UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________________________
FORM
10 – QSB
_______________________________
[mark
one]
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
|
For
the quarterly period ended: June 30,
2007
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
|
For
the transition period from ______________ to
______________
|
Commission
File Number 000-30237
_____________________________________________________________
Ethos
Environmental, Inc.
(Exact
name of registrant as specified in its charter)
Nevada
|
88-0467241
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
Number)
|
6800
Gateway Park
San
Diego, CA 92154
(Address
of principal executive offices including zip code)
(619)
575-6800
(Registrant’s
telephone number, including area code)
Paracorp
Incorporated
318
N.
Carson Street, Suite 208, Carson City, NV 89701
(Name
and address of agent for service)
888-972-7273
(Telephone
Number, including area code, of agent for service)
with
a
copy to:
SteadyLaw
Group, LLP
501
W.
Broadway, Suite 800
San
Diego, CA 92101
Telephone
(619) 399-3090
Telecopier
(619) 330-1888
Check
whether the issuer (1) filed all reports required to be filed by Section
13 or
15(d) of the Exchange Act during the past 12 months (or for 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 o No
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Number
of
shares outstanding of the issuer’s common stock as of the latest practicable
date: 26,309,187 shares of common stock, $.0001 par value per share, as of
August 14, 2007.
Transitional
Small Business Disclosure Format (check one): Yes o No x
Quarterly
Report on FORM 10-QSB For The Period Ended
June
30, 2007
Ethos
Environmental, Inc.
PART
I. FINANCIAL INFORMATION
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Page
|
|
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|
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Financial
Statements
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4
|
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Management’s
Discussion and Analysis or Plan of Operation
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12
|
|
|
Controls
and Procedures
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22
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|
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PART
II. OTHER INFORMATION
|
|
|
|
|
|
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|
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Legal
Proceedings
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23
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Unregistered
Sales of Equity Securities and Use of Proceeds
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23
|
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Defaults
Upon Senior Securities
|
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23
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Submission
of Matters to a Vote of Security Holders
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23
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Other
Information
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23
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Exhibits
|
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23
|
PART
I.
ETHOS
ENVIRONMENTAL, INC.
CONSOLIDATED
BALANCE SHEET
(Unaudited)
ASSETS
|
|
June
30,
2007
|
|
CURRENT
ASSETS:
|
|
|
|
Cash
|
|
$ |
12,857
|
|
Restricted
Cash
|
|
|
300,000
|
|
Accounts
Receivable (Net )
|
|
|
3,955,100
|
|
Inventory
|
|
|
323,409
|
|
Other
Current Assets
|
|
|
43,000
|
|
Total
Current Assets
|
|
$ |
4,634,366
|
|
|
|
|
|
|
Property
and Equipment, Net
|
|
|
5,817,729
|
|
Goodwill
|
|
|
2,411,103
|
|
Customer
List, Net
|
|
|
1,733,965
|
|
Other
Assets
|
|
|
368,976
|
|
Total
Assets
|
|
$ |
14,966,139
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
LIABILITIES:
CURRENT
LIABILITIES:
|
|
|
|
Accounts
Payable
|
|
$ |
762,595
|
|
Accrued
Expenses
|
|
|
203,113
|
|
Current
Portion of Long Term Debt
|
|
|
1,123,153
|
|
Note
Payable Related Party
|
|
|
115,124
|
|
Total
Current Liabilities
|
|
|
2,203,985
|
|
|
|
|
|
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Long-Term
Debt, Net of Current Portion
|
|
|
4,750,000
|
|
|
|
|
|
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Total
Liabilities
|
|
|
6,953,985
|
|
|
|
|
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|
SHAREHOLDERS’
EQUITY:
|
|
|
|
|
Common
Stock, $.0001 par value; 100,000,000
shares
authorized; 23,809,187 issued and
outstanding
|
|
|
2,381
|
|
Additional
Paid-in Capital
|
|
|
23,715,555
|
|
Accumulated
Deficit
|
|
|
(15,705,782) |
|
Total
Shareholders’ Equity
|
|
|
8,012,154
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$ |
14,966,139
|
|
See
notes
to consolidated financial statements.
ETHOS
ENVIRONMENTAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
For
the Three Months Ended June 30, 2007 and 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
2,599,962
|
|
|
|
1,380,307
|
|
Cost
of Goods Sales
|
|
|
728,001
|
|
|
|
469,304
|
|
Gross
Profit
|
|
|
1,871,961
|
|
|
|
911,003
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Depreciation
& Amortization
|
|
|
100,036
|
|
|
|
0
|
|
Selling
Expenses
|
|
|
195,401
|
|
|
|
241,526
|
|
General
& Administrative
Debt
Extinguishment (See Note 2)
|
|
|
1,490,489
6,646,171
|
|
|
|
462,593
0
|
|
Total
Operating Expenses
|
|
|
8,432,097
|
|
|
|
704,119
|
|
Operating
Income
|
|
|
(6,560,136) |
|
|
|
206,884
|
|
Other
Income
|
|
|
35
|
|
|
|
0
|
|
Interest
Expenses
|
|
|
(231,074) |
|
|
|
(157,608) |
|
Net
Income (Loss)
|
|
|
(6,791,175) |
|
|
|
49,276
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) per Common Share (basic & fully diluted)
|
|
$ |
(0.29) |
|
|
$ |
0.12
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in per share calculation (basic & fully
diluted)
|
|
|
23,763,000
|
|
|
|
415,616
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated
financial statements.
ETHOS
ENVIRONMENTAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
For
the Six Months Ended June 30, 2007 and 2006
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
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|
Revenue
|
|
|
5,297,095
|
|
|
|
2,697,943
|
|
Cost
of Goods Sales
|
|
|
1,593,307
|
|
|
|
809,383
|
|
Gross
Profit
|
|
|
3,703,788
|
|
|
|
1,888,560
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Depreciation
& Amortization
|
|
|
217,311
|
|
|
|
0
|
|
Selling
Expenses
|
|
|
242,634
|
|
|
|
285,849
|
|
General
& Administrative
Debt
Extinguishment See Note 2
|
|
|
1,961,487
6,646,171
|
|
|
|
952,857
0
|
|
Total
Operating Expenses
|
|
|
9,067,603
|
|
|
|
1,238,706
|
|
Operating
Income
|
|
|
(5,363,815) |
|
|
|
649,854
|
|
Other
Income
|
|
|
35
|
|
|
|
9089
|
|
Interest
Expenses
|
|
|
(408,734) |
|
|
|
(223,892) |
|
Net
Income (Loss)
|
|
|
(5,772,514) |
|
|
|
435,051
|
|
|
|
|
|
|
|
|
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Net
Income (Loss) per Common Share (basic & fully diluted)
|
|
$ |
(0.24) |
|
|
$ |
1.21
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares used in per share calculation (basic & fully
diluted)
|
|
|
23,570,744
|
|
|
|
360,494
|
|
|
|
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|
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|
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See
notes to consolidated financial statements.
