Ethos
FR – Proof of Performance Demonstrations
Ethos
Environmental’s fuel reformulating products reduce emissions by burning fuel
more completely, which improves fuel mileage. Exhaust is essentially unburned
fuel, wasted fuel, so when the fuel is used more completely the engine
delivers
better mileage from every tank. Efficient fuel use also means improved
engine
performance because a more complete combustion process obtains increased
power
from each engine revolution.
In
the
last decade hundreds of thousands of miles in road tests have been conducted.
Test after test, Ethos products have proven to reduce engine exhaust emissions
by 30% and more, including measurable reductions in the emissions of
hydrocarbons (HC), nitrogen oxides (NOx), carbon monoxide (CO), and sooty
exhaust or particulate matter (PM). All of these emissions are highly toxic
and
as a result, fuel mileage increases have been significant, ranging from
7% to
19% fleet wide.
Ethos
Environmental uses an opacity meter, a detection device for diesel vehicles
that
measures the percentage of opacity (light obstructed from passage through
an
exhaust smoke plume), to demonstrate dramatic reductions in emissions.
In more
that 1,000 heavy-duty diesel vehicles treated (a motor vehicle having a
manufacturer’s maximum gross vehicle weight rating (GVWR) greater than 6,000
pounds), emissions were lowered by as much as 90%. The Society of Automotive
Engineers (SAE) recommended practice SAE J1667 “Snap Acceleration Smoke Test
Procedure” to be used for heavy-duty diesel powered vehicles. Attached are
samples of opacity test sheets, taken from diesel-powered engines, demonstrating
the positive results after using Ethos FR®.
Target
Markets
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 18%.
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; thereby 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 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 BFC. This vessel would use approximately
one
drum (55gals.) of Ethos BFC per month. Accordingly, maritime customers
represent
a large and solid client base.
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,
much
like the United States. The Company has found broad and enthusiastic
acceptance of its Ethos products globally. During the past three
years, the Company has opened markets in Asia, Latin America, Canada, Australia,
Africa and Europe, often dealing directly with government entities that
possess
the power to implement widespread use of Ethos products – whether in citywide
public transportation systems or countrywide fuel distribution
structures.
As
with
our domestic client base, international customers of Ethos appreciate the
benefits of improved mileage and reduced emissions. In countries that
lack the regulatory structures necessary to control vehicle emissions and
fuel
efficiency, the benefits of Ethos are even more pronounced.
Customers
We
have a
diversified customer list which presently numbers 59 and is composed of
state
governments, corporations and high net worth individuals. There are
two who account for over 10% of our revenue: Petroindustrial 76.64%
and Petroecuador 10.51%. We do not have contracts with our
customers. Purchase orders are used as Ethos products are required
and ordered. We derive revenue from our customers as discussed in
Note 1, "Organization and Significant Accounting Policies: Revenue Recognition"
of the consolidated financial statements. Two customers accounted for 88%
of our
revenues for the fiscal year ended December 31, 2006. One customer accounted
for
40% and the second customer accounted for 48%. One of these customers accounted
for 62% of our accounts receivable at December 31, 2006. As our products
reach
more customers, the concentration of credit risk will spread out amongst
the
base of our clientele, and will lessen the effect of the risk shown during
the
year ended December 31, 2006.
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 may terminate the arrangement at any
time,
including the exclusivity aspect of the arrangement. If a 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 current suppliers, or that, if comparable, products can
be
acquired under acceptable terms and conditions.
Revenue
and Fixed Assets
The
Company’s revenue is generated in the United States and abroad through our San
Diego, California office, which at present is our only operating
office. All of the fixed assets are located in the San Diego,
California office. In February, 2007, the Company entered into a sale
and leaseback arrangement as outlined below under Loan Facilities.
Vendors
The
Company maintains strong relationships with all vendors. We are not dependent
upon any one vendor for our business.
Governmental
Regulation
In
the
United States, fuel and fuel additives are registered and regulated pursuant
to
Section 211 of the Clean Air Act. 40 CFR Part 79 and 80 specifically relates
to
the registration of fuels and fuel additives. Typically, there are registration
and regulation requirements for fuel additives in each country in which
they are
sold. In accordance with the Clean Air Act regulations at 40 CFR 79,
manufacturers (including importers) of gasoline, diesel fuel and additives
for
gasoline or diesel fuel, are required to have their products registered
by the
EPA prior to their introduction into commerce.
However,
EPA registered additives are derived from petroleum while Ethos FR® is
a reformulator.
Even though you “add it” to the fuel, Ethos FR® is
not derived from
petroleum and is non-toxic and non-hazardous and therefore not subject
to
governmental regulations. There could be unforeseen future changes to
the registration requirements under the Clean Air Act and Ethos FR® may
have to seek
registration under such new requirements. In addition, we currently
sell our product outside of the United States and intend to further expand
our
sales efforts internationally. We may need to seek registration in
other countries for the Ethos FR®
product.
At
this
time the Company is not aware of any present or pending rules or regulations
that would require the Company to seek registration of the Ethos FR® product
either
domestically or internationally.
Research
and Development Costs
Research
and development costs are charged to operations when incurred and are included
in operating expenses. The amounts charged for the years ended December
31, 2006
and 2005 amounted to $112,051 and $132,404, respectively. All of these
costs are
borne by the Company.
Following
is the Ethos FR® Material
Safety
Data Sheet (MSDS)
Employees
As
of
March 31, 2007, we had 25 full-time and 10 part-time employees.
RISK
FACTORS
You
should carefully consider the risks described below before investing in the
Company. We consider these risks to be significant to your decision whether
to
invest in our Common Stock at this time. If any of the following risks actually
occur, our business, results of operations and financial condition could
be
seriously harmed, the trading price of our Common Stock could decline and
you
may lose all or part of your investment.
Risks
Related to Our Business
Due
to the newness of our company and our products, our technology has received
only
limited market acceptance.
Our
technology is a relatively new product to the market place. Although
ever growing concerns and regulations
regarding the environment and pollution has increased interest
in environmentally friendly products generally, the engine treatment and
fuel
reformulator, i.e. additive, market remains an evolving market. The
Ethos FR®
technology competes with more established companies such
as Lubrizol Corporation, Chevron Oronite Company
(a subsidiary of Chevron Corporation), Octel Corp., Clean Diesel
Technologies, Inc. and
Ethyl Corporation, as well as
other companies whose products or
services alter, modify or adapt diesel engines
to increase their fuel efficiency and reduce
pollutants. Acceptance of Ethos FR® as an
alternative
to such traditional products and/or services depends upon a number of factors
including:
·
|
favorable
pricing vis a vis projected savings from increased fuel
efficiency
|
·
|
the
ability to establish the reliability of Ethos FR®
products
relative to available fleet data
|
·
|
public
perception of the product
|
Since
we
market a range of products within only one product line, we are entirely
dependent upon the acceptance of Ethos FR® in the
market place
for our success. Our business operations are not diversified. If we do not
generate sufficient sales of the Ethos FR® product,
we will
not be successful, and unlikely to be able to continue in business.
We
have a limited operating history with significant losses and expect losses
to
continue for the foreseeable future, though we expect our sufficient revenues
to
sustain our operations.
We
have yet to establish any history of profitable operations. We have incurred
net
losses allocable to shareholders of $6,490,113 and $1,051,637, respectively
for
the fiscal years ended December 31, 2006 and 2005. As a result, at
December 31, 2006 we had an accumulated deficit of $9,866,577. We expect,
however, that our revenues will be sufficient to sustain our operations for
the
foreseeable future. Our profitability though will require the successful
commercialization of our fuel reformulator.
We
believe that a viable market exists for our technology as there are many
conventional or competitive products in the markets that we have identified
for
exploitation. In the event that a viable market for our products cannot be
created as envisaged by our business strategy, we may need to commit greater
resources than are currently available to further develop our technology
into a
commercially viable product. Should this occur, we may not be able to continue
operations.
Our
independent auditors have added an explanatory paragraph to their audit report
issued in connection with the financial statements for the year ended
December 31, 2006 relative to our ability to continue as a going concern.
Our financial statements do not include any adjustments that might result
from
the outcome of this uncertainty.
We
rely on commercial arrangements with third parties, and any failure to retain
relationships with these third parties could negatively impact our ability
to
develop and market our products.
We
anticipate that our success in creating markets for our products will depend
largely on our ability to identify and establish strategic alliances with
companies and individuals that have experience in manufacturing and distributing
products to the markets we have identified. We have supplied our fuel
reformulator for evaluation purposes to a number of strategic partners and
customers. As such, our plans are dependent on and have been developed on
the
assumption that our product(s) will be promoted by our strategic partners
and
adopted by potential customers. Should our commercial arrangements
with current or future strategic partners deteriorate or cease, it can be
expected that this would have a material adverse affect on our financial
conditions, business, results of operations, and continues growth
prospects.
The
Company’s core product may not be acceptable to commercial customers due to
transportation, storage, and handling issues.
Our
core
product is a fuel reformulator. However, as with any new technology, there
are
risks associated with the commercial production and use of this product and
we
have experienced technical difficulties when deploying in commercial
applications which have required us to take additional precautions when
transporting, storing and handling our product(s). These characteristics
may
make the finished product(s) unattractive to certain distributors, customers
and
end-users. In addition, the finished fuel may only be stored and dispensed
from
tanks that meet stringent standards for cleanliness and not all tanks may
be
capable of achieving these standards.
Our
products must be distributed in commercial quantities, in compliance with
regulatory requirements, and at an acceptable cost and these factors could
harm
our business and future prospects.
Our
future revenues are unpredictable and our operating results may fluctuate
as a
result of the lack of a sales history of our
products.
