid interest and legal fees. On December 18,
2007, the Company filed a motion to dismiss this action on a jurisdictional
basis.
Since the notes are immediately callable due to the payment default, the
Company has recorded any previously unamortized debt discount as interest
expense and now carries the notes at their face value.
5. Derivative Financial Instruments
The caption Derivative Financial Instruments consists of (i) the fair
values associated with derivative features embedded in the Laurus
Convertible Secured Term Notes and (ii) the fair values of the detachable
warrants that were issued in connection with those financing arrangements.
The following tabular presentation reflects the components of Derivative
financial instruments on the Company's balance sheet at September 30, 2007:
--------------------------------------------------------------------- -------------------------
(Assets) Liabilities:
--------------------------------------------------------------------- -------------------------
Embedded derivative instruments $ 588,730
--------------------------------------------------------------------- -------------------------
Freestanding derivatives (warrants and options) 384,557
--------------------------------------------------------------------- -------------------------
$ 973,287
--------------------------------------------------------------------- =========================
The following tabular presentation reflects the number of common shares
into which the aforementioned derivatives are indexed at September 30,
2007:
--------------------------------------------------------------------- -------------------------
Common shares indexed:
--------------------------------------------------------------------- -------------------------
Embedded derivative instruments 33,726,060
--------------------------------------------------------------------- -------------------------
Freestanding derivatives (warrants and options) 11,162,790
--------------------------------------------------------------------- -------------------------
44,888,850
--------------------------------------------------------------------- =========================
10
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
6. Contracts in progress
Uncompleted contracts are summarized as follows:
Costs incurred on uncompleted contracts $ 22,946,066
Estimated earnings on uncompleted contracts 4,584,301
------------
27,530,367
Less billings to date (28,313,723)
-------------
($ 783,356)
============
The components of this amount are included on the September 30, 2007
balance sheet under the following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts $ -
Billings in excess of costs and estimated earnings on
uncompleted contracts ( 783,356)
-------------
($ 783,356)
============
7. Notes payable
Notes payable at September 30, 2007 consists of the following:
Insurance premium finance agreements payable in monthly
payments of $6,393 bearing interest at 11.1% $ 41,053
$500,000 revolving credit facility payable monthly to Fifth Third Bank,
secured by biodiesel inventory, interest at LIBOR
plus 2.5% to 2.75%, with a maturity of April 2008 15,418
$500,000 revolving credit facility payable monthly to Fifth Third Bank,
secured by water filtration equipment inventory, interest at LIBOR plus
2.5% to 2.75%, with a maturity of
November 2007 499,285
$100,000 unsecured note payable dated March 14, 2007, bearing interest
at 8.00%, payable in full with accrued interest at maturity
on May 7, 2007 (unpaid as of November 14, 2007) 100,000
------------
$ 655,756
============
8. Notes payable, related party
In January 2006, the Company through its subsidiary SolarDiesel Corporation
entered into a revolving line of credit promissory note in the amount of
$3,000,000, with "US Sustainable Energy Corp., an entity related to John
11
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
Stanton, the Company's Chairman of the Board, Chief Executive Officer, and
President. In June 2006, the amount of the revolving line of credit
promissory note was increased to $5,000,000, and the terms were modified to
require no payments until January 2009. The Promissory note accrues
interest at the rate of 6%. Simultaneously with the execution of the
promissory note, the Company entered into a security agreement pledging as
collateral all of debtor's right title and interest in and to all Palm Oil
and Palm Methyl Ester Products, and any and all assets associated with the
biofuels business of SolarDiesel Corporation.
In April 2007, John Stanton made a capital contribution of twenty two (22)
Water Purification Plants to be held for resale. The transaction was
recorded at $768,900, the cost basis of the related party.
As of September 30, 2007, the balance including accrued interest was
$4,083,394.
9. Stockholders equity:
The following information pertains to stock options outstanding and
exercisable at September 30, 2007:
Options outstanding Options exercisable
------------------- -------------------
Total options 15,533,800 13,325,800
Weighted average exercise price $ 0.08 $ 0.08
Weighted average contracted term in years 7.4 7.1
Intrinsic value $ 350,000 $ 272,650
As of September 30, 2007 the Company expects to record $41,990 of
compensation expense through March 31, 2008 for options not yet vested.
On May 4, 2007 the Company issued 3,200,000 shares of common stock to
outside directors
On August 24, 2007 the Board approved the issuance of 2,380,952 shares of
common stock to various employees of Electric Machinery Enterprises, Inc
for accrued bonuses in lieu of cash. See Note 10 for stock issued as
partial settlement of claim.
10. Commitments and Contingencies
Lease obligations:
The Company leases vehicles and certain office equipment under
noncancellable operating leases for periods up to four years. In addition,
12
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
the Company conducts the majority of its operations in a facility leased
from a related corporation owned by certain stockholders of the Company.
The total rent expense for the nine months ended September 30, 2007 and
2006 was approximately $734,464 and $754,139, respectively, of which
approximately $571,505 and $571,505 respectively, was for the facility
leased from the related corporation.
The Company, through its subsidiary, SolarDiesel Corporation, made an
initial $500,000 refundable deposit on a facility lease agreement for the
purpose of constructing a biodiesel manufacturing plant on these leased
facilities in Illinois. The agreement requires further refundable deposits
of $200,000 in 2008 and 2009. The lease term is initially for a period of
three years commencing on October 1, 2007, with four additional three year
renewal options. Monthly rentals under the terms of the lease for the
initial three year term range from $187,500 for the first year through
September 30, 2008, $250,000 for the second year through September 30,
2009, and $333,333 for the third year through September 30, 2010.
