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Earthfirst Technologies Inc – ‘10QSB’ for 6/30/07

On:  Monday, 8/20/07, at 5:24pm ET   ·   For:  6/30/07   ·   Accession #:  1193125-7-186036   ·   File #:  0-23897

Previous ‘10QSB’:  ‘10QSB’ on 5/21/07 for 3/31/07   ·   Next & Latest:  ‘10QSB’ on 12/20/07 for 9/30/07

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/20/07  Earthfirst Technologies Inc       10QSB       6/30/07    7:591K                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10QSB       Quarterly Report -- Small Business                  HTML    338K 
 2: EX-10.1     Stock Purchase and Shareholders Agreement - Ultra   HTML    130K 
                          Green Energy Corporation                               
 3: EX-10.2     Memorandum of Agreement - Orion Industrial          HTML     82K 
                          Services Corporation                                   
 4: EX-31.1     Section 302 CEO Certification                       HTML     12K 
 5: EX-31.2     Section 302 CFO Certification                       HTML     12K 
 6: EX-32.1     Section 906 CEO Certification                       HTML      8K 
 7: EX-32.2     Section 906 CFO Certification                       HTML      8K 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

For the quarterly period ended – June 30, 2007

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)

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 August 9, 2007: 609,410,294 shares $.0001 par value common stock.

Transitional Small Business Disclosure Format (check one)    Yes  ¨    No  x

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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.

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FORM 10-QSB

EARTHFIRST TECHNOLOGIES, INCORPORATED

TABLE OF CONTENTS

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EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

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EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See notes to condensed consolidated financial statements.

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EARTHFIRST TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Supplemental schedule of non-cash financing and investing activities:

During 2007, the Company

During 2006, the Company:

See notes to condensed consolidated financial statements.

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EARTHFIRST TECHNOLOGIES, INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

SIX MONTHS ENDED JUNE 30, 2007

(UNAUDITED)

See notes to condensed consolidated financial statements.

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)

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 most recently focusing on its products and technologies that reduce CO₂ footprint and reduce greenhouse gas emissions. The Company also supplies 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 anticipates providing 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 sale of the by-products produced in the process. 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. Only a small percentage of the Company’s total revenue have been generated to date from biofuel sales.

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. 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

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

Form 10-QSB. The December 31, 2006 condensed consolidated 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 $1,934,053 at June 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 $2,689,164 is adequate as of June 30, 2007. However, actual wrte-offs could exceed this estimate.

Accounts receivables from three customers accounted for approximately 36% of the Company’s trade accounts receivable balance at June 30, 2007. There are no individual customers representing 10% of revenues for the six months ended June 30, 2007. Approximately 51% of revenues for the six months ended June 30, 2007 were from off shore contracts.

Contract Claims

As of June 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

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

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 six months ended June 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 June 30, 2007 because the effect would be anti-dilutive.

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. The Company has exceeded the amount of this credit facility by approximately $600,000 at June 30, 2007.

The Company experienced significant losses and negative cash flows from operations during 2006

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

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 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.

While the Company believes that anticipated revenues earned during 2007 accompanied by its cost reduction efforts will ultimately be sufficient to bring profitability and positive operating 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 payables, 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.

Inventory consists of the following at June 30, 2007:

The following table reflects balances of the secured convertible notes with Laurus Master Fund, Ltd. at June 30, 2007:

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 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 that is acceptable to both parties. At June 30, 2007, the Company is delinquent in interest payments in the amount of approximately $116,000. The Company, along with Laurus is currently developing a forbearance agreement, and a work out plan. No assurance can be given that such a plan will be consummated; failure to consummate such an agreement will have a material adverse effect on the Company as substantially all of the Company’s assets are pledged on these notes. 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.

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 June 30, 2007:

The following tabular presentation reflects the number of common shares into which the aforementioned derivatives are indexed at June 30, 2007:

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

Uncompleted contracts are summarized as follows:

The components of this amount are included on the June 30, 2007 balance sheet under the following captions:

During the six months ended June 30, 2007, the Company recognized approximately $500,000 of additional revenue and gross profit as a result of changes in contract cost estimates as of December 31, 2006.

Notes payable at June 30, 2007 consists of the following:

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 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

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

entered into a security agreement pledging as collateral for the promissory note, 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 June 30, 2007, the balance, including accrued interest, was $4,825,927.

The following information pertains to stock options outstanding and exercisable at June 30, 2007:

As of June 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.

See Note 10 for stock issued as partial settlement of claim.

Lease obligations:

The Company leases vehicles and certain office equipment under noncancellable operating leases for periods up to four years. In addition, the Company conducts its operations in a facility leased from a related corporation owned by certain stockholders of the Company.