We
expect
to experience significant fluctuations in our future operating results due
to a
variety of factors, including (i) demand for our products,
(ii) introduction or enhancement of products by competitors,
(iii) market acceptance of our products, (iv) price reductions by
competitors or changes in how new products are priced, (v) availability of
raw materials of adequate quality and at prices which are economical,
(vi) availability of distribution channels through which our products are
to be sold, (vii) potential costs of litigation and intellectual property
protection, (viii) our ability to attract, train and retain qualified personnel,
(ix) the amount and timing of unforeseeable operating costs and capital
expenditures related to the expansion of our business, operations and
infrastructure, (x) any technical difficulties with respect to the use of
our products, and (xi) effects of current and future governmental
regulations on the sale of our products, which may be significant.
As
a
result of the lack of a sales history of our products, we do not have relevant
historical financial data for any periods on which to forecast revenues or
expected operating expenses in connection with growing revenues in the future.
Our expense levels are based in part on certain expectations with regard
to
future revenues. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. As a result, any significant
shortfall in anticipated demand for our products relative to our expectations
would have an immediate adverse effect on the Company’s business, financial
conditions and results of operations.
Our
ability to operate at a profit is dependent on the price and availability
of raw
materials.
Our
results of operations and financial condition have been and will continue
to be
significantly affected by the cost and supply of raw materials used to produce
our product(s). The price of raw materials can be volatile as a result of
a
number of factors, such as the overall supply and demand, the level of
government support, and the availability and price of competing
products.
Generally,
higher prices, in relation to diesel and bio-diesel fuels and related products,
will produce lower profit margins. This is especially true if market conditions
do not allow us to pass through these increased costs to our customers. It
is
important that we be able to pass through these higher raw material costs
to our
customers. If higher raw material prices were to be sustained for an extended
period of time, such pricing may have a material adverse effect on our ability
to grow profitable sales and operations, with a corresponding adverse impact
on
our cash flows and financial performance.
We
intend
to contract with third parties to help control the costs of raw materials
purchased and reduce short-term exposure to price fluctuations. Currently,
we do
not have definitive agreements with third parties for all of our needed
supply.
Ethos
has
two products, Ethos FR® and Ethos BFC. Should we be unable to obtain the
necessary raw materials to manufacture these products, this would have a
negative impact on our revenue forecast and financial results. In addition
to
being able to obtain the necessary quantity of raw materials, it is important
to
carefully select raw material suppliers because there is a wide range of
various
quality of such materials in the marketplace. It is critical that the raw
materials we purchase be of a consistently high quality and that they meet
certain other specifications. Should inferior raw materials be used, this
could
negatively impact our customers results and our future business with
them.
Our
business could suffer if we are unable to effectively compete with our
competitors’ technologies.
We
have
identified as competitors a number of technologies and companies who are
predominantly focusing on the fuel emission reduction market. In addition,
other
companies, many of which are likely to have substantially greater financial,
research and development, sales and marketing and personnel resources, may
currently be developing, or may develop in the future, technologies and products
that are equally or more effective and/or economical as any product we may
develop, or which would otherwise render our technologies obsolete.
If
we were to lose the services of our founders or our senior management team,
we
may not be able to execute our business strategy.
Our
future success depends in large part upon the continued service of key members
of our senior management team. In particular, Enrique de Vilmorin is critical
to
our overall management, as well as to the development of our technology,
our
culture and our strategic direction. Thomas Maher, our Chief Financial Officer,
is the only full-time trained financial professional in our organization;
he
performs most of the duties that in many other cases would be performed by
several people within a larger and deeper organization. We do not maintain
any
key-person life insurance policies. The loss of any of our management or
key
personnel could seriously harm our business.
Our
failure to protect our intellectual property could cause an erosion of our
current competitive strengths.
We
regard
the protection of our patents, trademarks, copyrights, trade secrets and
other
intellectual property as critical to our success. We rely on a combination
of patent, copyright, trademark, service mark and trade secret laws and
contractual restrictions to protect our proprietary rights. We have
entered into confidentiality and non-disclosure agreements with our employees
and contractors, and non-disclosure agreements with parties with whom we
conduct
business, in order to limit access to and disclosure of our proprietary
information. These contractual arrangements and the other steps taken by
us to protect our intellectual property may not prevent misappropriation
of our
technology or deter independent third-party development of similar technologies.
We also seek to protect our proprietary position by filing U.S. and
foreign patent applications related to our proprietary technology, inventions
and improvements that are important to the development of our business.
Proprietary rights relating to our technologies will be protected from
unauthorized use by third parties only to the extent they are covered by
valid
and enforceable patents or are effectively maintained as trade secrets. We
pursue the registration of our trademarks and service marks in the United
States
and internationally. We recognize that there are certain jurisdictions
where we have not applied for patent protection and where no patent protection
may be available. Our ability to market products or technology in
these jurisdictions may be limited.
The
steps we have taken to protect our proprietary rights may be inadequate and
third parties may infringe or misappropriate our trade secrets, trademarks
and
similar proprietary rights.
Any
significant failure on our part to protect our intellectual property could
make
it easier for our competitors to offer similar services and thereby adversely
affect our market opportunities. Our products are unique and one of a
kind, and should a comparative product come to market as a result of our
inability to protect our trade secrets, this could have a material adverse
affect on the Company’s business and future. In addition, litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of the proprietary
rights of others. Litigation could result in substantial costs and
diversion of management and technical resources and may not be
successful.
We
may not be able to manufacture and to market our products in commercial
quantities due to facilities or raw material supplies not meeting our
needs.
Our
products must be manufactured in commercial quantities, in compliance with
regulatory requirements and at an acceptable cost. If our existing facilities
and/or raw material supplies cannot meet our needs, we will seek other
manufacturers. The availability, pricing and supply of our products are
currently dependent on arrangements with our raw material suppliers. The
cost
and availability of raw materials and esters, the availability of tax and
other
incentives for our products and arrangements for the distribution of our
products by others, could change. Also, although we believe there is sufficient
manufacturing capacity to meet our long term objectives, this could change
as
well. Should the situation change with any of these important
components in the manufacture and distribution of our products this could
have a
significant negative effect on the company’s business, and outlook.
Our
business may be harmed if we fail to obtain regulatory approvals or comply
with
legislative and regulatory requirements.
The
manufacturing, marketing, supply, distribution and use of fuel and fuel
reformulators are subject to extensive legislation and regulation in most
jurisdictions in which we intend to do business. Our reformulator and the
resultant ester blend will be competing with both ordinary diesel fuel and
other
fuels and solutions that claim to offer environmental benefits. The business
of
Ethos depends, in part, on the availability of environmental legislation
which
requires or provides incentives to customers to use products similar to our
own.
New or revised legislation and regulations as a result of changes in the
prevailing political climate or for any other reasons, which for example
remove
the availability of incentives or which impose additional compliance burdens
on
us, or which provide incentives to distributors and customers to adopt
competitive products, could have an adverse effect on our business, prospects,
results of operations and financial position.
The
development and manufacture of our technology may subject us to environmental
compliance or remediation obligations.
Our
technology is and will be subject to many environmental laws and regulations
wherever it is used. Such laws and regulations govern, among other things,
fuel
emissions, the use and handling of hazardous substances, waste disposal and
the
investigation and remediation of soil and groundwater contamination. As with
other companies engaged in similar activities, a risk of environmental liability
is inherent in our current and historical activities. Future additional
environmental compliance or remediation obligations could adversely affect
our
business through increased production costs from implementing environmental
compliance. By restricting or prohibiting the manufacture, distribution and
use
of our products, environmental regulations could harm our business.
Our
business is subject to extensive and potentially costly environmental
regulations that could significantly increase our operating costs and our
ability to successfully operate.
We
are
subject to a number of environmental regulatory bodies such as the EPA, as
well
as other regulatory agencies.
In
accordance with the regulations promulgated under the US Clean Air Act,
manufacturers (including importers) of gasoline, diesel fuel and additives
for
gasoline or diesel fuel, are required to have their products registered with
the
EPA prior to their introduction into the market place. Currently, Ethos FR® has such
a
registration (1910-0001). However, unforeseen future changes to the
registration requirements may be made, and Ethos FR® may not
be able to
qualify for registration under such new requirements. The loss of our EPA
registration or restrictions on its current registration could have an adverse
affect on our business and plan of operation.
We
have
registered this product with the US Environmental Protection Agency. This
registration permits us to sell Ethos FR® for domestic
on-road use in the United States. However, there are provisions in
the Environmental Protection Act that could require further testing. In
addition, we currently sell our product outside of the United States and
intend
to further expand our sales efforts internationally. Accordingly, Ethos FR® is registered
in
the United States only, and we are considering its registration in other
countries. Further testing could be needed in these or other
countries. The failure of Ethos FR® to maintain or
obtain registration in countries or
areas where we would like to market it
would have a materially adverse effect on our business and
plan of operation.
Our
business is favorably affected by stricter air quality regulations and
regulations regarding emission controls. If these regulations are
withdrawn or determined to be invalid, our prospects would be adversely
affected.
Additionally,
environmental laws and regulations, both at the federal and state level,
are
subject to change and changes can be made retroactively. Consequently, even
if
we obtain approval, we may be required to invest or spend considerable resources
to comply with future environmental regulations. If any of these events were
to
occur, they may have a material adverse impact on our operations, cash flows
and
financial performance.
Developing
new products, creating effective commercialization strategies for our technology
and enhancing our products and strategies are subject to inherent risks.
These
risks include unanticipated delays, unrecoverable expenses, technical problems
or difficulties, as well as the possibility that funds will be insufficient.