ETHOS
ENVIRONMENTAL, INC.
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
(Unaudited) |
For
the Six Months Ended June 30, 2007
|
|
|
|
|
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|
|
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Common
Stock
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Amount
|
|
Additional
Paid-in Capital
|
Accumulated
Deficit
|
|
Total
|
Balance
at December 31, 2006
|
|
23,107,687
|
|
$2,311
|
|
$15,961,204
|
|
($9,933,267)
|
|
$6,030,248
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
468,000
|
|
47
|
|
49,953
|
|
|
|
50,000
|
Net
Income
|
|
|
|
|
|
|
|
|
|
1,018,660
|
|
1,018,660
|
Balance
March 31, 2007
|
|
23,575,687
|
|
$2,358
|
|
$16,011,157
|
|
($8,914,607)
|
|
$7,098,908
|
4/4/07
Common stock issued for services
|
|
156,000
|
|
15
|
|
662,985
|
|
|
|
663,000
|
4/5/07
Cancellation of shares
|
|
-50,000
|
-5
|
5
|
0
|
4/27/07
Common stock issued for services
|
|
127,500
|
13
|
395,237
|
395,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Extinguishment (See Note 2)
|
|
|
|
6,646,171
|
6,646,171
|
Net
Income (Loss)
|
|
|
|
|
|
|
|
-6,791,175
|
|
-6,791,175
|
Balance
June 30, 2007
|
|
23,809,187
|
|
$2,381
|
|
$23,715,555
|
|
($15,705,782)
|
|
$8,012,154
|
See
notes
to consolidated financial statements.
|
|
|
|
ETHOS
ENVIRONMENTAL, INC.
|
|
|
|
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
For
the Six Months Ended June 30, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
(5,772,514)
|
|
435,051
|
|
|
|
Adjustments
to reconcile Net Income
|
|
|
|
|
|
|
|
to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
Amortization
Loss
on Sale of Equipment
|
|
17,311
200,072
52,912
|
|
0
0
0
|
|
|
|
|
Common
Stock issued for Services
Loss
on Debt Extinguishment (See Note 2)
|
|
1,108,250
6,646,171
|
|
194,397
|
|
|
|
|
Changes
in operating assets and liabilities:
Accounts
Receivable
|
|
(3,627,776)
|
|
(24,183)
|
|
|
|
|
Inventory
Other
Current Assets
Other
Assets
|
|
7,506
(23,100)
(363,976)
|
|
56,653
30,500
(17,000)
|
|
|
|
|
Accounts
Payable and Accrued Expenses
|
|
360,320
|
|
613,605
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by Operating Activities
|
|
(1,314,824)
|
|
1,289,023
|
|
|
CHANGES
IN INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from Sale of Equipment
|
|
492,356
|
|
0
|
|
|
|
Purchase
of Property & Equipment
|
|
0
|
|
(5,759,942)
|
|
|
Net
cash provided by Investing Activities
|
|
492,356
|
|
(5,759,942)
|
|
|
CHANGES
IN FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
770,458
|
|
4,750,0000
|
|
|
|
Loans
from shareholders
|
|
0
|
|
58,930
|
|
|
|
Payments
to shareholders
|
|
0
|
|
(159,828)
|
|
|
Net
cash provided by Financing Activities
|
|
770,458
|
|
4,649,102
|
|
|
Net
cash increase for period
|
|
(52,010)
|
|
178,181
|
|
|
Cash
at beginning of period
|
|
364,867
|
|
201,200
|
|
|
Cash
at end of period
|
|
312,857
|
|
379,382
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
NON CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for debt
|
|
|
|
560,106
|
|
|
|
|
Common
stock issued for prepaid services
|
|
|
|
135,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
365,284
|
|
222,653
|
|
|
|
|
Taxes
paid
|
|
79,650
|
|
3,285
|
See
notes
to consolidated financial statements.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Three
months ended June 30, 2007
Note
1. Organization and Significant Accounting Policies
Organization
Ethos
Environmental, Inc. ("the Company") manufactures and distributes fuel
reformulating products that increase fuel mileage, reduce emissions, and
maintain lower fuel costs. The Company is based in Southern California and
sells
its product to customers on 6 continents.
Acquisition
On
April
20, 2006, Victor Industries, Inc., with the approval of its Board of Directors,
executed an Agreement and Plan of Merger with San Diego, CA based Ethos
Environmental, Inc., a Nevada corporation.
At
a
meeting of shareholders of the Company held on October 30, 2006, a majority
of
shareholders voted in favor of the merger. On November 2, 2006, the merger
was
consummated. As part of the merger, the Company redomiciled to Nevada, and
changed its name to Ethos Environmental, Inc. In addition thereto, and as
part
of the merger, the Company set a record date of November 16, 2006 for a reverse
stock split of 1 for 1,200. All of the per share data in these consolidated
financial statements are presented on a post-split basis.
The
merger provided for a business combination transaction by means of a merger
of
Ethos with and into the Company, with the Company as the corporation surviving
the merger. Accordingly, the comparative information presented is that of
Ethos
Environmental, Inc.
Going
Concern
The
Company has incurred significant losses from operations in the last two years.
The Company's ability to continue as a going concern is in substantial doubt
and
is dependent upon obtaining additional financing and/or achieving a sustainable
profitable level of operations.
Management
of the Company has undertaken steps as part of a plan with the goal of
sustaining the Company operations for the next twelve months and beyond.
These
steps include: (a) attempting to raise additional capital and/or other forms
of
financing; (b) controlling overhead and operating expenses; and (c) continuing
to increase the sales of its fuel reformulating product. There can be no
assurance that any of these efforts will be successful.
Principles
of Consolidation
These
consolidated financial statements include the accounts of the Company and
its
wholly owned subsidiary. All material inter-company accounts have been
eliminated in consolidation.