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

The total rent expense for the six months ended June 30, 2007 and 2006 was approximately $496,308 and $500,880, respectively, of which approximately $381,003 and $381,003 respectively, was for the facility leased from the related corporation.

Approximate future minimum rentals on noncancellable leases at June 30, 2007 are as follows:

The Company 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 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.

Legal proceedings:

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 our efforts for the processing of used automotive tires.

We are also involved in disputes with vendors for various alleged obligations associated with operations that were discontinued in prior years. Several disputes involve deficiency balances associated with lease obligations for equipment acquired by 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.

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

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;

The Company has issued 1,950,000 shares of common stock (with a $156,000 fair value) 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 related party 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 June 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 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

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

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.

Commencing with the Company’s acquisition of EME in the fourth quarter of 2004, and the establishment of SolarDiesel Corporation in 2005, 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.

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

SEGMENT INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2007 IS AS FOLLOWS:

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

SEGMENT INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 2006 IS AS FOLLOWS:

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

Pursuant to the terms of the agreement, Ultra Green will be acquiring up to 35% in either Solar or a newly formed entity, to be determined by the parties, based on meeting certain performance standards.

More specifically, Ultra Green shall acquire this ownership interest as follows:

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.

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EARTHFIRST TECHNOLOGIES, INCORPORATED

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(UNAUDITED)

Pursuant to the terms of the agreement, it is contemplated that an entity will be formed of which each party would retain an ownership interest of 50%. The investment in the joint venture entity will be comprised of assets, technology and services from each party.

More specifically, pursuant to the terms of the MOA:

The MOA also contain provisions for day to day management of RCT, securing additional funds that may be needed by RCT, entity governance, the possible admission of other venturers and RCT’s requirement to have CAVD reactors and related facilities designed and built by Orion Engineering an OIS affiliate.

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EARTHFIRST TECHNOLOGIES, INCORPORATED

FORM 10-QSB

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. We currently have a backlog of approximately $20 million.

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 Residential, Inc., a wholly owned subsidiary in the electrical contracting business of the Company, which now manages 15 actively engaged residential crews on the job throughout the State of Florida.

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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. We believe that the carbon and oil by-products represent the greatest value of this process. With current oil

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FORM 10-QSB

pricing reaching levels as high as $72 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” of “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.

The Company believes that the recently announced joint venture with OIS will accelerate the commercialization of the CAVD Reactor, and allow the operation of an upgraded reactor in Mobile, Alabama by the end of 2007.

Based upon our experiences thus far, we expect that there is considerable interest in the CAVD Reactor from potential users. We believe that delays in the creation of definitive agreements with the end users of the CAVD Reactors are waiting for the finalization of our renovated and upgraded design for our Mobile reactor. We than expect our technology to gain immediate credibility in the marketplace with both a variety of potential end users of the CAVD Reactors as well as the end users of carbon 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.

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 $450,000 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.

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FORM 10-QSB

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™ converter. The Company’s BigSpark™ plasma based technology splits apart the complex molecular bonds of water and hydrocarbon wastes to produce the clean burning, hydrogen-based fuel. BigSpark™ 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™ has a second stage combustion in a very high temperature oxygen flame. Third, BigSpark™ 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™ 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.

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, Prime has the unique ability to address large electrical contracting projects from design through build to maintenance and support, offering a fully integrated contracting solution. Management believes that the combination of the strengths of these two companies will create a competitive advantage when pursuing work on large projects.

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

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FORM 10-QSB

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 will be acquiring up to 35% in either Solar or a newly formed entity, to be determined by the parties, based on meeting certain performance standards.

More specifically, Ultra Green shall acquire this ownership interest as follows:

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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.

The Company believes that its agreement with UGE will provide the management experience, financial contribution and off-take contract resources for the improvements and operations of the bio-refinery being developed.

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 SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2006.

Revenues for the three month period ending June 30, 2007 in the amount of $6,740,461, represents a decrease of $6,201,478 or approximately 48% when compared to $12,941,939 for the three month period ending June 30, 2006. Revenues for the six month period ending June 30, 2007 in the amount of $14,353,482 represents a decrease of $9,986,919, or approximately 41% when compared to $24,340,401 for the six month period ending June 30, 2006. However, substantially all revenues are generated from contracting and subcontracting services. Biofuel sales for the three and six month periods ending June 30, 2007 in the amounts of $378,735 and $529,566 respectively represent approximately 5.6% and 3.6% of total sales for the periods. This decrease in revenue relates to smaller jobs being performed during 2007. During 2006, the Company had some very large contracts, although they didn’t produce large gross margins. The contracts in 2007 are more focused on profitability, and consist of contracts that are smaller in dollars. This is consistent with the restructuring of the Company and our focus on profitability.