Subsequent rentals are subject to increases based upon the Producers Price
Index for Industrial commodities. The lease agreement contains certain
obligations of both parties in order to effectuate the lease. This lease is
currently being renegotiated to reduce the monthly expense.
The Company through its subsidiary, SolarDiesel Corporation, entered into a
lease for office space in Tampa, Florida for a period of 15 months
commencing July 31, 2007 and continuing until October 31, 2008. The base
rent is $3,299 per month.
The Company through its subsidiary, Prime Power Design, Inc. (formerly
Prime Power Residential, Inc.), entered into a facilities lease for office
and warehouse space in Clearwater, Florida for a period of 56 months,
commencing on April 1, 2007 and continuing until December 31, 2011. The
initial base rent is $3,866 per month for a period of eight months, and
$7,732 for the balance of the lease.
Approximate future minimum rentals on non-cancelable leases for five years
at September 30, 2007 are as follows:
Year ending September 30,
-------------------------
2008 $ 2,582,147
2009 3,281,811
2010 4,118,186
2011 92,784
2012 23,196
-------------
$ 10,098,124
=============
13
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
Legal proceedings:
On November 21, 2007, the Company was served with a lawsuit in the United
States District Court for the Middle District of Florida entitled Laurus
Master Fund, Ltd. v. EarthFirst Technologies, Incorporated ("EarthFirst") ,
et al. Case # 8 07 CV 2723-T27EA. In its complaint Laurus is seeking relief
against EarthFirst and certain of its subsidiaries, not including
SolarDiesel Corporation ("SolarDiesel"). In Count I Laurus seeks to recover
damages in excess of a claimed $8,500,000 for the Company's alleged breach
of loan and forbearance agreements. In Counts II and III, Laurus seeks to
foreclose on all collateral pledged to Laurus by EarthFirst and certain of
its subsidiaries, except SolarDiesel. If successful, Laurus could force the
judicial sale of all EarthFirst and certain of its subsidiaries (not
including SolarDiesel's) assets to satisfy its indebtedness, and if any
balance remained, seek to obtain a deficiency judgment for this balance. If
successful, Laurus could also seek to obtain a money judgment in the full
amount of its indebtedness, unpaid interest and legal fees. On December 18,
2007, The Company filed a motion to dismiss this action on a jurisdictional
basis.
The Company is involved in litigation with Ruggero Maria Santilli
("Santilli"), The Institute for Basic Research, Inc. and Hadronic Press,
Inc. ("Hadronic") concerning certain aspects of the Company's liquid waste
technologies. Hadronic claims to own the intellectual property rights to
one or more aspects of our 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 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. This litigation does not involve the technology the Company is
developing in connection with its 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 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.
CNC Associates, Inc. obtained a judgment in September 2000 in the amount of
approximately $400,000 relative to one of these deficiency balances. On May
9, 2007, and pursuant to Florida Statutes section 56.29, the Pinellas
County Circuit Court has ordered by May 19, 2007, that EarthFirst
Technologies, Incorporated;
14
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
(a) turn over to CNC the EFTI treasury shares or if there are no issued
treasury shares, then EFTI is directed to reissue the shares to CNC in
partial satisfaction of the judgment; and
(b) turn over to the Pinellas County Sheriff, 100% of the shares of
SolarDiesel Corporation, and such shares are to be sold by a publicly
advertised sheriff sale.
The Company has issued 1,950,000 shares of common stock to CNC in partial
satisfaction of the judgment, and has filed a motion for reconsideration
relative to the shares of SolarDiesel Corporation to be heard on December
14, 2007. The Company believes the Solar Diesel shares may not be turned
over as they are being held by a secured lender of SolarDiesel pursuant to
a stock pledge. The Company's biofuels business segment is conducted by
SolarDiesel Corporation. Should the Company ultimately be forced to convey
these shares as ordered by the court, the ability to conduct operations in
that business segment could be significantly reduced or eliminated.
Included in the balance of accrued expenses and other current liabilities
is our estimate of the remaining amount at which the matters contemplated
above will ultimately be resolved. Approximately $700,000, less the
$156,000 fair value of the common stock issued has been recorded as a
liability in the September 30, 2007 balance sheet as attributable to the
disputed matters contemplated above. While management believes the amounts
recorded are adequate, there can be no assurance that actual liabilities
that may result from the resolution of these matters will not exceed
recorded amounts
We are involved in litigation with the liquidator of Amwest Surety Company
based on a final judgment entered against Amwest in the amount of $432,471
in favor of Sunhouse Construction. Amwest is seeking recovery from Electric
Machinery Enterprises, Inc. for this amount. There is no reasonable manner
to determine with any degree of certainty as to the outcome of the
objection to Amwest's claim. As this claim pertains to transactions that
occurred prior to EME's bankruptcy, settlements if any would fall under the
reorganization plan for unsecured creditors capping the amount to 55.5% of
the allowed claim, payable over 5 years. At this time, management is
aggressively defending against this claim, and has not made any provision
for a liability associated with it.
The Company is currently involved in an adversary proceeding pending in the
Bankruptcy Court in the Middle District of Florida, Tampa division. The
action was filed on December 23, 2003 and is entitled "Electric Machinery
Enterprises, Inc. vs Hunt, Clark/Construct Two, a Joint Venture, and Orange
County (Adversary No. 03-00811)". In August of 2001, EME was contracted to
perform services on the construction project of Phase V of the Orlando
Orange County Convention Center. During the project, various disputes arose
relative to the work required, and many unforeseen disruptions not caused
by EME resulted in a severe delay in the prosecution of the work. EME
15
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
completed the job, and in doing so incurred substantial costs far in excess
of those estimated. The dollar amount of the claim is approximately
$9,000,000. The entire amount is disputed. EME expects to collect the full
amount of this claim plus interest and attorney's fees. The defendants have
asserted various technical contract related defenses. Therefore, EME cannot
estimate when the recovery, if any, is expected, as EME cannot predict
whether or not Defendants will appeal any judgment entered in EME's favor.