Any
one of these could make us abandon or substantially change our technology
commercialization strategy.
Our
success will depend upon, among other things, our products meeting targeted
cost
and performance objectives for large-scale production, our ability to adapt
technologies to satisfy industry standards, satisfying consumer expectations
and
needs and bringing our products to market before the market is saturated.
We may
encounter unanticipated technical or other problems that result in increased
costs or substantial delays in introducing and marketing new products. Current
and future products may not be reliable or durable under actual operating
conditions or otherwise commercially viable. New products may not satisfy
price
or other performance objectives when introduced in the marketplace. Any of
these
events could adversely affect our realization of revenues from such new
products.
Product
liability claims related to our products could prove to be costly to defend
and
could harm our business reputation.
Fuel
and
fuel-additive businesses may be adversely affected by litigation and complaints
from distributors, customers and government authorities resulting from fuel
quality, illness, injury or other health concerns or other issues. Adverse
publicity surrounding such allegations could negatively affect our products,
regardless of whether the allegations are true, by discouraging distributors
and
customers from buying our products. We could also incur significant costs
and
the diversion of management time in defending the Company against claims,
whether or not such claims have any basis.
We
face management, financial and information systems and controls challenges
that
must be met to manage our anticipated growth and failure to do so will hurt
our
financial situation and the company’s future
prospects.
In
order
to successfully manage our anticipated growth, we must improve our management,
financial and informational systems and controls, and expand, train and manage
our employee base effectively. There will be additional demands placed on
our
technical, sales, marketing and administrative resources as we expand in
our
target markets. Our ability to cope with these demands may be impaired as
a
result.
Our
business may suffer if we are unable to attract and retain key officers or
employees.
We
believe our future success will depend greatly upon the expertise and continued
service of certain key executives and technical personnel. Furthermore, our
ability to expand operations to accommodate our anticipated growth will also
depend on our ability to attract and retain qualified management, finance,
marketing, sales and technical personnel. However, competition for these
types
of employees is intense due to the limited number of qualified professionals.
We
have attempted to reduce these personnel risks by (i) entering into
contracts with certain key employees, (ii) providing employment benefits
such as
vacations and health coverage, and (iii) adopting an employee stock option
plan that covers most employees. However, these measures do not guarantee
that
employees will remain with the Company, or ensure that qualified employees
can
be recruited in the future.
Our
ability to continue as a going concern is uncertain.
The
report of our independent registered public accounting firm on our consolidated
financial statements for the fiscal year ended December 31, 2006 states
that there is substantial doubt about the Company’s ability to continue as a
going concern. This “going concern” opinion could adversely affect our ability
to sell our products, attract and retain strategic relationships and obtain
additional financing.
Our
ability to use our net operating loss carry forward may be
limited.
As
of December 31, 2006, we have approximately $9,866,577 million in federal
and
state net operating loss carry forwards which will begin to expire in 2022
if
not used to offset future federal and state taxable income. Our net loss
carry
forwards are subject to various limitations and have not been audited by
the
Internal Revenue Service. We anticipate the net loss carry forwards will
be used
to offset the federal and state taxable income and the related tax payments
which we would otherwise be required to make with respect to income, if any,
generated in future years.
The
growth of our business is dependent upon the availability of adequate
capital.
The
growth of our business will depend on the availability of adequate capital,
which in turn will depend in large part on cash flow generated by our business
and the availability of equity and debt financing. Our cash flow is dependent
on
the successful commercialization of our products, principally Ethos FR®. Should
it be insufficient to achieve our financial projections, our ability to obtain
additional funding will determine our ability to continue as a going
concern.
We
face intense competition and may not have the financial and human resources
necessary to keep up with rapid technological changes which may result in
our
technology becoming obsolete.
The
fuel
additive business and
related anti-pollutant businesses are subject
to
rapid technological change, especially due
to environmental protection regulations, and subject to intense
competition. We compete with both established companies and a significant
number
of startup enterprises. We face competition from
producers and/or distributors of other diesel fuel
additives (such as Lubrizol Corporation,
Chevron Oronite Company, Octel
Corp., Clean Diesel Technologies, Inc. and Ethyl Corporation), from
producers of alternative mechanical technologies (such as Algae-X
International, Dieselcraft, Emission Controls Corp. and
JAMS Turbo, Inc.) and from alternative fuels (such as bio-diesel fuel
and liquefied natural gas) all targeting the same markets and claiming increased
fuel economy, and/or a decrease in toxic emissions and/or a reduction
in engine wear. Most of our competitors have substantially greater
financial and marketing resources than we do and may independently develop
superior technologies which may result in our technology becoming less
competitive or obsolete. We may not be able to keep pace with this change.
If we
cannot keep up with these advances in a timely manner, we will be unable
to
compete in our chosen markets.
Competition
from the advancement of alternative fuels may lessen the demand for our products
and negatively impact our profitability.
Alternative
fuels, gasoline oxygenates and ethanol production methods are continually
under
development. A number of automotive, industrial and power generation
manufacturers are developing more efficient engines, hybrid engines and
alternative clean power systems using fuel cells or clean burning gaseous
fuels.
Vehicle manufacturers are working to develop vehicles that are more fuel
efficient and have reduced emissions using conventional gasoline. Vehicle
manufacturers have developed and continue to work to improve hybrid technology,
which powers vehicles by engines that utilize both electric and conventional
gasoline fuel sources. In the future, the emerging fuel cell industry offers
a
technological option to address increasing worldwide energy costs, the long-term
availability of petroleum reserves and environmental concerns. Fuel cells
have
emerged as a potential alternative to certain existing power sources because
of
their higher efficiency, reduced noise and lower emissions. Fuel cell industry
participants are currently targeting the transportation, stationary power
and
portable power markets in order to decrease fuel costs, lessen dependence
on
crude oil and reduce harmful emissions. If the fuel cell and hydrogen industries
continue to expand and gain broad acceptance, and hydrogen becomes readily
available to consumers for motor vehicle use, we may not be able to compete
effectively. This additional competition could reduce the demand for Ethos
FR® products,
which would negatively impact our profitability, causing a reduction in the
value of your investment.
Our
officers and directors have significant voting power and may take actions
that
may not be in the best interest of other
stockholders.
Our
officers and directors control 46% of our outstanding common stock, of which
Enrique de Vilmorin, our Chairman, controls approximately 45%. If these
stockholders act together, they may be able to exert significant control
over
our management and affairs requiring stockholder approval, including approval
of
significant corporate transactions. This concentration of ownership may
have the effect of delaying or preventing a change in control and might
adversely affect the market price of our common stock. This concentration
of ownership may not be in the best interests of all our
stockholders.
Risks
Related to Regulation and Governmental Action
A
change in government policies unfavorable to our products may cause demand
for
our products to decline.
Growth
and demand for our products may be driven primarily by federal and state
government policies. The continuation of these policies is uncertain, which
means that demand for our products may decline if these policies change or
are
discontinued. A decline in the demand for our products may negatively affect
our
results of operations, financial condition and cash flows.
A
change in environmental regulations or violations thereof could result in
the
devaluation of our common stock and a reduction in the value of your
investment.
Environmental
laws and regulations, both at the federal and state level, are subject to
change
and changes can be made retroactively. Consequently, even if we have the
proper
permits at the present time, we may be required to invest or spend considerable
resources to comply with future environmental regulations or new or modified
interpretations of those regulations, which may reduce our
profitability.
Volatility
in gasoline selling price and production cost may reduce our gross
margins.
Ethos
FR® products
are used as a fuel reformulator to reduce vehicle emissions. Therefore,
the supply and demand for gasoline impacts the price of raw materials and
our
business and future results of operations may be materially adversely affected
if gasoline demand or price decreases.
Risks
Related to Our Stock Being Publicly Traded
We
have a material weakness in internal controls due to a limited segregation
of
duties, and if we fail to maintain an effective system of internal controls,
we
may not be able to accurately report our financial results or prevent fraud.
As
a result, current and potential stockholders could lose confidence in our
financial reporting which could harm the trading price of our
stock.
Effective
internal controls are necessary for us to provide reliable financial reports
and
prevent fraud. Inferior internal controls could cause investors to lose
confidence in our reported financial information, which could have a negative
effect on the trading price of our stock. With only 25 employees at the Company,
there is very limited segregation of duties, which the Company has identified
as
a material weakness in our internal controls.
Our
stock price may be volatile.
Since
our
recent name change to Ethos Environmental, our Common Stock has been trading
in
the public market since November 16, 2006. We cannot predict the extent to
which
a trading market will develop for our Common Stock or how liquid that market
might become. The trading price of our Common Stock has been and is expected
to
continue to be highly volatile as well as subject to wide fluctuations in
price
in response to various factors. These factors include:
·
|
Quarterly
variations in our results of operations or those of our
competitors.
|
·
|
Announcements
by us or our competitors of acquisitions, new products, significant
contracts, commercial relationships or capital
commitments
|
·
|
Disruption
to our operations.
|
·
|
The
emergence of new sales channels in which we are unable to compete
effectively.
|
·
|
Our
ability to develop and market new and enhanced products on a timely
basis.
|
·
|
Commencement
of, or our involvement in,
litigation.
|
·
|
Any
major change in our board of directors or
management.
|
·
|
Changes
in governmental regulations or in the status of our regulatory
approvals.
|
·
|
Changes
in earnings estimates or recommendations by securities
analysts.
|
·
|
General
economic conditions and slow or negative growth of related
markets
|
In
addition, the stock market in general, and the market for technology companies
in particular, have experienced extreme price and volume fluctuations that
have
often been unrelated or disproportionate to the operating performance of
those
companies. These broad market and industry factors may seriously harm the
market
price of our Common Stock, regardless of our actual operating performance.
