See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
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
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.
See notes to condensed consolidated financial statements.
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