This amount is not carried as an asset on the balance sheet, and will only
be recorded as revenue when and if the claim is favorably settled.
The Company has other litigation and disputes that arise in the ordinary
course of its business, including significant vendor litigations seeking
payment of past due trade balances. The Company has accrued amounts for
which it believes all of its litigation will ultimately be settled.
11. Segment Information
The Company operates in three business segments. The waste disposal segment
is focused on research and development and bringing the existing
technologies to commercial realization. The Contracting segment operates
electrical contracting and subcontracting services on commercial,
residential and municipal construction projects primarily in Florida and
the Caribbean. The Caribbean projects are all denominated in U.S. currency.
The Biofuels segment is focused on the importing and producing of biodiesel
fuels.
16
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
SEGMENT INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 IS AS FOLLOWS:
Waste
Disposal Contracting Biofuels Total
------------ ------------ ---------- ------------
Revenue $ - $ 17,320,425 $ 934,066 $ 18,254,491
Cost of Sales 14,569,714 1,002,813 15,572,527
------------ ------------ ---------- ------------
Gross profit (loss) - 2,750,711 (68,747) 2,681,964
Selling, general and administrative expenses 761,830 3,331,194 979,506 5,072,530
Impairment of intangible asset 6,000,000 6,000,000
Research and development expenses 283,897 52,146 336,043
------------ ------------ ---------- ------------
Income (loss) from operations before reorganization
item, income taxes and majority interest (1,045,727) (6,580,483) (1,100,399) (2,726,609)
Other income (expense)
Miscellaneous income 120,498 120,498
Interest expense (5,468) (88,977) (119,443) (213,888)
------------ ------------ ---------- ------------
Income (loss) before reorganization item, Income
taxes and majority and monority interests (1,051,195) (6,548,962) (1,219,842) (8,819,999)
Reorganization item, professional fees related to
bankruptcy and pursuit of claims (277,352) (277,352)
------------ ------------ ---------- ------------
Income (loss) before majority and minority interest(1,051,195) (6,826,314) (1,219,842) (9,097,351)
------------ ------------ ---------- ------------
Majority interest and minority interests - -
------------ ------------ ---------- ------------
Income (loss) from operations (1,051,195) (6,826,314) (1,219,842) (9,097,351)
------------ ------------ ---------- ------------
Net Income (loss) $ (1,051,195) $ (6,826,314) $ (1,219,842) $ (9,097,351)
============ ============ ============ ============
Total Assets $ 2,241,380 $ 7,188,958 $ 1,511,574 $ 10,941,912
============ ============ ============ ============
Goodwill $ - $ -
============ ============ ============ ============
Reconciliation of Segment Amounts Reported to Condensed Consolidated Amounts
Revenue
Total revenues for reportable segments $ 18,254,491
------------
Total consolidated revenue $ 18,254,491
------------
Net loss
Total loss for reportable segments $ (9,097,351)
Unallocated amounts relating to corporate operations
Miscellaneous income 655
Selling, general and administrative expenses (1,530,709)
Interest expense (2,370,354)
Derivative loss 32,309
------------
Total consolidated net income $(12,965,450)
============
Assets
Total assets for reportable segments $ 10,941,912
Corporate investments and other assets 300,417
------------
Total consolidated assets $ 11,242,329
============
17
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
SEGMENT INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 IS AS FOLLOWS:
Waste
Disposal Contracting Biofuels Total
------------ ------------ ---------- ------------
Revenue $ - $32,097,205 $ 989,258 $33,086,463
Cost of Sales - 29,068,523 1,162,485 30,231,008
------------ ------------ ---------- ------------
Gross profit (loss) - 3,028,682 (173,227) 2,855,455
Selling, general and administrative expenses 629,406 4,933,415 525,659 6,088,480
Research and development expenses 452,538 - - 452,538
------------ ------------ ---------- ------------
Income (loss) from operations before reorganization
item, income taxes and majority interest (1,081,944) (1,904,733) (698,886) (3,685,563)
Other income (expense)
Gain on extinguishment of debt, bankruptcy - 81,020 - 81,020
Claims recovery - 1,100,000 - 1,100,000
Miscellaneous income - 122,294 56,334 178,628
Interest expense (3,481) (2,543) (94,862) (100,886)
------------ ------------ ---------- ------------
Income (loss) before reorganization item, Income
taxes and minority interests (1,085,425) (603,962) (737,414) (2,426,801)
Reorganization item, professional fees related to
bankruptcy and pursuit of claims - (374,248) (374,248)
------------ ------------ ---------- ------------
Income (loss) before minority interest (1,085,425) (978,210) (737,414) (2,801,049)
Minority interest - (93,526) (93,526)
------------ ------------ ---------- ------------
Income (loss) from operations (1,085,425) (1,071,736) (737,414) (2,894,575)
------------ ------------ ---------- ------------
Net Income (loss) for reportable segments $ (1,085,425) $ (1,071,736) $ (737,414) $(2,894,575)
============ ============ ============ ============
Total Assets $ 2,978,293 $30,758,793 $ 1,799,469 $35,536,555
============ ============ ============ ============
Goodwill $ 15,323,152 $15,323,152
============ ============ ============ ============
Reconciliation of Segment Amounts Reported to Condensed Consolidated Amounts
Revenue
Total revenues for reportable segments $ 33,086,463
------------
Total consolidated revenue $ 33,086,463
------------
Net loss
Total loss for reportable segments $ (2,894,575)
Unallocated amounts relating to corporate operations
Miscellaneous income 16,732
Selling, general and administrative expenses (1,825,296)
Research and development expense (143,265)
Interest expense (2,855,492)
Derivative gain 3,906,048
------------
Total consolidated net income $(3,795,848)
============
Assets
Total assets for reportable segments $ 35,536,555
Corporate investments and other assets 488,628
------------
Total consolidated assets $36,025,183
============
18
EARTHFIRST TECHNOLOGIES, INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
12. Subsequent Events
On October 2, 2007 the Company entered into a Forbearance Agreement
("Agreement") with Laurus Master Fund Ltd. Laurus is owed a balance of
approximately $6.6 million under the term and revolving provisions of its
existing financing with the Company.