In
addition, in the past, following periods of volatility in the overall market
and
the market price of a company’s securities, securities class action litigation
has often been instituted against these companies. Such litigation, if
instituted against us, could result in substantial costs and a diversion
of our
management’s attention and resources.
The
liquidity of our common stock is affected by its limited trading
market.
Shares
of our common stock are quoted on the OTC Bulletin Board under the symbol
ETEV.OB. We expect our shares to continue to be quoted in that market and
not to
be de-listed, as we have no intention to stop publicly reporting. An
“established trading market” may never develop or be maintained. Active trading
markets generally result in lower price volatility and more efficient execution
of buy and sell orders. The absence of an active trading market reduces the
liquidity of an investment in our shares. The trading volume of our common
stock historically has been limited and sporadic. Our daily trading volume
has averaged approximately 4,664 shares since November 16, 2006. As a
result of this trading activity, the quoted price for our common stock on
the
OTC Bulletin Board is not necessarily a reliable indicator of its fair market
value, and the low trading volume may expose the price of our common stock
to
volatility. Further, if we cease to be quoted, holders would find it more
difficult to dispose of, or to obtain accurate quotations as to the market
value
of, our common stock and the market value of our common stock would likely
decline.
A
significant number of our shares will soon become eligible for sale and their
sale or potential sale may depress the market price of our common
stock.
Some
or
all of the shares of common stock may be offered from time to time in the
open
market pursuant to Rule 144, and these sales may have a depressive effect
on the
market for our shares of common stock. In general, a person who has held
restricted shares for a period of one year may, upon filing with the SEC
a
notification on Form 144, sell into the market common stock in an amount
equal
to the greater of 1% of the outstanding shares or the average weekly number
of
shares sold in the last four weeks prior to such sale. Such sales may be
repeated once each three months, and any of the restricted shares may be
sold by
a non-affiliate after they have been held two years.
Investors
should not anticipate receiving cash dividends on our common
stock.
We
have
never declared or paid any cash dividends or distributions on our capital
stock.
We currently intend to retain any future earnings to support operations
and to finance expansion and, therefore, we do not anticipate paying any
cash
dividends on our common stock in the foreseeable future.
Our
Common Stock has a small public float and future sales of our Common Stock,
or
sales of shares being registered under this document may negatively affect
the
market price of our Common Stock.
We
cannot
predict the effect, if any, that future sales of shares of our Common Stock
into
the market will have on the market price of our Common Stock. However, sales
of
substantial amounts of Common Stock may materially and adversely affect
prevailing market prices for our Common Stock.
Because
the market for and liquidity of our shares is volatile and limited, and because
we are subject to the "Penny Stock" rules, the level of trading activity
in our
Common Stock may be reduced.
Our
Common Stock is quoted on the OTCBB. The OTCBB is generally considered to
be a
less efficient market than the established exchanges or the NASDAQ markets.
While our Common Stock continues to be quoted on the OTCBB, an investor may
find
it more difficult to dispose of, or to obtain accurate quotations as to the
price of our Common Stock, compared to if our securities were traded on NASDAQ
or a national exchange. In addition, our Common Stock is subject to certain
rules and regulations relating to "penny stocks" (generally defined as any
equity security that is not quoted on the NASDAQ Stock Market and that has
a
price less than $5.00 per share, subject to certain exemptions). Broker-dealers
who sell penny stocks are subject to certain "sales practice requirements"
for
sales in certain nonexempt transactions (i.e., sales to persons other than
established customers and institutional "accredited investors"), including
requiring delivery of a risk disclosure document relating to the penny stock
market and monthly statements disclosing recent bid and offer quotations
for the
penny stock held in the account, and certain other restrictions. If the
broker-dealer is the sole market maker, the broker-dealer must disclose this,
as
well as the broker-dealer's presumed control over the market. For as long
as our
securities are subject to the rules on penny stocks, the liquidity of our
Common
Stock could be significantly limited. This lack of liquidity may also make
it
more difficult for us to raise capital in the future.
Available
Information
We
file
electronically with the Securities and Exchange Commission our annual reports
on
Form 10-KSB, quarterly reports on Form 10-QSB, and current reports on Form
8-K,
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
You may obtain a free copy of our reports and amendments to those reports
on the
day of filing with the SEC by going to http://www.sec.gov.
We
are
located at 6800 Gateway Park Drive San Diego, CA 92154. We own,
approximately 70,000 square feet of industrial space and manufacturing
space. We purchased our current facility in 2006. It is
our belief that the space is more than adequate for our immediate and future
needs. The company is also still obligated to a long-term lease
at its prior facility. Please see Note 5. “Operating Leases” in the
consolidated financial statements.
From
time
to time, we are involved in routine legal matters incidental to our business.
In
the opinion of management, the ultimate resolution of such matters will not
have
a material adverse effect on our financial position, results of operations
or
liquidity.
Item
4. Submission of Matters to a Vote of
Security Holders
None.
|
Item
5.
Market for the Common Equity and Related Stockholder
Matters
|
Price
Range of Our Common Stock
Our
shares of common stock are currently trading on the OTC Bulletin Board
(“OTCBB. Prior to November 16, 2006, our trading symbol was “VICI.”
On November 16, 2006, to reflect our new name and the 1 for 1,200 stock split,
our trading symbol was changed to “ETEV”. The OTCBB is a regulated quotation
service that displays real-time quotes, last-sale prices, and volume information
in over-the-counter equity securities. An OTCBB equity security generally
is any
equity that is not listed or traded on NASDAQ or a national securities exchange.
The reported high and low bid and ask prices for the common stock are shown
below for the period from January 1, 2005 through December 31,
2006.
|
|
Bid*
|
|
|
Low
|
|
High
|
2005
Fiscal Year
|
|
|
|
|
Jan
- March 2005
|
|
$
|
6.00
|
|
$
|
18.00
|
Apr
- June 2005
|
|
$
|
7.20
|
|
$
|
12.00
|
July
- Sept 2005
|
|
$
|
3.00
|
|
$
|
32.40
|
Oct
– Dec 2005
|
|
$
|
6.00
|
|
$
|
22.80
|
2006
Fiscal Year
|
|
|
|
|
Jan
- Mar 2006
|
|
$
|
6.60
|
|
$
|
13.20
|
Apr
- June 2006
|
|
$
|
6.00
|
|
$
|
11.76
|
July
- Sept 2006
|
|
$
|
3.00
|
|
$
|
7.68
|
Oct
– Dec 2006
|
|
$
|
2.00
|
|
$
|
11.15
|
*All
of
the prices indicated in the table above reflect the reverse stock split,
which
became effective November 16, 2006.
Because
our common stock is subject to the SEC's penny stock rules, broker-dealers
may
experience difficulty in completing customer transactions, and trading activity
in our securities may be adversely affected.
Transactions
in our common stock are currently subject to the "penny stock" rules promulgated
under the Securities Exchange Act of 1934. Under these rules, broker-dealers
who
recommend our securities to persons other than institutional accredited
investors must:
·
|
make
a special written suitability determination for the
purchaser;
|
·
|
receive
the purchaser's written agreement to a transaction prior to
sale;
|
·
|
provide
the purchaser with risk disclosure documents which identify certain
risks
associated with investing in "penny stocks" and which describe
the market
for these "penny stocks" as well as a purchaser's legal remedies;
and
|
·
|
obtain
a signed and dated acknowledgment from the purchaser demonstrating
that
the purchaser has actually received the required risk disclosure
document
before a transaction in a "penny stock" can be
completed.
|
As
a
result of these rules, broker-dealers may find it difficult to effectuate
customer transactions and trading activity in our securities may be adversely
affected. As a result, the market price of our securities may be depressed,
and
you may find it more difficult to sell our securities.
Holders
As
of
December 31, 2006, there were approximately 855 holders of record of our
common
stock.
Dividends
We
have
not paid any cash dividends on our common stock or preferred stock since
inception and presently anticipate that all earnings, if any, will be retained
for development of our business and that no dividends on our common stock
or
preferred will be declared in the foreseeable future. Any future dividends
will
be subject to the discretion of our Board of Directors and will depend upon,
among other things, future earnings, operating and financial condition, capital
requirements, general business conditions and other pertinent facts. Therefore,
there can be no assurance that any dividends on our common stock or preferred
stock will be paid in the future.
Securities
Authorized for Issuance Under Equity Compensation
Plans
On
November 20, 2006, the board of directors adopted the 2006 Stock Incentive
Plan
or the 2006 Plan. The 2006 Plan reserves 3,500,000 shares of our common stock
for issuance in connection with stock options, stock awards and other
equity-based awards to be granted under the 2006 Plan.
Recent
Sales of Unregistered Securities
None
(other than in connection with the merger described herein).
Item
6. Management's Discussion and Analysis or Plan of
Operation.
The
following discussion should be read in conjunction with our audited financial
statements and notes thereto included herein. In connection with, and because
we
desire to take advantage of, the “safe harbor” provisions of the Private
Securities Litigation Reform Act of 1995, we caution readers regarding certain
forward looking statements in the following discussion and elsewhere in this
report and in any other statement made by, or on our behalf, whether or not
in
future filings with the Securities and Exchange Commission. Forward-looking
statements are statements not based on historical information and which relate
to future operations, strategies, financial results or other developments.
Forward looking statements are necessarily based upon estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control and
many
of which, with respect to future business decisions, are subject to change.
These uncertainties and contingencies can affect actual results and could
cause
actual results to differ materially from those expressed in any forward looking
statements made by, or our behalf. We disclaim any obligation to update
forward-looking statements.