Interim
Disclosure
The
interim period consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosure
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such SEC rules and regulations. The interim period
consolidated financial statements should be read together with the audited
consolidated financial statements and accompanying notes for the years ended
December 31, 2006 and 2005, included in the Company's annual reports on
Form 10-KSB. In the opinion of the Company, the unaudited consolidated financial
statements contained herein contain all adjustments necessary (consisting
of a
normal recurring nature) to present a fair statement of the results of the
interim periods presented.
The
results of operations for the six months ended June 30, 2007, are not
necessarily indicative of the results to be expected for the entire year
ending
December 31, 2007.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual
results could differ from the estimated amounts.
Goodwill
Goodwill
represents the excess of the purchase price of the estimated fair value of
the
net identified tangible and intangible assets of the acquired business. Goodwill
must be tested for impairment at least on an annual basis, or if an event
occurs
or circumstances change prior to the annual test of impairment, then the
carrying value of goodwill must be tested on an interim basis. The Company
has
determined there is no impairment at June 30, 2007.
Customer
List
As
a
result of the acquisition, the Company acquired a customer list which has
an
identifiable defined life. The customer lists is amortized on a straight-line
basis over a five-year period. The Company will continue to amortize the
identifiable intangible asset over the life of the asset unless an event
occurs
or circumstances change that indicate that the carrying value of this asset
may
not be recoverable. The following table reflects the cost of the customer
list
and the accumulated amortization related to this asset as of June 30,
2007:
Customer
list
|
|
|
$2,000,727
|
Accumulated
Amortization
|
(200,072)
|
|
|
|
$1,733,965
|
For
the
three months ending June 30, 2007, the Company recorded $100,036 as amortization
expense. The Company expects to record annual amortization expense of
approximately $400,000 in 2007, $400,000 in 2008, $400,000 in 2009, $400,000
in
2010 and 333,000 in 2011 related to the customer list.
Revenue
Recognition
Revenue
from the sale of fuel reformulating products is recorded when the product
is
shipped, the price is fixed and determinable, collection is reasonably assured,
and no further obligations of the Company remain.
One
customer accounted for 90% of revenue for the quarter ended June 30,
2007. The same customer accounted for 89% of revenue for the six
months ended June 30, 2007.
Stock
Based Compensation
The
Company accounts for stock based awards in accordance with SFAS No. 123(R)
“share-based payment”, which requires measurement of compensation cost for all
stock-based awards at fair value on the date of grant and recognition of
compensation over the service period for awards expected to vest. The fair
value
of stock options is determined using the Black-Scholes valuation model, which
is
consistent with the Company’s valuation techniques previously utilized for
options in footnote disclosures required under SFAS No. 123, “Accounting for
Stock Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock
Based Compensation Transition and Disclosure”.
Earnings
Per Share
Basic
earnings per share is computed by dividing the net income (loss) available
to
common shareholders by the weighted average number of common shares outstanding
in the period. There were 1,900,000 dilutive securities outstanding at June
30,
2007 and none in 2006. These were not included in the calculation of basic
and
fully diluted earnings per share because the effect would be anti-dilutive
due
to the Company’s net loss.
Note
2. Debt Extinguishment
On
May
23, 2007 the Company amended the loan agreement for the financing of its
building by extending the maturity date to March 31, 2010, and rescinding
the
convertible feature. Due to the substantial modification of the
agreement, the original loan is considered extinguished and a new note
issued. In addition to the new note, the Company issued to the lender
as consideration for the modified loan terms a warrant for 1,900,000 shares
of
its common stock with an exercise price of $2.50 per share. The fair
value of the warrant was determined using the Black Scholes valuation
model. The assumptions included an estimated term of three (3) years,
volatility of 383%, discount rate of 8.25% and a dividend rate of
0%. The resulting fair value of the warrant totaled $6,646,171, which
has been included in the loss on debt extinguishment in the Company’s
consolidated Statement of Operations for the quarter ended June 30,
2007.
Note
3. Subsequent Events
On
or
about August 7, 2007, the Company agreed to sell the land and building located
at 6800 Gateway Park Drive located in San Diego, CA, as well as 2,500,000
shares
of its common stock in exchange for $7,875,000. The Company’s Form
8-K filed on or about August 10, 2007 is incorporated by reference herein
and
provides additional details regarding this transaction.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATION
This
discussion and analysis should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes. Our discussion and analysis
of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of any contingent liabilities at the financial statement date
and
reported amounts of revenue and expenses during the reporting period. On
an
on-going basis we review our estimates and assumptions. Our estimates are
based
on our historical experience and other assumptions that we believe to be
reasonable under the circumstances. Actual results are likely to differ from
those estimates under different assumptions or conditions, but we do not
believe
such differences will materially affect our financial position or results
of
operations. Our critical accounting policies, the policies we believe are
most
important to the presentation of our financial statements and require the
most
difficult, subjective and complex judgments, are outlined below in ‘‘Critical
Accounting Policies,’’ and have not changed significantly.
In
addition, certain statements made in this report may constitute “forward-looking
statements”. These forward-looking statements involve known or unknown risks,
uncertainties and other factors that may cause the actual results, performance,
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. Specifically, 1) our ability to obtain necessary regulatory
approvals for our products; and 2) our ability to increase revenues and
operating income, is dependent upon our ability to develop and sell our
products, general economic conditions, and other factors. You can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continues" or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected-in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
Overview
The
mission of Ethos Environmental is to be recognized as the industry standard
for
high quality, non-toxic cleaning and lubricating products that increase fuel
mileage and reduce emissions.
Ethos’
customers exist everywhere that budgets are affected by the rising cost of
fuel
and where solutions are sought for the pervasive ills of air pollution. Our
customers are motivated both by cost savings and environmental concerns,
and it
is our mission to provide products to meet their needs, risk free, and at
an
economic gain to every client.
It
is our
goal to build on our success in the domestic U.S. market and continue to
grow
internationally, offering the benefits of our products to companies and
countries around the world.
Our
Corporate History
We
were
originally incorporated under the laws of the State of Idaho on January 19,
1926
under the name of Omo Mining and Leasing Corporation. The Company was renamed
Omo Mines Corporation on January 19, 1929. The name was changed again on
November 14, 1936 to Kaslo Mines Corporation and finally Victor Industries,
Inc.
on December 24, 1977.