The purpose of this Agreement was to obtain a waiver of any possible
pre-existing defaults, extend the term of the Laurus financing arrangement
through 12/31/08 and to clearly define the principal and interest
obligations of the Company through Loan Maturity.
On November 8, 2007, the Company received notice from LV Administrative
Services, Inc. as agent for Laurus Master Fund, Ltd., that the Company had
defaulted on the terms of the Forbearance Agreement, and that Laurus had
elected to accelerate all obligations owed to Laurus by the Company.
The debt to Laurus is evidenced by a Secured Convertible Term Note, Secured
Revolving Note and Secured Minimum Borrowing Note ("Notes"). The Notes have
an approximate remaining outstanding balance due of $6,6 million. The Notes
are secured by virtually all of the tangible and intangible assets of EFTI,
with the exception of the shares of the Company's SolarDiesel subsidiary.
On November 21, 2007, the Company was served with a lawsuit in the United
States District Court for the Middle District of Florida entitled Laurus
Master Fund, Ltd. v. EarthFirst Technologies, Incorporated ("EarthFirst") ,
et al. Case # 8 07 CV 2723-T27EA. In its complaint Laurus is seeking relief
against EarthFirst and certain of its subsidiaries, not including
SolarDiesel Corporation ("SolarDiesel"). In Count I Laurus seeks to recover
damages in excess of a claimed $8,500,000 for the Company's alleged breach
of loan and forbearance agreements. In Counts II and III, Laurus seeks to
foreclose on all collateral pledged to Laurus by EarthFirst and certain of
its subsidiaries, except SolarDiesel. If successful, Laurus could force the
judicial sale of all EarthFirst and certain of its subsidiaries (not
including SolarDiesel's) assets to satisfy its indebtedness, and if any
balance remained, seek to obtain a deficiency judgment for this balance. If
successful, Laurus could also seek to obtain a money judgment in the full
amount of its indebtedness, unpaid interest and legal fees. On December 18,
2007, the Company filed a motion to dismiss this action on a jurisdictional
basis.
19
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
ITEM 2. 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.
Electrical Contracting - Electric Machinery Enterprises
The Company performs electrical contracting and subcontracting services on
commercial, residential and municipal projects primarily in Florida and the
Caribbean through its subsidiary Electric Machinery Enterprises, Inc.
("EME"). Substantially all of the Company's revenues are currently
generated through EME's contracting and subcontracting services.
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.
Domestic work includes electrical contract work performed principally in
the State of Florida. The Company is attempting to improve profitability in
this segment of its business by introducing enhanced technology in the
bidding process for these contracts and in monitoring the progress with
budgeted amounts as work is performed. The Company is optimistic that these
and other enhancements will enable it to be the successful bidder on an
increased number of financially attractive contracts.
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 entered the market as an electrical contractor
for residential real estate. Initially these services were provided on a
small scale to allow the Company to evaluate the economic viability of this
market. In response to management's evaluation of early demand from the
custom residential home building market, EME formally established Prime
Power Design, Inc. (formerly Prime Power Residential, Inc.) as a wholly
owned subsidiary in the electrical contracting business of the Company.
20
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
Catalytic Activated Vacuum Distillation Process ("CAVD") Reactors
EarthFirst 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 produces recyclable and reusable by-products.
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 processing these waste products into recyclable material.
Initially, we are focusing on the processing of rubber tires through our
demonstration plant in Mobile, Alabama. We have also processed carbon laden
non-waste products. The typical results of processing materials in our CAVD
reactor is the production of alternative fuels consisting of a synthetic
gas, oil products and some form of carbon based powder or crumb. 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, the Company processes, on a demonstration basis, 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.
The Company's first CAVD Reactor was constructed at a facility in Mobile,
Alabama and processes shredded tires on a demonstration basis. No revenues
have been generated to date from this facility.
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 is dependant upon the successful sale of the by-products recovered.
21
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
We believe that the carbon and oil by-products represent the greatest value
of this process. With current oil pricing reaching levels as high as $98
per barrel, the attractiveness of the CAVD technology has grown beyond the
prior emphasis on 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 various carbon recovered from our CAVD Reactor has led us to
believe that, at the current time, the best carbon product to market is a
substitute for certain series of commodity grade carbon black
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, the Company is working with several potential
end users who are conducting substantive testing of the carbon for use in
their operations. An added advantage is that the CAVD carbon may qualify
for "Carbon" or "Green" credits, because it reduces CO2 production during
manufacturing and creates a recycled carbon.
Provisional Patent Application US60/681,701 filed on May 17, 2005 describes
the CAVD technology as a unique process for producing carbon and other
products, and also contains several claims for novel components in the
system. The technology is the cumulative result of six years of research
and development.
New provisional patents are being filed based on the Company's Reactor,
Reactor Process and By-Products.