Gross profit for the three month period ending June 30, 2007 increased from $1,697,653 to $1,961,811, or approximately 15% when compared to the three month period ending June 30, 2006. Gross profit percentages for the three month periods ending June 30, 2007 and 2006 were approximately 29% and 13% respectively. Gross profit for the six month period ending June 30, 2007 decreased from $3,204,562 to $3,025,347, or approximately 6% when compared to the six month period ending June 30, 2006. Gross profit percentages for the six months ended June 30, 2007 and 2006 were approximately 21% and 13% respectively. Although revenues for the three and six months ended June 30, 2007 have declined significantly when compared to the three and six months ended June 30, 2006, the Company has improved its gross profit percentages. The increase in gross profit percentage is consistent with the contracts in 2007 being more profitable than those of 2006. During 2006, the Company experienced several contracts which were originally anticipated to be profitable, but ultimately proved to be losses. Most of these contracts were closed out in 2006, and therefore the effect of those contracts is not impacting 2007.

Selling, general and administrative expenses for the three-month period ending June 30, 2007 decreased by $223,408 from $2,749,590 in the prior year, to $2,526,182 in the current period, or a decrease of approximately 8% compared to the three-month period ending June 30, 2006. Selling, general and administrative expenses for the six month period ending June 30, 2007

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FORM 10-QSB

decreased by $367,389 from $ 5,023,306 in the prior year, to $4,655,917. Selling, general and administrative expenses have reduced for both periods in 2007 versus 2006 as the result of cost controls implemented by management.

Research and development expenses for the three and six months ended June 30, 2007 increased from $40,776 to $110,005 and from $195,294 to $244,346 when compared to the three and six month periods ended June 30, 2006. This is due to an increase in expenses relative to the current development efforts in both the solid waste and bio fuels segments.

Loss from operations decreased by $418,337 from a loss for the three months ended June 30, 2006 of $1,092,713 to a loss of $674,376 for the three months ended June 30, 2007. Loss from operations decreased by $139,122 from a loss for the six months ended June 30, 2006 of $2,014,038 to a loss of $1,874,916. Loss from operations exclusive of share based compensation would have been $430,810 and $1,631,350 for the three months and six months ended June 30, 2007.

Gain on extinguishment of debt for the three and six month periods ended June 30, 2006 are 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 six months ended June 30, 2007

During the six months ended June 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 six months ended June 30, 2007

Derivative gain decreased from a gain of $618,868 for the three month period ended June 30, 2006 to a loss of $546,587 for the three month period ended June 30, 2007. Derivative gain decreased from a gain of $3,626,768 for the six months ended June 30, 2006 to a loss of $530,661 for the six month period ended June 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 increased from $904,830 for the three month period ended June 30, 2006 to $1,679,191 for the three months ended June 30, 2007. Interest expense increased from $2,217,649 for the six month period ended June 30, 2006 to $2,315,638 for the six month period ended June 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.

Since there were no profitable activities in these entities, majority and minority interest expense was zero for the three and six month periods ended June 30, 2007, as compared to $104,323 for the three month period ended June 30, 2006, and $331,221 for the six month period ended June 30, 2006. The

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FORM 10-QSB

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 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 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 has exceeded the amount of this credit facility by approximately $600,000 at June 30, 2007.

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.

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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies are the most critical to us, in that they are important to the portrayal of our financial statements and they require our most difficult, subjective or complex judgments in the preparation of our financial statements:

Revenue Recognition: 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.

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FORM 10-QSB

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, 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.

Evaluation of Disclosure Controls and Procedures: As of June 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.

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FORM 10-QSB

PART II. OTHER INFORMATION

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;

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 June 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.

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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.

The Laurus Credit Facility has a balance outstanding of $6,624,159 as of June 30, 2007. With the cash flow difficulties the Company has been experiencing, the Company became delinquent on both principal and interest payments. As of June 30, 2007 the Company is in arrears on interest payments for the two months of May and June in the amount of approximately $116,000. Laurus is working with the Company to create a forebearance agreement, whereby Laurus will not hold the Company in default under certain specified terms and conditions. As of August 20, 2007, these documents are still being negotiated. The Laurus Credit Facility holds as security for its credit facility substantially all of the assets of the Company and its subsidiaries.

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EARTHFIRST TECHNOLOGIES, INCORPORATED

FORM 10-QSB

No matters were submitted to the Security Holders of the Company for a vote during the six months ended June 30, 2007.

The Company has no other information to report.