General
Discussion on Results of Operations and Analysis of Financial
Condition
We
begin
our General Discussion and Analysis with a discussion of the Critical Accounting
Policies and the Use of Estimates, which we believe are important for an
understanding of the assumptions and judgments underlying our financial
statements. We continue with a discussion of the Results of Operations for
the
three-month periods ended March 31, 2007 and 2006 and for the years ended
December 31, 2006 and 2005, followed by a discussion of Liquidity and
Capital Resources available to finance our operations.
Since
inception in 2000, Ethos has been used by over 10,000 corporations and/or
consumers in over 40 countries worldwide, which extends to six of the seven
continents. Each and every such end-user has reported to us, either
in writing or verbally, that after using the Ethos FR product, they experienced
cost savings of anywhere from 7% to 19% and emissions reductions of at least
30%
as mentioned in this report. 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
in
the U.S., China, Ecuador, Africa and Europe expected to top current forecasts.
Based on our growth to date, the 100% satisfaction rate and testimonials
we are
receiving from our satisfied customers, 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, we project that top line
revenue will grow to the tens of millions in 2008 and beyond.
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 begin 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
our products, primarily Ethos FR®, 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.
The
Company and Our Business
Ethos
Environmental, Inc. (“Ethos” or the “Company”) manufactures
and distributes fuel reformulating products designed to enable fuels to burn
cleaner. The products developed by the Company are proprietary and, as such,
protected by the Uniform Trade Secrets Act. Our products, distributed
using our registered trademark, Ethos FR®,
are comprised of a unique line of fuel reformulators that consist of
a
blend of high quality, non-toxic, non-petroleum based esters.
Ethos
products are non-toxic, non-hazardous and work with any fuel and in both
internal and external combustion engines, which includes cars, trucks, buses,
RV’s, ships, trains and generators. Ethos products reduce fuel costs by
producing a net gain in mileage above cost. Our products contain two families
of
esters, a group of cleaning esters and a group of lubricating esters, both
of
which are combined with a mineral oil base. Our products serve to clean and
lubricate the internal parts of an engine without the use of petroleum-derived
products commonly found in fuel additives. The main objective is to make
fuels
self-cleaning and self-lubricating without increasing toxic
emissions. Importantly, since moving parts function more smoothly
with reduced heat and friction, less engine maintenance is required and
horsepower returns closer to the manufacturer specifications. Ethos products
remove carbon deposits, one of the culprits that cause fuel to combust
incompletely, resulting in wasted fuel that creates toxic emissions. The
combination of cleaning and lubricating esters in Ethos products serve to
stabilize fuel without changing its formula or specifications.
Overall,
our products make engines combust fuel more completely. When an engine uses
each
measure of fuel to the maximum degree possible, it has two very important
benefits. First, it reduces fuel consumption and reduces non-combusted residues
that an engine expels in the form of exhaust emissions, such as hydrocarbons,
nitrogen oxides, carbon monoxide, particulate matter and other harmful products
of combustion. Next, unused fuel is saved in the fuel tank, waiting to be
used
efficiently by the engine, instead of exhausted in the form of toxic emissions.
Ethos products reduce emissions without adding any of its own components
to the
exhaust. EPA Laboratory tests confirm that Ethos FR®
is 99.99976% clean upon ignition and ashless upon
combustion.
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 sales is “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.
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.
The
management of Ethos Environmental firmly believes that the market for our
product is aggressively expanding. Worldwide fuel consumption is
approximately 85 million barrels per day and projected by the Energy Information
Administration to continue to grow to 97 million barrels per day by 2015,
and
118 million barrels per day by 2030. Much of the dramatic growth over
the past decade has been fueled by the dramatic expansion of India, China
and
Brazil. As additional undeveloped countries begin to expand, so too
will fuel consumption and the Company’s market base. In addition,
consumers are becoming more sensitive to increased fuel economy as oil prices
have increased eight times since the late 1990s.
It
is our
goal to continue to aggressively build on our success in the domestic and
international markets, offering the benefits of our products to companies
and
countries around the world. During 2006, our revenue base increased
by 168% over 2005. Since 2004, the company has increased its revenue
base by 450%, and by 573% since 2003.
The
company’s management is directed to continued growth with its attention focused
on comparative savings in marketing and production costs. Our
attention going forward is to increase market awareness of our name and the
benefits provided by our product line.
During
2007, the company will be directing concerted focus to full compliance with
Sarbanes-Oxley requirements, as revised in Audit Standard No. 5 for small
businesses, in implementing Section 404(a) of the Act.
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, using the most effective
sales tool possible - a product that works! 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
in
the U.S., China, Ecuador and Europe 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.
Results
of Operations
The
following financial data compares the balances as relates to Ethos
Environmental, Inc. for the fiscal years ended December 2006 and
2005. The following discussion has been updated using the restated
financial statement balances.
Revenues
The
Company recognized revenues of $4,768,013 for the year ended December 31,
2006
compared to $1,780,825 for the year ended December 31, 2005, an increase
of
$2,987,188 or 168%. The primary source of revenue for the years ended December
31, 2006 and 2005 is from the sale of Ethos
FR®. Other components of revenue include freight and
service. Freight is billed to the customer and compared to the amount
of freight recorded in cost of sales, so that the Company is adequately
capturing the cost of freight and billing to the client
appropriately.
During
2006 the Company added a major new distributor in the United States, 4E Corp.,
and experienced a dramatic growth in sales to Latin America. In
addition, the Company has contracted sales scheduled in 2007 to new markets
in
Africa and Australia.
Our
main
priorities relating to revenue are to: (1) increase market awareness of
Ethos FR® product through our sales and marketing plan, (2) increase
growth in the number of customers and vehicles per customer, and (3) provide
extensive customer service and support.
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 $3,154,647 or 66%
of
sales for the year ended December 31, 2006, compared to $1,254,366 or 70%
of
sales for the year ended December 31, 2005. The reason for the decrease in
gross
profit and increase in cost of sales in 2006 is due to the addition of
depreciation of the building beginning in 2006, of which substantially most
of
this depreciation is included within cost of sales.
Management
continues to direct attention to increasing production efficiency and thereby
reducing cost of sales as a percentage of sales. Cost of sales
includes the following components: Material, labor, depreciation, and
freight.
Operating
Expenses
The
Company’s current operating expenses are comprised of costs associated with
administration; including salaries, consulting, marketing, legal and business
development. We will incur additional operating expenses for new staff
members as they are hired.
Depreciation
expense incurred for the year ended December 31, 2006 was $292,096, versus
$83,209 for the year ended December 31, 2005. The increase in
depreciation was due to the purchase in 2006 of the new building which
represented approximately $200,000 of the total depreciation of $292,096.
Production and office equipment are depreciated on a 5-year basis, and the
building is depreciated on a 25-year basis. Only $18,865 of
depreciation is shown in general and administrative expenses, as the remainder
is included in cost of sales.
General
and Administrative expenses incurred during the year ended December 31, 2006
totaled $4,987,623. These expenses were incurred primarily in the following
accounts:
Legal
fees of approximately $ 136,598 - of which the majority relates to fees
generated by the merger
Accounting,
audit, bookkeeping and director fees totaling $ 57,676
Business
consulting fees of approximately $ 4,500,000 - of which the majority
relates to the non-cash issuance of stock
Outside
services of $ 159,749
Office
expenses of $ 129,410
Similar
expenses incurred for the year ended December 31, 2005 totaled $1,821,160
and
were primarily for consulting services of a similar nature.
For
comparison purposes, the Company issued 4,910,000 new shares of common stock
for
the payment of services during the year ended December 31, 2006, compared
to
5,108,190 shares issued for cash during the year ended December 31, 2005.
Of the 4,910,000 shares issued in 2006, 3,600,000 shares were for services
directly associated with the merger contract between Ethos Environmental,
Inc.
and Victor Industries, Inc. These shares were accounted for at the
book value of $0.25 and charged against general and administrative expenses
(business consulting) in accordance with Generally Accepted Accounting
Principles (GAAP). The remaining 1,310,000 shares were issued in
compliance with prior consulting agreements
and valued at the market price at the date of issue,
$5.10. The value of these shares was charged against both selling
expenses and general and administrative expenses. There was no cash
involved in this transaction.
The
stock
award given to the CEO consisted of 3,500,000 shares of common stock which
was
valued at $.25, the book value of Ethos at the date of merger.
The
CEO’s
salary at December 31, 2006 consisted of shareholder loans which had been
on the
books of the Company prior to the merger. These loans totaled
approximately $344,325 and were converted to compensation for the CEO during
the
year ended December 31, 2006.
Research
and Development Costs
Research
and development costs are charged to operations when incurred and are included
in general and administrative expenses. The amounts expensed for the years
ended
December 31, 2006 and 2005 amounted to $112,051 and $132,404, respectively.
Research and development (R&D) costs will continue to decrease in the future
due to the completion of much of the R&D of the Ethos FR®
product.
Net
Loss
The
Company incurred a net loss for the year ended December 31, 2006 of $6,490,113
as compared to a net loss of $1,051,637 for the year ended December 31,
2005. Even though revenues increased by 168% during 2006, as compared
to December 31, 2005, the net loss increased by approximately
$5,400,000. The main reason for the increase in net loss is due to
the issuance of stock associated with the merger, and for services provided
which totaled $7,580,990. No cash was transferred in this
transaction. The stock compensation is included in the consolidated
statement of operations under both selling expenses and general and
administrative expenses.
In
addition, during 2006, the Company purchased a new building for its corporate
headquarters at a cost of $5,300,000, as well as, an additional $1,235,000
spent
on building improvements and production equipment. The total value of
fixed assets at December 31, 2006 totaled $6,783,145. These purchases
were funded partially with interest-bearing notes valued at
$5,141,800. Due to this increase in fixed assets, depreciation
increased accordingly, and totaled $292,096 in 2006, versus $83,209 in
2005.