Based upon our experiences thus far, we expect that there is considerable
interest in the CAVD Reactor from potential users. The Company has executed
two MOU's pursuant to which each customer has expressed an interest in
purchasing multiple units from Renewable Carbon Technologies, LLC (Our
50/50 venture with Orion Industrial Services). However, the actual ordering
of CAVD units and execution of license agreements under these MOU's will
depend on the operating success of the renovated and upgraded Mobile
reactor. We believe that delays in the creation of definitive agreements
with other end users of the CAVD Reactors are waiting for the finalization
of our renovated and upgraded design for our Mobile reactor. We then expect
our technology to gain credibility in the marketplace with both a variety
of potential end users of the CAVD Reactors as well as the end users of
carbon and other products recovered in the process. It is envisioned that
future 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. However, there can be no
assurance that the Company will ultimately be successful in achieving such
arrangements / agreements.
On August 6, 2007, the Company and its subsidiary, World Environmental
Solutions Company, Inc. (WESCO) entered into an agreement with Orion
Industrial Services Corporation to joint venture the final design,
construction and commercial roll-out of its next generation tire processing
facility.
22
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
Under the terms of the Agreement WESCO will contribute certain intellectual
property rights relating to CAVD tire technology, use of the Mobile
facility and up to $650,000 cash. Orion contributes certain intellectual
property, construction and operational resources plus cash or cash
equivalents of up to $850,000. Profits from the venture will be shared
equally.
The Company has made the two initial, scheduled payments under the August
6th Agreement with OIS and engineering and dismantling of the Mobile
Reactor are underway. WECO and OIS are currently in the process of
finalizing a formal LLC operating agreement with OIS. If such an agreement
cannot be finalized for any reason, the project may be delayed or prevented
from moving forward. In addition, because neither the Company nor WESCO
have any operating capital, WESCO's continued participation in and
completion of the joint venture with OIS will likely depend on third party
funding being received. Currently, the most likely source of this funding
would be affiliated entities.
Liquid Waste Technologies
The Company is continuing to attempt to identify and implement commercially
viable applications of its plasma arc converter technologies embodied in
the BigSpark(TM) converter. The Company's 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 the Company has 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.
The Company is 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.
23
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
Prime Power of Tampa, Inc.
EME, a wholly owned subsidiary of EarthFirst, and Triad Companies have
consummated the formation of Prime Power of Tampa, Inc. ("Prime"), a
strategic alliance created by the companies to jointly pursue major utility
projects, large offshore projects, and/or major design/build opportunities.
Through this strategic alliance, it was believed that Prime would have the
unique ability to address large electrical contracting projects from design
through build to maintenance and support, offering a fully integrated
contracting solution. This Company is currently inactive. The only project
remaining is the one in receivership in Exuma, the Bahamas.
SolarDiesel Corporation (formerly EarthFirst Americas, Incorporated)
(Biofuels)
SolarDiesel Corporation ("SDC"), (formerly EarthFirst Americas
Incorporated), was originally formed to develop the market opportunities
available and associated with Palm Oil as a feed stock for bio-fuels. The
Company initially imported palm oil biodiesel from Central America for
research, development and resale. While the Company continues to sell
biodiesel on a wholesale basis, the focus of its efforts are now geared
toward the establishment of a bio-refinery capable of producing multiple
products, primarily the production of ASTM 6751 biodiesel, which can be
used as a substitute for petroleum diesel in all markets.
The Company entered into a pilot program for biodiesel use in municipal
markets with the City of Coral Gables, Florida. The City has dedicated a
portion of its fleet to operate using a "B20" blend consisting of 20% palm
oil biodiesel (purchased from SDC) and 80% petroleum diesel. The Company
provides the City with all technical support in coordination of the pilot
program. Negotiations are also underway with other municipal governments
and agencies for similar pilot programs toward the end of becoming a major
governmental biodiesel supplier.
In April 2007, the Company through its subsidiary, SolarDiesel Corporation
made an initial $500,000 refundable deposit on a facility lease agreement
for the purpose of constructing a biodiesel manufacturing plant in
Channahon, Illinois. The agreement requires further refundable deposits in
2008 and 2009. The lease term is initially for a period of three years
commencing on October 1, 2007, with four additional three year renewal
options. Monthly rentals under the terms of the lease for the initial three
year term range from $187,500 to $333,333. Subsequent rentals are subject
to increases based upon the Producers Price Index for Industrial
commodities. The lease agreement contains certain obligations of both
parties in order to effectuate the lease.
On July 24, 2007, the Company and its subsidiary, Solar Diesel Corporation
("Solar") entered into an agreement with Ultra Green Energy Corporation
("Ultra Green") to co-own and operate the Company's bio-refinery in
Channahon, Illinois.
Pursuant to the terms of the agreement, Ultra Green has the right to
acquire up to 35% in either Solar or a newly formed entity, to be
determined by the parties, based on meeting certain performance standards.
24
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
More specifically, Ultra Green has the right to acquire this ownership
interest as follows:
(a) 17.5% shall be issued on the assignment from Ultra Green of 60 million
gallons of Ultra Green's right to place biodiesel produced by a third
party under a master off-take contract;
(b) 4% shall be issued upon the execution of a management agreement
wherein Ultra Green shall be providing experienced personnel to
develop and operate the Channahon facility, including its President,
Thomas M. Campone;
(c) 2% shall be issued upon the completion by Ultra Green, at its own cost
and expense, of certain preliminary work on the facility, including
planning and implementation action and using its best efforts to
obtain financing for the project.
(d) 2% shall be issued on the facility receiving government building
grants of at least $3 million; and
(e) 9.5% shall be issued upon Ultra Green successfully operating the
facility at a minimum level of 5 million gallons per month and the
receipt of certain certifications for the facility.
As additional consideration, Ultra Green shall be entitled to receive
warrants to acquire 4.9% of EFTI's currently outstanding common stock at
$.07 per share on the successful completion of (a) through (d) above, which
includes the minimum government grant of $3,000,000. Additional warrants
for EFTI's common stock would be issuable based on certain benchmarks to be
negotiated among the parties.