As
Victor
Industries, Inc., the Company developed, manufactured, and marketed products
related to the use of the mineral known as zeolite. Zeolites have the unique
distinction of being nature's only negatively charged mineral. Zeolites are
useful for metal and toxic chemical absorbents, water softeners, gas absorbents,
radiation absorbents and soil and fertilizer amendments.
In
November of 2006, and as part of a two-step reverse merger, the Company merged
with and into Victor Nevada, Inc. a newly incorporated entity for the purpose
of
redomiciling under the laws of the State of Nevada. Concurrently therewith,
we
completed the merger transaction with Ethos Environmental, Inc., a privately
held Nevada corporation “Ethos”). The Company was the surviving
entity. To more adequately reflect the new direction of the Company the Company
changed its name to Ethos Environmental, Inc. and adopted the business plan
of
Ethos.
The
proposed merger was submitted to the shareholders of Victor Industries, Inc.
pursuant to a Proxy Statement first filed with the Commission on March 25,
2006.
As fully described in the Company’s Form 8-K filed on November 11, 2006 with the
Commission, the shareholders of the Company and Ethos approved the merger,
and
the merger was legally effected on November 2, 2006.
Pursuant
to the agreement of merger between the Company and Ethos,
·
|
The
Company was the surviving
corporation,
|
·
|
The
Company acquired all issued and outstanding shares of Ethos in
exchange
for 17,718,187 shares of common stock of the Company. Shares of
Company
common stock, representing an estimated 97% of the total issued
and
outstanding shares of Company common stock, shall be issued to
the Ethos
stockholders,
|
·
|
The
shareholders of Concierge received pro rata for their shares of
common
stock of Ethos, 17,718,187 shares of common stock of the Company
in the
merger, and all shares of capital stock of Ethos were
cancelled,
|
·
|
The
officers and directors of Ethos became the officers and directors
of the
Company,
|
·
|
The
name of Victor Industries, Inc. was changed to “Ethos Environmental,
Inc.”, and
|
·
|
Ethos
requested a new symbol for trading on the Over the Counter Bulletin
Board
(“OTCBB”), which also reflects the reverse stock split of 1 for 1,200,
the
new symbol of the Company is
“ETEV.”
|
Business
Description
Ethos
Environmental manufactures and distributes an array of fuel reformulating
products under the name Ethos FR®, Ethos Fuel Reformulators. Ethos
FR® is a unique line of fuel reformulators based on a blend of high
quality, non-toxic, non-petroleum based esters. When added to any fuel, these
specially designed esters add cleaning and lubricating properties. They make
engines run more efficiently smoother, cooler and cleaner. Ethos FR®
improves the formula of commonly used fuels such as gasoline, diesel, methanol,
ethanol, CNG or bio-diesel. Only the elements of carbon, hydrogen and oxygen
are
used in Ethos FR® products and are 99.9% clean upon ignition, ashless
upon combustion and free of carcinogenic compounds.
Over
the
last decade, the unmatched value of Ethos FR® products has been proven
through millions of miles of on-the-road testing. On average, customers have
achieved a 7% to 19% increase in fuel mileage, and more than a 30% reduction
in
emissions.
Ethos
seeks both a cleaner environment and economic success. As the name Ethos
suggests, we are committed to the highest ethical standards - in the product
that we sell, in the relationship with our clients, and in the conduct of
our
business. The Company’s approach is to sell Ethos FR®“one gallon at a
time”, earning the trust and loyalty of each customer by providing products that
perform as promised and make a positive difference in the world.
Product
Ethos
manufactures a unique line of fuel reformulators that contain a blend of
low and
high molecular weight esters. Ethos FR® products add cleaning and
lubricating qualities to any type of fuel or motor oil, allowing engines
to
perform cooler, smoother and with more vigor. The overall benefits are increased
fuel mileage, reduced emissions, and reduced maintenance costs.
Ethos
fuel reformulating products increase fuel mileage and reduce emissions by
burning fuel more completely. Exhaust is essentially unburned fuel - wasted
fuel
- so when that fuel is used more completely, the engine delivers better mileage
from every tank. Efficient fuel use also improves engine performance, because
a
more complete combustion process obtains increased power from every engine
revolution.
Ethos
FR® products reduce fuel emissions, benefiting the environment in two
notable ways:
|
1.
|
The
use of Ethos FR® products reduce engine exhaust emissions by 30%
or more, including measurable reductions in the emission of hydrocarbons
(HC), nitrogen oxides (Nox), and carbon monoxide (CO). All of
these emissions are highly toxic and detrimental to the
environment.
|
|
2.
|
Ethos
FR® products reduce emissions of particulate matter, especially
in
diesel-powered engines. Diesel fuel is commonly dirty and maintaining
a
diesel engine in the prime condition necessary to reduce emissions
is both
expensive and time-consuming. As a result, diesel engines are a
constant source of air contaminants. In most industrialized countries,
including the U.S., diesel engines are one of the largest sources
of air
pollution. When Ethos FR® products are added to diesel fuel, the
engine runs cleaner, smoother and cooler - significantly reducing
sooty
exhaust. Engines treated with Ethos FR® run with less friction,
heat and noise. Fuel and lubricating systems, filters, tanks, and
injectors last longer, reducing maintenance
costs.
|
Ethos
FR® products provide risk-free benefits with an economic gain to the
client. Customers realize a monetary gain on fuel savings alone, with an
average
improvement in mileage between 7% and 19%, depending on the fuel (gasoline
or
diesel) and the vehicle used. Even greater savings are achieved with
the significant increase in oil prices.
Trademarks
We
own
the following trademark(s) used in this document: Ethos FR®. Trademark rights
are perpetual provided that we continue to keep the mark in use. We consider
these marks, and the associated name recognition, to be valuable to our
business.
Air
Quality Standards
Ethos
Environmental began the manufacturing and marketing of Ethos FR® products after
ten years of successful product testing. During the early years, widespread
public environmental concerns were only beginning to surface. Air quality
standards were non-existent and fuel costs were low, making penetration of
the
market an uphill battle.
In
recent
years most of the improvements in air quality have come through advancements
in
engine technologies. Through catalytic converters and computer
controlled air and fuel injection systems, engineers have designed cars that
use
fuel much more efficiently and pollute far less than ever before. But
as new engine technologies have reached their limits, the government has
turned
its attention to the oil companies to produce cleaner-burning
fuels.