NON-OPERATING
INCOME AND EXPENSES
Non-operating
income, net of expenses, increased in the year ended December 31, 2006 versus
2005, due to the settlement of a substantial amount due to one of our vendors.
A
substantial order placed with one of our suppliers in previous years, and
carried on the books of Ethos Environmental, Inc., was canceled with the
vendor
in early 2006, and full credit given by the vendor. A liability is
considered extinguished for financial reporting purposes if either of the
following is met: The debtor pays the creditor and is relieved of its
obligation or the debtor is legally released from the primary obligation
under
the liability. In this case, the creditor relieved the Company
(debtor) for materials that were found to be faulty and invoiced and expensed
in
a prior year. Extinguishment of debt is shown as a gain or loss in
the period occurred and should only be classified as extraordinary if certain
criterion is met for being unusual and infrequent. This is not an extraordinary
event. The amount of $670,200 is presented correctly as other
income.
Interest
expense totaled $620,244 during the year ended December 31, 2006 as compared
to
$8,907 in 2005. The interest was primarily associated with the interest-only
loan for $4,750,000, related to the purchase of the new building. Other expenses
totaled and $58,931 in 2006 versus $0 in 2005.
Liquidity
and Capital Resources
On
December 31, 2006, we had working capital of $49,801 and stockholders’ equity of
$1,696,269 compared to a working capital deficit of $(405,752) and stockholders’
equity of $610,392 on December 31, 2005.
On
December 31, 2006, the Company had $64,867 in cash and $300,000 in restricted
cash, total assets of $7,519,474 and total liabilities of $5,823,205, compared
to $198,498 in cash and $300,000 in restricted cash, total assets of $1,446,212
and total liabilities of $793,395 on December 31, 2005.
The
Company purchased a building in 2006. The initial term of the
building loan was for a period of one year with a maturity date of January,
2007. To further increase cash flow and working capital, the Company
proposed new terms to the note holders. Effective, December, 2006 the
note was assigned to a new note holder with reduced interest of 14% compared
to
the original 17%. The decrease in the interest rate on the note adds
to the future of the Company’s overall liquidity and functional capital
resources.
Subsequent
to year end (May 23, 2007), an agreement to modify the promissory note was
negotiated. Terms of the modified note include an extension to March
31, 2009, and a reduction of interest to 12%. The conversion feature
was replaced with a three-year warrant to purchase up to 1.9 million shares
of
common stock at an exercise price of $2.50. The warrant expires March
31, 2010. This transaction is reflected in the 8K which was filed May 24,
2007.
During
2006, the company re-evaluated its reserve for doubtful accounts and reduced
its
reserve to $126,500 from the $576,800 level maintained in 2005. This
change is believed by management to more closely reflect the corporate risk
for
accounts receivable delinquent for more than 90 days.
In
January 2006, the Company received a credit from a supplier for $670,200
of
materials purchased and booked in 2005, and found to be faulty. This has
no
effect on cash; however, the corresponding accounts payable account was reduced
accordingly increasing working capital for the year.
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 twelve 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.
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 doubt and is
dependent upon obtaining additional financing and/or achieving a sustainable
profitable level of operations.
The
net
loss incurred at December 31, 2006 increased significantly due to issuance
of
stock for services in the amount of $7,580,990, as reflected within the cash
flow. This was a non-cash transaction that increased expenses and
increased equity. In addition, depreciation expense increased
significantly due to the purchase of a building in 2006. The Company
decreased its allowance for doubtful accounts based upon a more in depth
analysis of the client base and realization of receivables, and an overall
increase in collections reflected the decrease in receivables for 2006.
Inventory has increased each year, due to the need for keeping larger quantities
of inventory on hand as sales have increased over 100% from 2005 to
2006. Accounts payable and accrued expenses decreased due to more
efficient handling of vendor bills and quicker payment turnaround, as well
as,
the change due to the other income relayed above in non-operating income
and
expenses. A significant increase in both purchases of fixed assets
and notes payable are due to the building purchase and the note
thereon. In conclusion, cash decreased by approximately $134K for the
year ended December 31, 2006.
Management
of the Company has undertaken steps as part of a plan with the goal of
sustaining Company operations for the next twelve months and beyond. These
steps
include: (a) attempting to raise additional capital and/or other forms of
financing, some of which was consummated during the first quarter 2007 (please
see ‘Loan Facilities’, below); (b) controlling overhead and operating expenses;
and (c) continuing to increase the sales of its fuel reformulating product.
During the first quarter 2007 the company increased its presence in Africa,
Australia and Latin America and has made strong progress in the
Caribbean. There can be no assurance that any of these
efforts will be successful.
Loan
Facilities
On
February 7, 2007, the Company 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 March 29, 2007, the company has placed
property valued at $737,968 under this lease arrangement with Mazuma Capital
Corp.
The
contract for this sale and leaseback of equipment should be accounted for
as an
operating lease per SFAS 13 and 28, and will be shown as such in
2007. There is no bargain purchase option at the end of the lease,
and neither the 75% nor the 90% test has been met. The title may pass
back to the Company at the end of the lease; however, the lease may also
be
continued at the end of the 24 month period. The Company feels the appropriate
stance is to show this as an operating lease in 2007; thereby recording the
reduction of equipment, the corresponding loss, and treating the payments
as
lease expense.
The
Company is in negotiations to extend the term of the mortgage on the building,
and reduce the interest rate accordingly.
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.
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 collectibility is reasonably
assured.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Ethos
Environmental, Inc.
San
Diego, CA
We
have
audited the accompanying consolidated balance sheet of Ethos Environmental,
Inc., ("the Company") as of December 31, 2006, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the
years
ended December 31, 2006 and 2005. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether
the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged
to
perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Ethos Environmental,
Inc.,
as of December 31, 2006, and the results of its operations and its cash
flows for the years ended December 31, 2006 and 2005, in conformity with
accounting principles generally accepted in the United States.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company has experienced recurring
losses from operations. This raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans
regarding this matter are also described in Note 1. The
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
As
discussed in Note 2, the accompanying 2006 consolidated financial statements
have been restated.
/S/
PETERSON SULLIVAN PLLC
Seattle,
Washington
April 15,
2007, except for the effects of the restatement described in Note 2 for
which
the date is November 16, 2007
ETHOS
ENVIRONMENTAL, INC.
CONSOLIDATED
BALANCE SHEET
ASSETS
|
|
December
31,
2006
(Restated)
|
CURRENT
ASSETS:
|
|
|
Cash
|
|
$
64,867
|
Restricted
Cash
|
|
300,000
|
Accounts
Receivable, net of allowance for doubtful accounts
|
|
327,324
|
Inventory
|
|
410,915
|
Other
Current Assets
|
|
19,900
|
Total
Current Assets
|
|
$
1,123,006
|
|
|
|
Property
and Equipment, net
|
|
6,391,468
|
Other
Assets
|
|
5,000
|
|
|
|
Total
Assets
|
|
$
7,519,474
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
LIABILITIES:
CURRENT
LIABILITIES:
|
|
|
Accounts
Payable
|
|
$
503,898
|
Accrued
Expenses
|
|
101,488
|
Notes
Payable
|
|
5,167,819
|
Note
Payable Related Party
|
|
50,000
|
Total
Current Liabilities
|
|
5,823,205
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY:
|
|
|
Common
Stock, $.0001 par value; 100,000,000 shares
authorized; 23,107,687 issued and outstanding
|
|
2,311
|
Additional
Paid-in Capital
|
|
11,560,535
|
Accumulated
Deficit
|
|
(9,866,577)
|
Total
Shareholders’ Equity
|
|
1,696,269
|
Total
Liabilities and Shareholders’ Equity
|
|
$
7,519,474
|
See
notes
to consolidated financial statements.
ETHOS
ENVIRONMENTAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Years Ended December 31, 2006 and 2005
|
2006
(Restated)
|
|
2005
|
Revenue
|
$
4,768,013
|
|
$
1,780,825
|
Cost
of Sales (exclusive of depreciation shown below)
|
1,613,366
|
|
526,459
|
Gross
Profit
|
3,154,647
|
|
1,254,366
|
|
|
|
|
Operating
Expenses:
|
|
|
|
Depreciation
(other than in cost of sales above)
|
18,865
|
|
83,209
|
Selling
Expenses |
4,689,910 |
|
483,953 |
General
and Administrative |
4,987,623 |
|
1,737,951 |
Total
Operating Expenses |
9,696,398 |
|
2,305,113 |
Operating
Loss
|
(6,541,751)
|
|
(1,050,747)
|
|
|
|
|
Other
Income |
730,813 |
|
0 |
Interest
Expense |
(620,244) |
|
(890) |
Other
Expense |
(58,931) |
|
0 |
Net
Loss
|
$
(6,490,113)
|
|
$
(1,051,637)
|
|
|
|
|
Net
Loss per Common Share
|
$
(6.76)
|
|
$
(5.38)
|
Weighted
average shares used in per share calculation (basic and fully
diluted)
|
960,685
|
|
195,504
|
See
notes
to consolidated financial statements.
ETHOS
ENVIRONMENTAL, INC.