The agreement also provides for certain funding commitments by the parties,
provisions for day-to-day management, certain restrictions, rights and
obligations of the shareholders, including transfer restrictions, and
corporate governance provisions, including a required two-thirds
shareholder vote for certain actions, including acts not deemed to be in
the ordinary cause of business.
Increased biodiesel feedstock prices for soy, palm and other traditional
feedstock have risen to such a level that the Company has delayed its plans
to start-up Biodiesel production. In fact an industry journal has reported
that even in the Midwest most existing producers have scaled back or even
terminated their biodiesel production operations because of the inability
to operate [GRAPHIC OMITTED][GRAPHIC OMITTED]profitably. To address these
issues and because the Channahon facility leased by the Company has the
capability of producing other bio-refined products, the Company is
negotiating a restructure of the Channahon Lease and a moratorium on the
Channahon Supply Agreement. The goal of these negotiations will be to
obtain a restructured lease that will financially allow the immediate
production of non-biodiesel bio-refinery products at a profit. If these
negotiations prove unsuccessful, then it is unlikely the Company will be
able to make the payments due under the Channahon Lease as currently
structured or meet the minimum purchase requirements under the Supply
Agreement. It is also anticipated that the Company will have to modify its
existing arrangement with UGE and raise funds from third parties to make
the capital improvements necessary to upgrade the Channahon facility.
Negotiations are underway with various third parties at this time to raise
these funds and the contribution of these funds, if successful, will most
likely result in a reduction of participation and or profit interest the
Company may retain at Channahon.
25
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
The Company continues to explore the use of it's CAVD technology to process
vegetable feed stocks such as palm fruit, soy beans and corn into a biofuel
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 2006.
Revenues for the three month period ending September 30, 2007 in the amount
of $3,901,009 represents a decrease of $4,845,053 or approximately 56% when
compared to $8,746,062 for the three month period ending September 30,
2006. Revenues for the nine month period ending September 30, 2007 in the
amount of $18,254,491 represents a decrease of $14,831,972, or
approximately 45% when compared to $33,086,463 for the nine month period
ending September 30, 2006. Substantially all revenues are generated from
contracting and subcontracting services. Biofuel sales for the three and
nine month periods ending September 30, 2007 in the amounts of $404,500 and
$934,066 respectively represent approximately 11% and 5% of total sales for
the periods.
Gross profit is negative for the three month period ending September 30,
2007 in the amount of $343,383, as compared to a negative gross profit in
the amount of $349,107 for the three month period ending September 30,
2006. Gross profit for the nine month period ending September 30, 2007
decreased from $2,855,455 to $2,681,964, or approximately 7.4% when
compared to the nine month period ending September 30, 2006. Gross profit
percentages for the nine months ended September 30, 2007 and 2006 were
approximately 14.5% and 8.6% respectively. Although revenues for the three
and nine months ended September 30, 2007 have declined significantly when
compared to the three and nine months ended September 30, 2006, the Company
has improved its gross profit percentages.
Selling, general and administrative expenses for the three-month period
ending September 30, 2007 decreased by $937,678 from $2,885,000 in the
prior year, to $1,947,322 in the current period, or a decrease of
approximately 33% compared to the three-month period ending September 30,
2006. Selling, general and administrative expenses for the nine month
period ending September 30, 2007 decreased by $1,305,067 from $ 7,908,306
in the prior year, to $6,603,239. These decreases are a result of staff
reductions and cost controls implemented by management.
Impairment of goodwill for the three-month period and nine-month period
ending September 30, 2007 in the amount of $6,000,000 represents the
remaining balance of goodwill that had been carried on the balances sheet
pertaining to the acquisition of Electric Machinery Enterprises, Inc. in
2004. Due to the substantial doubt associated with the electric contracting
segment, the Company has elected to reflect this charge during this
quarter.
Research and development expenses for the three and nine months ended
September 30, 2007 decreased from $400,509 to $91,697 and from $595,803 to
$336,043 when compared to the three and nine month periods ended September
30, 2006. This is due to a decrease in expenses relative to the current
development efforts in both the solid waste and bio fuels segments.
26
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
Loss from operations increased by $4,787,984 from a loss for the three
months ended September 30, 2006 of $3,634,616 to a loss of $8,382,402 for
the three months ended September 30, 2007. Loss from operations increased
by $4,608,664 from a loss for the nine months ended September 30, 2006 of
$5,648,654 to a loss of $10,257,318. These increased losses are primarily
due to the impairment of goodwill. Loss from operations exclusive of this
impairment charge would have been $2,382,402 and $4,257,318 for the three
months and nine months ended September 30, 2007.
Gain on extinguishment of debt for the nine month period ended September
30, 2006 was attributable to the settlement of liabilities with the
unsecured creditors in EME's plan of reorganization. There are no gains on
extinguishment of debt for the three and nine months ended September 30,
2007
During the nine months ended September 30, 2006, the company realized
income from the settlement of a claim that the company had been pursuing
for approximately two years in the amount of $1,100,000. This amount was
recognized as income upon receipt of the funds. The Company has not
realized any claims recovery for the nine months ended September 30, 2007
Derivative gain increased from a gain of $279,280 for the three month
period ended September 30, 2006 to a gain of $562,970 for the three month
period ended September 30, 2007. Derivative gain decreased from a gain of
$3,906,048 for the nine months ended September 30, 2006 to a gain of
$32,309 for the nine month period ended September 30, 2007. The derivative
gain or loss is associated with the Company's Laurus credit facility and
fluctuations occur normally in the fair value adjustment of the derivatives
each reporting period, which result primarily from fluctuations in the
Company's stock price.