The
approach of Ethos Environmental is to sell Ethos FR® “one gallon at a time”,
earning the respect and trust of each user. Over the past decade, the Ethos
FR®
product has gone though millions of miles in road tests, and test after test
has
demonstrated the ability of Ethos FR® to significantly reduce emissions while
improving gas mileage. Now, at a time of skyrocketing fuel costs, the
value of Ethos FR® is paying off for a long list of domestic customers and a
growing contingent of international clients.
Market
Research
Air
pollution caused by cars, trucks and other vehicles burning petroleum-based
fuels is one of the most harmful and ubiquitous environmental problems.
Furthermore, local accumulation in heavy traffic is the greatest source of
community ambient exposure, largely because carbon monoxide is formed by
incomplete combustion of carbon containing fuels.
Diesel
exhaust is a major contributor of particulate matter concentrations.
Representing only 2 percent of the vehicles on the road, diesel powered vehicles
generate more than half of the particulates and nearly a third of the nitrogen
oxides in the air, according to a study by the California Air Resources
Board. Air pollution monitoring efforts by the American Lung
Association indicate that diesel accounts for 70% of the cancer risk.
Furthermore, pioneers in the study of global warming factors have come to
believe that particulate matter, such as that emitted by diesel engines,
plays a
far more critical role in the development of the “greenhouse effect” than
previously suspected.
To
combat
this problem the U.S. Environmental Protection Agency developed a two-step
plan
to significantly reduce pollution from new diesel engines. (New Emission
Standards for Heavy-Duty Diesel Engines Used In Trucks and Buses) (October
1997,
EPA 420-F-97-016). The first step set new emissions standards for
diesel engines beginning in 2000. The second step sets even more stringent
emission standards that will take effect in 2007, combined with mandated
reductions in the sulfur levels of all diesel fuel.
When
blended with fuels, Ethos FR® products reduce the emissions of hydrocarbons
(HC), nitrogen oxides (NOx) carbon monoxide (CO), particulate matter (PM)
and
other harmful compounds of combustion. Given these conditions, the
commercial fuels consumer market represents an important target for Ethos
Environmental.
Competition
The
primary task for the Company is to distinguish itself as an industry leader
in
the reduction of fuel costs and emission problems at a profit gain to the
commercial user. Part of the challenge before us is to differentiate
Ethos FR® from two types of products in this industry, additives - that are
purported to increase fuel mileage and oxygenates - which are mandated to
lower
emissions. Both provide short-term benefits at the price of long-term engine
or
environmental problems.
Additives
contain highly refined petrochemicals or compressed hydrocarbons that promise
better fuel mileage and sometimes lower emissions, by “cleaning” the engine.
Used mainly by individual consumers, they are expensive and commonly sold
at the
auto parts and retail stores. More than five thousand EPA-registered fuel
additives compete in the retail market and although the EPA requires that
such
products be registered, that registration constitutes neither endorsement
nor
validation of the product’s claims.
Oxygenates,
such as methyl tertiary butyl ether (MTBE) and Ethanol, are intended to lower
emissions by adding oxygen to the fuel. Ethos FR® products actually complement
federally mandated oxygenates by lowering emissions, but as mentioned earlier,
Ethos FR® is not an oxygenate and cannot be used for the purpose of complying
with current language federal legislation.
In
contrast, Ethos FR® products have cleaning properties that contribute to the
lubrication of the engine instead of destroying it. The ester-based formula
dissolves the gums and residues and adds important lubrication that an engine
needs. The engine stays clean and lubricated, allowing it to run
smoothly and efficiently.
Marketing
Strategy
Ethos
FR®
products are ideally positioned to capitalize on increasing fuel prices and
regulatory pressure to tighten emissions standards. Fuel is a
significant operating cost for companies that use cars, trucks or vessel
fleets
in their daily business, especially where competitive markets make it difficult
to pass along fuel increases. Every hike in the price of fuel hurts the
profitability of that company. For these businesses, obtaining better
mileage offers a crucial competitive edge, and the goal of Ethos Environmental
is to help them maximize their fuel use and maintain profitability.
From
its
earliest days, Ethos has focused on the product demonstration as the most
effective means of introducing Ethos FR® to potential users. During this
demonstration phase, Ethos supplies product to treat a sample of the fleet
at no
cost to the client. It is vital that the customer understand and prove the
effectiveness of Ethos FR® in their fleets. This demonstration phase will last
as long as necessary to quantify the value and projected savings possible
once
the entire fleet is treated.
Through
this demonstration process, we prove to each customer that they can realize
the
benefits of reduced emissions, smoother-running vehicles and lower maintenance
costs at virtually no risk, because the reduction in fuel usage will more
than
cover the expense of using Ethos FR®. In fact, the addition of Ethos FR® will
result in fuel savings beyond the cost of treatment, resulting in monetary
gain
to the user.
Commercial
fleets vary in size from a few to thousands of vehicles. Such fleets generally
produce immediate sales results because administrative requirements are minimal
and the product demonstration phase is brief. Typically, a sample of
the fleet is treated and the potential customer is quickly able to quantify
the
value and project the savings that the use of Ethos FR® will produce. Usually a
fleet’s oldest and dirtiest vehicles, or vehicles out of warranty, are included
in the demonstration. Such vehicles amplify the effectiveness of the products
and help to ease any initial client objections regarding manufacturer
warranties. Once the demonstration is underway, Ethos FR® products sell
themselves, increasing fuel mileage between 7% and 19% and reducing emissions
by
more than 30%. Once the effectiveness of the product has been
established, a conscientious customer-service program ensures continued
use.
The
Ethos
Environmental strategy has been to approach each market from the perspective
of
the customer’s strongest motivation, whether to reduce fuel costs or reduce
engine emissions. From a marketing standpoint, it is most cost-effective
for
Ethos Environmental to focus on commercial fuel users that keep track of
maintenance and operating expenses. These consumers are more sensitive to
pressures from rising fuel costs and more concerned about meeting emissions
standards.
Rising
fuel costs will always be a marketing advantage for Ethos. Higher fuel prices
decrease the cost to treat each gallon of fuel; resulting in even greater
savings to Ethos clients. The Company’s marketing strategy
strengthens as the price of fuel increases. Even where cost savings
are a client’s primary motivator, the use of Ethos FR® identifies the user as an
environmentally conscientious business. It also creates goodwill within the
community through the reduction of unhealthful and unsightly exhaust
emissions.