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
For
the Years Ended December 31, 2006 and 2005
|
|
|
Common
Stock
|
|
Additional
Paid-in Capital
|
|
|
|
|
|
|
Number
of Shares
|
|
Amount
|
|
|
Accumulated
Deficit
|
|
Total
|
Balance
at December 31, 2004
|
17,609,287
|
|
$
17,610
|
|
$
3,793,046
|
|
$(2,324,827)
|
|
$1,485,829
|
Common
stock issued for cash
|
5,108,190
|
|
5,108
|
|
171,092
|
|
|
|
176,200
|
Net
loss
|
|
|
|
|
|
|
(1,051,637)
|
|
(1,051,637)
|
Balance
at December 31, 2005
|
22,717,477
|
|
22,718
|
|
3,964,138
|
|
(3,376,464)
|
|
610,392
|
|
Common
stock repurchased
|
|
(5,000,000)
|
|
(5,000)
|
|
(45,000)
|
|
|
|
(50,000)
|
Capital
contribution
|
|
|
|
|
|
45,000
|
|
|
|
45,000
|
Adjust
shares to par (.0001) from (.001)
|
|
(17,717,477)
|
|
(17,718)
|
|
17,718
|
|
|
|
|
Common
Stock issued to effect reverse acquisition (Restated)
|
|
17,718,187
|
|
1,772
|
|
(1,772)
|
|
|
|
|
Shares
converted with merger (Restated)
|
|
479,500
|
|
48
|
|
(48)
|
|
|
|
|
Common
stock issued for services (See Note 1)
|
4,910,000
|
|
491
|
|
7,580,499
|
|
|
|
7,580,990
|
Net
Loss (Restated)
|
|
|
|
|
|
|
|
(6,490,113)
|
|
(6,490,113)
|
Balance
at December 31, 2006 (Restated)
|
|
23,107,687
|
|
$2,311
|
|
$11,560,535
|
|
($9,866,577)
|
|
$1,696,269
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to consolidated financial statements.
ETHOS
ENVIRONMENTAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2006 and 2005
|
2006 (Restated)
|
|
2005
|
Cash
Flows from Operating Activities
|
|
|
|
Net
Loss (Restated)
|
$
(6,490,113)
|
|
$
(1,051,637)
|
Adjustments
to Reconcile Net Loss to Net Cash provided by (used by) operating
activities
|
|
|
|
Common
Stock Issued for Expenses
|
7,580,990
|
|
0
|
Depreciation
|
292,096
|
|
83,209
|
Changes
in allowance for doubtful accounts
Changes
in Operating Assets and Liabilities
|
(450,297)
|
|
527,847
|
Assets:
|
|
|
|
Accounts
receivable
|
413,030
|
|
(451,030)
|
Inventory
|
(151,351)
|
|
(200,816)
|
Other
assets
|
67,209
|
|
(10,000)
|
Liabilities:
|
|
|
|
Accounts
payable
|
(246,658)
|
|
567,575
|
Accrued
expenses
|
10,929
|
|
90,559
|
|
|
|
|
Net
Cash Provided (Used) by Operating Activities
|
1,025,835
|
|
(444,293)
|
Cash
Flows from Investing Activities
|
|
|
|
Building
Deposit
|
0
|
|
(200,000)
|
Purchase
of Property and Equipment
|
(6,359,874)
|
|
(101,549)
|
Cash
Received from Acquisition
|
589
|
|
|
|
|
|
|
Net
Cash Used by Investing Activities
|
(6,359,285)
|
|
(301,549)
|
Cash
Flows from Financing Activities
|
|
|
|
Proceeds
from Note Payable
Proceeds
from Related Party Note Payable
|
5,167,819
50,000
|
|
11,003
0
|
Repayment
of Note Payable
Repurchase
of Common Stock
Proceeds
from Common Stock sales
|
(13,000)
(50,000)
0
|
|
0
0
176,200
|
Proceeds
from Capital Contribution
|
45,000
|
|
0
|
Net
Cash Provided by Financing Activities
|
5,199,819
|
|
187,203
|
Net
Change in Cash and Cash Equivalents
|
(133,631)
|
|
(558,639)
|
Cash
at Beginning of Period
|
498,498
|
|
1,057,137
|
Cash
at End of Period
|
$
364,867
|
|
$
498,498
|
Reconciliation
to Balance Sheet Presentation:
|
|
|
|
Cash
|
$
64,527
|
|
$
198,498
|
Restricted
Cash
|
300,000
|
|
300,000
|
|
$
364,527
|
|
$
498,498
|
See
notes
to consolidated financial statements.
NOTES
TO FINANCIAL STATEMENTS
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, primarily in the United States, Latin America, Europe, Africa,
Australia and Asia.
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 provides 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. Under the terms of the merger, 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, was issued
to
the Ethos stockholders. Ethos shareholders were able to exchange their shares
beginning on or after November 16, 2006, the record date set for the reverse
stock split.
The
transaction between the Company and Ethos Environmental, Inc. is accounted
for
as a purchase transaction; that is, the transaction is equivalent to the
issuance of shares by the Registrant for the net assets of Ethos
Environmental, Inc. The shares issued by the Registrant were valued at $0.25
per
share, a value determined by management’s estimate of the dilution effect
expected to occur from the issuance of such a large block of shares, i.e.
17,718,187 shares of common stock.
The
merger was intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code and no gain or loss will be
recognized by the Company as a result of the merger.
The
merger is accounted for under the purchase method of accounting as a reverse
acquisition in accordance with U.S. generally accepted accounting principles
for
accounting and financial reporting purposes. Under this method of accounting,
Ethos is treated as the “accounting acquirer” company for financial reporting
purposes. Accordingly the operations of the company are included in these
financial statements as of November 2, 2006. In accordance with guidance
applicable to these circumstances, the merger was considered to be a capital
transaction in substance. Accordingly, for accounting purposes, the merger
was
treated as the equivalent of Ethos issuing stock for the net monetary assets
of
the Company. The net monetary assets of the Company have been stated at their
fair value.
The
terms
of the acquisition included the Company's issuance of 17,718,187 shares of
common stock to the shareholders of Ethos. Upon the Company’s issuance of the
17,718,187 shares, Ethos cancelled its 17,717,477 shares of common stock
issued
and outstanding. Since this was accounted for as a reverse acquisition, the
Company is the legal acquirer while Ethos is the accounting acquirer.
Accordingly, the financial statements present the activities of Ethos while
the
stock issued and outstanding is that of the Company. The accounting effect
of
the reverse acquisition is reflected in the consolidated statements of
stockholders’ equity.
As
part
of the reverse acquisition, the prior activities of the Company were
discontinued. No discontinued operations are presented in these financial
statements since there were no expenses or revenues incurred after November
2,
2006 related to these operations.
The
Company agreed to acquire Ethos Environmental, Inc. because of its anticipated
future growth in a marketplace that is in strong demand for its product,
and it
was believed that the acquisition would benefit the existing shareholders
of
both companies.
Of
the
4,910,000 shares issued in 2006, 3,600,000 shares were for services directly
associated with the merger contract between Ethos Environmental, Inc. and
Victor
Industries, Inc. These shares were accounted for at the book value of
$0.25 and charged against general and administrative expenses (business
consulting) in accordance with Generally Accepted Accounting Principles
(GAAP). The remaining 1,310,000 shares were issued in compliance with
prior consulting agreements and valued at the market price at the date of
issue,
$5.10. The value of these shares was charged against selling expenses
and general and administrative expenses. There was no cash involved in this
transaction.
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 doubt and
is dependent upon obtaining additional financing and/or achieving a sustainable
profitable level of operations. The net loss incurred at December 31, 2006
is
mainly due to non-cash transactions for issuance of stock for
services.
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.
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.
Cash
Cash
includes a payroll account and an operating checking account held at a financial
institution. The Company's cash balances have exceeded federally insured
limits
from time to time during the year ended December 31, 2006.
Restricted
cash consists of a deposit made in August 2005 that is being held in a bank
in
Beijing, China. This deposit is required by the government of China and must
be
held in the account a minimum of eighteen months in order for the Company
to
conduct business in China.
Accounts
Receivable
Accounts
receivable are stated at their principal balances, do not bear interest and
are
generally unsecured. Management considers all balances over 30 days old to
be
past due. However, if credit is extended management conducts a periodic review
of the collectibility of its accounts receivable. If an account is determined
to
be uncollectible based on historical experience and the current economic
climate, an allowance is established and the account is written off against
the
allowance. The Company recorded an allowance of $126,485 and $576,782 at
December 31, 2006 and 2005, respectively. At December 31, 2006, 62% of
accounts receivable is due from one customer.
Inventory
Inventory
consists primarily of the Company's fuel reformulating product and is stated
at
the lower of cost or market. In production, the company accounts for its
inventory on a first-in-first-out basis (FIFO).
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the anticipated lease term
or the
estimated useful life. The Company's policy is to capitalize items with a
cost
greater than $4,000 and an estimated useful life greater than one year. The
Company reviews all property and equipment for impairment at least annually.
Typically, the company depreciates its assets over a 5 year period except
for
the building which is depreciated on a 25 year basis.
Notes
Payable
On
December 26, 2006, the company entered into a Demand Loan Agreement with
a third
party for $500,000 with an annual interest rate of 12%. At December 31, 2006,
$417,819 had been funded. The remainder of the Demand Note was funded on
January
2, 2007.
On
January 26, 2006 the Company secured a loan for its building in the amount
of
$4,750,000 with a convertible Promissory Note. The Note was convertible at
$2.50
per common share up to 1.9 million shares. The Note carried an annual
interest rate of 17% with interest-only payments and a term of
one year. On December 6, 2006, the Note was assigned to another third party,
and
interest was renegotiated at 14%.
Prior
to
maturity, the Company approached the current note holders and requested that
they extend the maturity of the Note to March 31, 2009. As part of its offer
to
induce the note holders to extend the maturity date, the Company offered
to
rescind the conversion feature and issue 1.9 million detachable
warrants. The Company is still currently negotiating the terms of a
mutually acceptable extension.