Interest expense decreased from $738,729 for the three month period ended
September 30, 2006 to $268,604 for the three months ended September 30,
2007. Interest expense decreased from $2,956,378 for the nine month period
ended September 30, 2006 to $2,584,242 for the nine month period ended
September 30, 2007. These changes in interest expense are primarily due to
amortization of the debt discounts associated with the Laurus credit
facility, and the reduction in the amount of principal when compared to the
prior year.
Majority and minority interest expense was zero for the three and nine
month periods ended September 30, 2007, as compared to a gain of $237,695
for the three month period ended September 30, 2006, and an expense of
$93,526 for the nine month period ended September 30, 2006. The majority
and minority interest expense is a function of the net income of the
entities, which the Company does not wholly own. (i.e., the other party's
share of earnings in these entities)
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded any negative operating cash flows with
proceeds from sales of common and preferred stock, as well as notes,
convertible debentures and related party loans. Commencing with the
27
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
Company's acquisition of EME in late 2004, the Company restructured many of
EME's liabilities with funding provided by the Laurus credit facility
discussed in Note 4 to the financial statements as well as additional
related party loans.
As discussed in Note 8 to the financial statements, in January 2006, the
Company secured a $5,000,000 line of credit with an entity related to the
Company's Chairman and Chief Executive Officer.
The Company experienced negative cash flows from operations during 2006.
During 2006, the Company incurred a bad debt expense of approximately
$2,800,000, a loss on a negotiated settlement on a contract in the
Caribbean of approximately $1,000,000, and several jobs not realizing the
profitability originally estimated, all of which have caused the Company
difficulty in meeting cash requirements.
In evaluating the factors that caused these 2006 negative results of
operations, the Company in 2007 has taken steps to improve the contracting
segment by increasing the quality of job estimating and implementation, as
well as reducing selling, general and administrative overhead.
While the Company believes that anticipated revenues earned during 2007
accompanied by its restructuring efforts could be sufficient to bring
profitability and a positive cash flow back to the Company, it is uncertain
that these results will be achieved (while our gross profit percentage
significantly increased in the first two quarters of 2007 versus that
achieved in 2006, revenues have significantly declined in 2007). As such,
the Company continues to experience cash flow difficulties and is
delinquent on payment of many of its trade creditors, its secured
convertible notes (see Note 4 to the financial statements) and a $100,000
unsecured note payable (see Note 7 to the financial statements).
Accordingly, the Company will have to raise additional capital to operate.
There can be no assurance that such capital will be available when needed,
or that it will be available on satisfactory terms.
As described in the report of our independent registered public accountants
for the year ended December 31, 2006, as reported in our form 10KSB for
2006, the foregoing factors raise substantial doubt as to the ability of
the Company to continue as a going concern.
EFFECTS OF INFLATION
Management does not believe that inflation has had a significant impact on
the financial position or results of operations of the Company since its
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
28
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
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: 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 at least reasonably
possible that these estimates used will change within the near term.
Stock-Based Compensation and other stock based valuation issues (derivative
accounting): We account for stock-based awards to employees and
non-employees using the accounting provisions of SFAS 123R -- Accounting
for Share-Based Payments, which provides for the use of the fair value
based method to determine compensation for all arrangements where shares of
stock or equity instruments are issued for compensation. Fair values of
equity securities issued are determined by management based predominantly
on the trading price of the Company's common stock. The values of these
awards are based upon their grant-date fair value. That cost is recognized
over the period during which the employee is required to provide service in
exchange for the award.
We use the Black-Scholes options-pricing model to determine the fair value
of stock option and warrant grants. We also use the Black Scholes option
pricing model as the primary basis for valuing our derivative liabilities
at each reporting date (both embedded and free-standing derivatives). The
underlying assumptions used in this determination are primarily the same as
are used in the determination of stock-based compensation discussed in the
previous paragraph except contractual lives of the derivative instruments
are utilized rather than expected option terms as discussed in the previous
paragraph.
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
longlived asset is determined to be unable to recover the carrying amount,
29
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
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 of
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.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures: As of September 30, 2007,
the Company's management carried out an evaluation, under the supervision
of the Company's Chief Executive Officer and the Chief Financial Officer,
of the effectiveness of the design and operation of the Company's system of
disclosure controls and procedures pursuant to the Securities and Exchange
Act, Rule 13a-15(d) and 15d-15(d) under the Exchange Act. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were
effective, as of the date of their evaluation, for the purposes of
recording, processing, summarizing and timely reporting material
information required to be disclosed in reports filed by the Company under
the Securities Exchange Act of 1934.
Changes in internal controls: There were no changes in the Company's
internal controls over financial reporting, that occurred during the period
covered by this report that have materially affected, or are reasonably
likely to materially effect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 21, 2007, the Company was served with a lawsuit in the United
States District Court for the Middle District of Florida entitled Laurus
Master Fund, Ltd. v. EarthFirst Technologies, Incorporated ("EarthFirst") ,
et al. Case # 8 07 CV 2723-T27EA. In its complaint Laurus is seeking relief
against EarthFirst and certain of its subsidiaries, not including
SolarDiesel Corporation ("SolarDiesel"). In Count I Laurus seeks to recover
damages in excess of a claimed $8,500,000 for the Company's alleged breach
of loan and forbearance agreements. In Counts II and III, Laurus seeks to
foreclose on all collateral pledged to Laurus by EarthFirst and certain of
its subsidiaries, except SolarDiesel. If successful, Laurus could force the
judicial sale of all EarthFirst and certain of its subsidiaries (not
including SolarDiesel's) assets to satisfy its indebtedness, and if any
balance remained, seek to obtain a deficiency judgment for this balance. If
successful, Laurus could also seek to obtain a money judgment in the full
30
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
amount of its indebtedness, unpaid interest and legal fees. On December 18,
2007, the Company filed a motion to dismiss this action on a jurisdictional
basis.