Target
Markets
Domestic
According
to the American Petroleum Institute, the United States fuels consumer market
is
comprised of the following segments: retail consumer 27%, government agencies
16%, ground fleets 14%, industrial users 10%, aircraft 9%, maritime 6%,
miscellaneous 4%.
The
Company’s typical customers use cars, trucks or vessels in their day-to-day
operations. Fuel is a significant operating cost, and consequently these
fleets
are particularly sensitive to fuel price fluctuations and strict emissions
standards. The ideal clients are those with fleet managers and are conscientious
about keeping track of operating expenses. They understand that every hike
in
fuel price hurts their profitability, this being a critical factor wherever
competitive markets make it difficult to pass on the price increases to their
clients. Making it critical for businesses to obtain better mileage
as a competitive advantage.
Maritime
and government agencies are desirable for their large fuel volume use and
industry credibility. They offer the Company medium to long-term
sales, since the process requires a longer lead-time to close. The product
demonstration phase and administrative requirements are generally more complex,
particularly with large government institutions. At the same time, they offer
large volume sales and a continual source of staged orders that promote
production stability.
Marine
vessels run on bunker fuel that is less refined than diesel. A
mid-size ship will use more than half a ton per hour of operation, or 125
gallons of fuel per hour. For example, a mid-size vessel running on bunker
on a
typical trip to Japan from Los Angeles will require a half a ton per hour,
or
180 tons. This represents a total of 45,000 gallons of fuel that
requires 4,500 oz. (35 gallons) of Ethos FR®. This vessel would use
approximately one drum (55gals.) of Ethos FR® per month. Accordingly, maritime
customers represent a large and solid client base.
Like
the
United States, countries all around the world are endeavoring to deal with
the
high costs of petroleum products and the detrimental effects of those products
on the environment. The Company has found broad and enthusiastic
acceptance of its Ethos FR® products globally. During the past three
years, the Company has opened markets in Asia, Latin America, Canada and
Europe,
often dealing directly with government entities that possess the power to
implement widespread use of Ethos FR® – whether in citywide public
transportation systems or countrywide fuel distribution structures.
As
with
our domestic client base, international customers of Ethos FR® appreciate the
benefits of improved mileage and reduced emissions. And in countries
that lack the regulatory structures necessary to control vehicle emissions
and
fuel efficiency, the benefits of Ethos FR® are even more
pronounced.
Customers
We
have a
diversified customer list. Although we have many customers utilizing products,
the broadly diversified base means there is no significant concentration
in any
industry. We derive revenue from our customers as discussed in Note 1,
"Organization and Significant Accounting Policies: Revenue Recognition" of
the
consolidated financial statements. Three customers accounted for 89.3% of
our
revenues for the period ended June 30, 2007. For the period ended June 30,
2007,
we had the following customers account for a significant portion of our
revenues:
(1)
|
Petro
Industrial, an Ecuadorian company, accounted for 46.14% of
revenues;
|
(2)
|
Electroguayas
S.A., an Ecuadorian company, accounted for 29.77% of revenues;
and
|
(3)
|
PetroEcuador,
another Ecuadorian company, accounted for 13.4% of
revenues.
|
Supply
Arrangements
We
presently obtain our raw materials on an exclusive basis from five (5)
suppliers. However, these arrangements are not governed by any formal written
contract. Accordingly, either party can terminate the arrangement at any
time,
including the exclusivity aspect of the arrangement. If this supplier is
not
able to provide us with sufficient quantities of the product, or chooses
not to
provide the product at all (for any reason), or if exclusivity is lost, business
and planned operations could be adversely affected. Although management has
identified alternate suppliers of the products, no assurance can be given
that
the replacement products will be comparable in quality to the product presently
supplied to us by these companies, or that, if comparable, that it can be
acquired under acceptable terms and conditions.
Revenue
and Fixed Assets
Most
of
our revenue is generated in the United States through our San Diego, California
office, and all of our fixed assets are located in the San Diego, California
office.
Vendors
We
maintain strong relationships with all of our vendors. We are not dependent
upon
any one vendor for our business.
Quarterly
Developments
During
the period ended June 30, 2007, the Company had several important
developments:
(1)
|
On
April 10, 2007, we received an order from Chika Oil and Gas Limited,
a
Nigerian company, totaling $2,100,000 of Ethos FR product in 12
ounce
bottles. This order will be shipped in various stages during
2007.
|
(2)
|
On
June 14, 2007, we received an order from Electroguayas S.A., an Ecuadorian
company, for 150 barrels of product per month for 12 months, for
a total
purchase order value of $4,424,000.
|
(3)
|
On
June 18, 2007, we received an order from Petro Industrial, an Ecuadorian
company, for 298 barrels per month of product for 12 months, for
a total
purchase order value of
$10,012,800.
|
Critical
Accounting Policies and Estimates
We
believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management’s judgments and estimates. These significant accounting policies
relate to revenue recognition, research and development costs, valuation
of
inventory, valuation of long-lived assets and income taxes. For a summary
of our
significant accounting policies (which have not changed from December 31,
2006),
see our annual report on Form 10-KSB for the period ended December 31,
2006.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2007 AS COMPARED WITH THE
THREE MONTHS ENDED JUNE 30, 2007
The
following analysis of historical financial condition and results of operations
are not necessarily reflective of the on-going operations of the
Company.
Income
Taxes
We
have
accumulated approximately $15,705,782 of net operating loss carry-forwards
as of
June 30, 2007, that may be offset against future taxable income. There will
be
limitations on the amount of net operating loss carry-forwards that can be
used
due to the change in the control of the management of the Company. No tax
benefit has been reported in the financial statements, because we believe
there
is a 50% or greater chance the carry-forwards will expire unused.
Accordingly,
the potential tax benefits of the loss carry-forwards are offset by valuation
allowance of the same amount.
Inflation
Our
results of operations have not been affected by inflation and we do not expect
inflation to have a significant effect on its operations in the
future.
Research
and Development Costs
Research
and development costs are charged to operations when incurred and are included
in operating expenses. The amounts charged for period ended June 30, 2007
amounted to $7,500, compared to $82,933 for the same period in the prior
year.
All of these costs are borne by the Company.