The Company is involved in litigation with Ruggero Maria Santilli
("Santilli"), The Institute for Basic Research, Inc. and Hadronic Press,
Inc. concerning certain 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 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 its 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 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.
CNC Associates, Inc. obtained a judgment in September 2000 in the amount of
approximately $400,000 relative to one of these deficiency balances. On May
9, 2007, and pursuant to Florida Statutes section 56.29, the Pinellas
County Circuit Court has ordered by May 19, 2007, that EarthFirst
Technologies, Incorporated;
(a) turn over to CNC the EFTI treasury shares or if there are no
issued treasury shares, then EFTI is directed to reissue the
shares to CNC in partial satisfaction of the judgment; and
(b) turn over to the Pinellas County Sheriff, 100% of the shares of
SolarDiesel Corporation, and such shares are to be sold by a
publicly advertised sheriff sale.
The Company has issued 1,950,000 shares of common stock to CNC in partial
satisfaction of the judgment, and has filed a motion for reconsideration
relative to the shares of SolarDiesel Corporation to be heard on October 4,
2007. The Company believes the Solar Diesel shares may not be turned over
as they are being held by a secured lender of SolarDiesel pursuant to a
stock pledge.
Included in the balance of accrued expenses and other current liabilities
is our estimate of the remaining amount at which the matters contemplated
above will ultimately be resolved. Approximately $700,000, less the
$156,000 fair value of the common stock issued has been recorded as a
liability in the September 30, 2007 balance sheet as attributable to the
disputed matters contemplated above. While management believes the amounts
recorded are adequate, there can be no assurance that actual liabilities
that may result from the resolution of these matters will not exceed
recorded amounts.
31
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
We are involved in litigation with the liquidator of Amwest Surety Company
based on a final judgment entered against Amwest in the amount of $432,471
in favor of Sunhouse Construction. Amwest is seeking recovery from Electric
Machinery Enterprises, Inc. for this amount. There is no reasonable manner
to determine with any degree of certainty as to the outcome of the
objection to Amwest's claim. As this claim pertains to transactions that
occurred prior to EME's bankruptcy, settlements if any would fall under the
reorganization plan for unsecured creditors capping the amount to 75% of
the allowed claim, payable over 5 years. At this time, management is
aggressively defending against this claim, and has not made any provision
for a liability associated with it.
The Company is currently involved in an adversary proceeding pending in the
Bankruptcy Court in the Middle District of Florida, Tampa division. The
action was filed on December 23, 2003 and is entitled "Electric Machinery
Enterprises, Inc. vs Hunt, Clark/Construct Two, a Joint Venture, and Orange
County (Adversary No. 03-00811)". In August of 2001, EME was contracted to
perform services on the construction project of Phase V of the Orlando
Orange County Convention Center. During the project, various disputes arose
relative to the work required, and many unforeseen disruptions not caused
by EME resulted in a severe delay in the prosecution of the work. EME
completed the job, and in doing so incurred substantial costs far in excess
of those estimated. The dollar amount of the claim is approximately
$9,000,000. The entire amount is disputed. EME expects to collect the full
amount of this claim plus interest and attorney's fees. The defendants have
asserted various technical contract related defenses. Therefore, EME cannot
estimate when the recovery, if any, is expected, as EME cannot predict
whether or not Defendants will appeal any judgment entered in EME's favor.
This amount is not carried as an asset on the balance sheet, and will only
be recorded as revenue when and if the claim is favorably settled.
The Company has other litigation and disputes that arise in the ordinary
course of its business, including significant vendor litigation seeking
payments of past due balances. The Company has accrued amounts for which it
believes all of its litigation will ultimately be settled.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(A) On May 4, 2007 the Board of Directors authorized the issuance of
1,600,000 shares of restricted common stock to each of its outside
board members, Dr. David E. Crow and Nicholas R. Tomassetti,
representing compensation for their service on the board for 2006 and
2007. These shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as
amended.
(B) On July 25, 2007, the Company issued 1,950,000 shares of restricted
common stock to CNC Associates, Inc. in partial satisfaction of the
judgment previously referenced. These shares were issued pursuant to
an exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended.
(C) On August 24, 2007, the Board of Directors authorized the issuance of
2,380,592 shares of restricted common stock to various officers of
32
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
Electric Machinery Enterprises, Inc. representing compensation for
services. These shares were issued pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The Laurus Credit Facility has a balance outstanding of $6,624,159 as of
September 30, 2007. With the cash flow difficulties the Company has been
experiencing, the Company became delinquent on both principal and interest
payments.
On October 2, 2007 the Company entered into a Forbearance Agreement
("Agreement") with Laurus Master Fund Ltd. The purpose of this Agreement
was to obtain a waiver of any possible pre-existing defaults, extend the
term of the Laurus financing arrangement through 12/31/08 and to clearly
define the principal and interest obligations of the Company through Loan
Maturity.
On November 8, 2007, the Company received notice from LV Administrative
Services, Inc. as agent for Laurus Master Fund, Ltd., that the Company had
defaulted on the terms of the Forbearance Agreement, and that Laurus had
elected to accelerate all obligations owed to Laurus by the Company. See
"Item 1. Legal Proceedings".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Security Holders of the Company for a vote
during the nine months ended September 30, 2007.
ITEM 5. OTHER INFORMATION
The Company has no other information to report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits None
(b) Reports on Form 8-K (incorporated by reference) None.
33
EARTHFIRST TECHNOLOGIES, INCORPORATED
FORM 10-QSB
(c) Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EarthFirst Technologies, Incorporated
(Registrant)
Date: December 20, 2007
By: /s/ John D. Stanton
--------------------------------------
John D. Stanton
Chief Executive Officer and President
34