Revenues
We
recognized revenues of $ 2,599,962 for the three months ended June 30, 2007
and
$5,297,095 for the six months ended June 30, 2007 compared to revenues of
$
1,380,307 and $2,697,943 for the same periods in the prior year. For
the six months ended June 30, 2007 this represents an increase of $2,599,152
or
96%. The primary source of revenue for the periods ended March 31, 2007 and
June
30, 2007 is from the sale of Ethos FR®.
We
expect
our growth to continue as sales increase and the sales and marketing strategies
are implemented into the targeted markets and we create an understanding
and
awareness of our technology through proof of performance demonstrations with
potential customers.
Our
future growth is significantly dependent upon our ability to generate sales.
Our
main priorities relating to revenue are: (1) increase market awareness of
Ethos
FR® product through our sales and marketing plan, (2) growth in the number of
customers and vehicles per customer, and (3) providing extensive customer
service and support.
Gross
Profit
Gross
profit, defined as revenues less cost of goods sold, was $ 1,871,961 or 72%
of
sales for the three months ended June 30, 2007 and $3,703,788 or 70% for
the six
months ended June 30, 2007, compared to $ 911,003 or 66% of sales for the
three
months ended June 30, 2006 and $1,888,560 or 70% for the six months ended
June
30, 2006. In terms of absolute dollars, gross profit increased 96% for the
six
months ended June 30, 2007 compared to same period in the prior year due
primarily to the sales of the Ethos FR® product.
Cost
of
goods sold was $ 728,001 for the three months ended June 30, 2007 and $469,304
for the three months ended June 30, 2006. Cost of Goods Sold represented
28% of
revenues for the three months ended June 30, 2007. For the six months
ended June 30, 2007, Cost of Goods Sold was $1,593,307, or 30% of Sales versus
$809,383 and 30% for the year prior.
Operating
Expenses
Our
current operating expenses are comprised of costs associated with
administrative, salary, marketing, legal and business development. We will
have
additional operating expenses for additional staff members as they are hired.
We
have allocated funds in our capital structure for our current
expenses.
General
& Administrative expenses incurred during the three months ended June 30,
2007 totaled $1,490,489 and $1,961,487 for the six months ended June 30,
2007.
Similar
expenses incurred for the three months ended June 30, 2006 were $462,593
and
were incurred primarily for expenses of a similar nature.
Also,
for
comparison purposes, there were 283,500 newly issued shares for the payment
of
services during the period ended June 30, 2007, compared to nil during the
period ended June 30, 2006.
Net
Profit
We
incurred a net loss for the three months ended June 30, 2007 of $6,791,174
as
compared to a net profit of $49,276 for the comparable prior year
period. For the six months ended June 30, 2007, we incurred a Net
Loss of $5,772,514 as compared to a net profit of $435,051 for the comparable
period of the prior year. This net loss for the three months and six
months ended June 30, 2007 is a direct result of our issuance of a Common
Stock
Purchase Warrant to purchase 1,900,000 shares of our common stock at a purchase
price of $2.50, as well as the issuance of 283,500 shares of our common stock
for services.
NON-OPERATING
INCOME AND EXPENSES
Non-operating
income, net of expenses, increased for the six months ended June 30, 2007
versus
2006, due to an increase in sales. Interest expense increased to $408,734
during
the 6 months ended June 30, 2007 from $223,892 for the comparable period
in
2006. The interest was directly associated with the interest-only loan for
$4,750,000, related to the purchase of our new building and an interest-only
$500,000 working capital loan.
Liquidity
and Capital Resources
During
the six months ended June 30, 2007, we had a working capital of $2,430,381
and
stockholders’ equity of $8,012,154 compared to a working capital deficit of
$5,068,449 and stockholders’ equity of $1,350,648 during the comparable period
in the prior year.
On
June
30, 2007, the Company had $312,857 in cash of which $300,000 is
restricted, total assets of $14,966,139 and total liabilities of $6,953,985,
compared to $367,224 in cash and $300,000 in restricted cash, total assets
of
$7,355,667 and total liabilities of $6,005,019 on June 30, 2006.
We
anticipate, based on currently proposed plans and assumptions relating to
our
operations, that our current cash and cash equivalents together with projected
cash flows from operations and projected revenues will be sufficient to satisfy
our contemplated cash requirements for the next 12 months. Our contemplated
cash
requirements for 2007 and beyond will depend primarily upon the level of
sales
of our products, inventory levels, product development, sales and marketing
expenditures and capital expenditures.
Management
of the Company has undertaken steps as part of a plan with the goal of
sustaining the Company operations for the next twelve months and beyond.
These
steps include: (a) attempting to raise additional capital and/or other forms
of
financing; (b) controlling overhead and operating expenses; and (c) continuing
to increase the sales of its fuel reformulating product. There can be no
assurance that any of these efforts will be successful.
Loan
Facilities
On
February 7, 2007, we entered into an equipment lease agreement with Mazuma
Capital Corp. wherein the Company agreed to a 24-month sale and leaseback
arrangement for up to $800,000 of its manufacturing equipment. The lease
calls
for a monthly payment based on a factor of .04125 times the average outstanding
loan balance during the month. Through August 20, 2007, the company had placed
property valued at $ 740,000 under this lease arrangement with Mazuma Capital
Corp.
Inflation
has not significantly impacted the Company’s operations.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our
investors.
PLAN
OF OPERATIONS FOR THE NEXT TWELVE MONTHS
Since
inception in 2000, Ethos Environmental has grown its customer base to thousands
of diverse clients in over 15 countries worldwide In addition to an effective
and desirable product, the company’s success also derives from the careful
development and tenacious implementation of a structured “proof-of-concept”
marketing strategy.
Throughout
this “proof-of-concept” sales and marketing phase, gross sales for Ethos
Environmental have consistently exceeded forecasts, reaching more than $1.78
million by the end of 2005, and $4.77 million by the end of 2006. Even more
significant growth is anticipated for 2007, with sales in established markets
on
six continents expected to top current forecasts. Furthermore, market
implementation plans anticipate growth in 2007 and beyond, leading to gross
multi million sales in 2008. These projections are based on the product’s proven
ability to improve fuel efficiency while reducing emissions, the Company’s
proven ability to penetrate new markets and build a solid base of loyal
customers, and the world’s increasing costs in the petro-economic
markets.
Looking
forward, marketing will constitute a significant portion of company expenditures
as Ethos Environmental continues to develop sales of new ester-based fuel
and
engine enhancing products. We are in the process of developing new products
covering areas of synthetic oils, sulfur substitutes, and varied formulations
of
the original Ethos FR® and its enhancements.
In
addition, we will continue to initiate patents to cover ongoing development
of a
new engine design that combines past, present and state-of-the-art technologies.
This new system generates rotary shaft power using only a fraction of the
fuel
consumed by today’s internal combustion engines, and testing has yielded power
output that rivals current technologies with just a fraction of the emissions.
We have great hope that this project will revolutionize power generation
as we
know it, significantly easing pollution from the usage of fossil
fuels.
The
management of Ethos Environmental is excited by the enthusiastic acceptance
that
Ethos FR® products have received - domestically and all around the
world. We are proud to provide a product that is part of the solution to
the
high cost of fuel and the health costs of environmental pollutants. Since
inception management has been focused on the development of a solid
infrastructure, building relationships and establishing the foundation of
a
business that will continue to grow - non-stop - into the future.
Critical
Accounting Policies
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make a wide variety of estimates
and assumptions that affect (i) the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the
financial statements, and (ii) the reported amounts of revenues and expenses
during the reporting periods covered by the financial statements. Our management
routinely makes judgments and estimates about the effect of matters that
are
inherently uncertain. As the number of variables and assumptions affecting
the
future resolution of the uncertainties increases, these judgments become
even
more subjective and complex. The most significant accounting policies that
are
most important to the portrayal of our current financial condition and results
of operations are as follows:
Revenue
Recognition
The
Company recognizes revenue in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial
Statements”. Revenue consists of the sale of products and is recognized only
when the price is fixed or determinable, persuasive evidence of an arrangement
exists, the product is shipped, and collectability is reasonably
assured.
Acquired
Goodwill
Goodwill
represents the excess of the purchase price of acquired assets over the fair
values of the identifiable assets acquired and liabilities assumed. Pursuant
to
SFAS No. 141, “Business Combinations” the Company does not amortize goodwill,
but tests for impairment of goodwill on an annual basis and at any other
time if
events occur or circumstances indicate that the carrying amount of goodwill
may
not be recoverable. Circumstances that could trigger an impairment test include
but are not limited to: a significant adverse change in the business climate
or
legal factors; an adverse action or assessment by a regulator; unanticipated
competition and loss of key personnel. Goodwill is tested for impairment
using
present value techniques of estimated future cash flows; or using valuation
techniques based on multiples of earnings. If the carrying amount of goodwill
exceeds the implied fair value of that goodwill, an impairment loss is charged
to operations.
Customer
Relationships
The
Company used the replacement cost approach for accounting for customer
relationships. This approach uses an estimate of what a notional purchaser
would
likely pay for the intangible asset in order to be in the same position of
the
Company at the date of the closing of the Asset Purchase Agreement described
above in “Acquired Goodwill”.
ITEM
3. CONTROLS AND PROCEDURES
(a) Evaluation
of Disclosure Controls and Procedures:
Our
President, after evaluating the effectiveness of our “disclosure controls and
procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), has
concluded that, as of June 30, 2007 due to the material weaknesses in our
internal control over financial reporting identified in our 2006 Form 10-KSB,
our disclosure controls and procedures were not effective in providing
reasonable assurance that information we are required to disclose in reports
we
file is recorded, processed, summarized and reported within the periods
specified.
(b) Management’s
Annual Report on Internal Control Over Financial Reporting:
While
we
have continued our efforts to address each of the material weaknesses identified
in our 2006 Form 10-KSB, there were no material changes in our internal
control
over financial reporting during the most recently completed
quarter. We have not identified any additional material weaknesses
during this quarter. We are not planning to report on whether there
has been full remediation of the identified material weaknesses until our
2007
report on internal control over financial reporting is
complete.
(c) Changes
in Internal Control Over Financial Reporting:
There
were no changes in our internal control over financial reporting during the
quarter ended June 30, 2007 that have materially affected, or are reasonably
likely to materially affect our internal controls over financial
reporting.
PART
II.
In
June
2007, the Company was served with a Summons and Complaint by Plaintiff Michael
Later, Esq., who formerly provided legal services to the Company. The
Company and Mr. Later have agreed to a settlement of all claims, and the
lawsuit
is anticipated to be dismissed with prejudice in August 2007.
Also,
during the quarter ended June 30, 2007, ACCUTEK, Inc. filed a lawsuit against
the Company seeking $60,000 in damages. The Company has filed its
answer, including various counter claims against ACCUTEK, Inc., including
breach
of contractual obligations.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS.
As
a
result of a Private Placement that was concluded on August 7, 2007, the Company
issued 2,500,000 shares of common stock. The complete details of this
transaction are referenced in the Company’s Form 8-K filed on August 10, 2007,
which is incorporated by reference herein.
Between
April 1, 2007 and June 30, 2007, the Company issued 283,500 shares of its
common
stock to consultants, officers, directors and/or key employees for services
rendered.
On
April
4, 2007, the Company returned 50,000 shares of its common stock to
treasury.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
On
or
about August 7, 2007, the Company agreed to sell the land and building located
at 6800 Gateway Park Drive located in San Diego, CA, as well as 2,500,000
shares
of its common stock in exchange for $7,875,000. The Company’s Form
8-K filed on or about August 10, 2007 is incorporated by reference herein
and
provides additional details regarding this transaction.
ITEM
6. EXHIBITS AND REPORTS ON FORM
8-K
(a)
Exhibits.
EXHIBIT
NUMBER
|
DESCRIPTION
|
LOCATION
|
3.1
- 3.2
|
Articles
of Incorporation and Bylaws
|
Previously
Filed.
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification (CEO)
|
Filed
herewith
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification (CFO)
|
Filed
herewith
|
32.1
|
Section
1350 Certification (CEO)
|
Filed
herewith
|
32.2
|
Section
1350 Certification (CFO)
|
Filed
herewith
|
(b) Reports
on Form 8-K.
The
following reports on Form 8-K are
incorporated by reference herein:
(a)
|
Form
8-K filed on or about April 4, 2007;
and
|
(b)
|
Form
8-K filed on or about August 10,
2007.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
DATE:
August 21, 2007
|
ETHOS
ENVIRONMENTAL, INC.
(Registrant)
By:
/s/ Enrique de Vilmorin
|
|
Enrique
de Vilmorin
Director,
CEO and CFO
|