Note
Payable - Related Party
During
2006, there was one Loan Payable to the President of the Company in the amount
of $50,000. The loan has no stated repayment terms, is due on demand, is
unsecured and does not bear interest. The Note was issued for a deposit to
the
Company account for short-term working capital needs.
Fair
Value of Financial Instruments
The
carrying value of the Company's accounts receivable, accounts payable, accrued
expenses, note payable, note payable related party and building loan approximate
their estimated fair value due to the relatively short maturities of those
instruments.
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.
Two
customers accounted for 88% of the Company’s revenues for the fiscal year ended
December 31, 2006. One Mexican customer accounted for 40% and one U.S. customer
accounted for 48%.
There
was
one U.S. customer that accounted for 40% of 2005 sales and one Hong Kong
customer that accounted for 30% of 2005 sales.
Stock
Based Compensation
Prior
to
January 1, 2006, the Company accounted for stock-based awards under the
intrinsic value method, which followed the recognition and measurement
principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”,
and related Interpretations. The intrinsic value method of accounting resulted
in compensation expense for stock options to the extent that the exercise
prices
were set below the fair market price of the Company’s stock at the date of
grant.
As
of
January 1, 2006, the Company adopted SFAS No. 123(R) “share-based payment” using
the modified prospective method, 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”.
Since
the
Company did not issue stock options to employees during the year ended December
31, 2006 or 2005, there is no effect on net loss or earnings per share had
the
Company applied the fair value recognition provisions of SFAS No. 123(R)
to
stock-based employee compensation. When the Company issues shares of common
stock to employees and others, the shares of common stock are valued based
on
the market price at the date the shares of common stock are approved for
issuance.
Loss
Per Share
Basic
loss per share is computed by dividing the net loss available to common
shareholders by the weighted average number of common shares outstanding
in the
period. Diluted loss per share takes into consideration common shares
outstanding (computed under basic earnings per share) and potentially dilutive
common shares. There were no dilutive securities outstanding at December
31,
2006 or 2005. The convertible feature of the Notes Payable is not included
in
the calculation of diluted earnings per share since the effect is anti-dilutive
due to the Company’s net loss.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising expense for the years ended
December 31, 2006 and 2005 was $132,955 and $231,380, respectively and are
included in selling expenses in the consolidated financial
statements.
Shipping
and Handling
Expenses
related to shipping and handling is expensed as incurred and is included
in
"cost of sales" in the statement of operations.
Research
and Development
Research
and development costs are expensed to operations when incurred and are included
in general and administrative expenses. The amounts expensed for the
years ended December 31, 2006 and 2005 amounted to $112,051 and $132,404,
respectively.
Concentrations
The
Company uses five vendors for most of its fuel reformulating products although
there are other companies that can provide equivalent products. These vendors
accounted for 90% of product purchases in 2006. During 2005, the company
primarily used one vendor for most of its fuel reformulating products. That
vendor accounted for 90% of products purchased in 2005.
Income
Taxes
The
Company accounts for its income taxes under the provisions of Statements
of
Financial Accounting Standards No. 109 (SFAS No. 109). Income taxes are provided
for the tax effects of transactions reported in the financial statements
and
consist of taxes currently due plus deferred taxes related primarily to
differences between the bases of certain assets and liabilities for financial
and tax reporting. Deferred taxes represent the future tax return consequences
of those differences, which will either be taxable or deductible when the
assets
and liabilities are recovered or settled. No provision for deferred taxes
is
reflected in the financial statements as the valuation allowance offsets
any
deferred tax benefit. See Note 4.
Foreign
Operations
Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the local functional currency (the U.S.
Dollar) are included in "general and administrative" expenses in the statements
of operations, which amounts were not material for the years ended
December 31, 2006 and 2005. Currently, the company requires all sales,
receipts, purchases and disbursements to be calculated in U.S.
Dollars.
Reclassification
Certain
items from the 2005 financial statements have been reclassified to conform
to
the 2006 presentation.
Recent
Accounting Pronouncements
During
October 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). This statement does not require any new fair value measurements
but provides guidance on how to measure fair value and clarifies the definition
of fair value under accounting principles generally accepted in the United
States of America. The statement also requires new disclosures about the
extent
to which fair value measurements in financial statements are based on quoted
market prices, market-corroborated inputs, or unobservable inputs that are
based
on management’s judgments and estimates. The statement is effective for fiscal
years beginning after November 15, 2007. The statement will be applied
prospectively by the Company for any fair value measurements that arise after
the date of adoption.
The
FASB
has also issued SFAS No. 158, “Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans—an amendment of FASB Statements
No. 87, 88, 106, and 132(R)”. As the Company has no plans covered by this
standard, it will have no effect on the consolidated financial
statements.
The
SEC
has issued Staff Accounting Bulletin No. 108, “Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements” (“SAB 108”), in September 2006. SAB 108 requires entities
to quantify misstatements based on their impact on each of their financial
statements and related disclosures. SAB 108 is effective as of December 31,
2006. The adoption of this standard is not expected have an impact on the
Company’s consolidated results of operations, cash flows or financial
position.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB
Statement No. 115.” This statement permits entities to choose to measure
eligible items at fair value at specified election dates. The statement is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007 although early adoption is permitted provided that an entity
also adopts SFAS 157. The Company has not determined the impact this standard
will have on its consolidated operating results or financial position upon
adoption.
Note
2. Restatement of Previously Issued Financial Statements
The
Company has restated its consolidated balance sheet as of December 31, 2006,
and
the related consolidated statements of operations, stockholders’ equity, and
cash flows for the years ended December 31, 2006. The Company has
reassessed certain accounting policies and concluded certain items had been
accounted for incorrectly in the past and has restated them
accordingly.
The
restated items are as follows:
·
|
The
Company corrected the accounting for the reverse acquisition of
Victor
Industries, Inc. (former name of Registrant). Since Victor
Industries, Inc. was determined to meet the definition of a public
shell,
the transaction should be accounted for as a
recapitalization. Accordingly, no goodwill or other intangible
assets are recognized in conjunction with this
transaction. Therefore, there was a reduction of goodwill,
customer list, accumulated amortization, accumulated depreciation
and
additional paid in capital resulting from this correction, in the
amount
of $2,411,103, $2,000,726, $66,690, 11,160 and $4,400,669, respectively.
The net effect on the statement of operation resulted in a reduction
of
the net loss of $66,690 for the amortization which had previously
been
recorded on the intangibles.
|
·
|
The
Company corrected the classification of depreciation between cost
of sales
and general and administrative
expenses.
|
The
following table presents the effects of the restatement adjustments on net
loss
for the periods ended December 31, 2006:
Net
loss, as previously
reported |
$(6,556,803)
|
Restatement
adjustments: |
|
Amortization
of intangibles
|
66,690
|
|
|
Net
loss, as restated |
$(6,490,113)
|
The
following table presents the effects of the restatement adjustments on the
Company’s previously reported financial position and results of operations as of
and for the year ended December 31, 2006:
|
As
Previously
Reported
|
|
As
Restated
|
Revenue |
$
4,768,013
|
|
$
4,768,013
|
Cost
of sales |
1,340,135
|
|
1,613,366
|
Operating
expenses |
10,036,319
|
|
9,696,398
|
Other
income/expense |
51,638
|
|
51,638
|
Net
loss
|
$
(6,556,803)
|
|
$
(6,490,113)
|
Net
Loss per Common Share
|
$ (6.83)
|
|
$
(6.76)
|
Total
current assets |
$
1,123,006
|
|
$
1,123,006
|
Property
and intangibles, net |
10,725,447
|
|
6,391,568
|
Other
assets |
5,000
|
|
5,000
|
Total
assets |
$
11,853,453
|
|
$
7,519,474
|
Total
current liabilities |
$
5,823,205
|
|
$
5,823,205
|
Stockholders’
equity |
6,030,248
|
|
1,696,269
|
Total
liabilities and stockholders’ equity |
$
11,853,453
|
|
$
7,519,474
|
|
|
|
|
Note
3. Property and Equipment
The
Company’s property and equipment consisted of the following at
December 31:
|
|
2006
|
|
|
2005
|
|
Building
|
|
$ |
5,845,417
|
|
|
$ |
0
|
|
Equipment
|
|
|
886,353
|
|
|
|
167,591
|
|
Furniture
and fixtures
|
|
|
14,727
|
|
|
|
14,727
|
|
Computers
|
|
|
36,648
|
|
|
|
35,790
|
|
|
|
|
6,783,145
|
|
|
|
218,108
|
|
Less:
accumulated depreciation
|
|
|
(391,677) |
|
|
|
(63,153) |
|
|
|
$ |
6,391,468
|
|
|
$ |
154,955
|
|
Note
4. Income Taxes
The
Company is liable for taxes in the United States. As of December 31, 2006,
the Company does not expect to have any income for tax purposes and therefore,
no tax liability or expense has been recorded in these financial
statements.
The
Company estimates that it has tax losses of approximately $9,900,000 (as
restated) which may be available to reduce future taxable
income. Any tax loss carry forwards available expire between the years 2020
and
2026.
The
deferred tax asset associated with the estimated tax loss carry forward is
approximately $3,366,000 (as restated). The Company has provided for a valuation
allowance as an offset against the deferred tax asset as it is unknown at
this
time if the asset will be utilized. The valuation allowance increased
by approximately $2,210,000 and $358,000 for the years ended 2006 and 2005,
respectively.
Note
5. Operating Leases
The
Company leases an office building under a lease agreement that expires in
July
2012. The rent expense for the year ended December 31, 2006 and 2005, totaled
to
$66,844 and $48,634, respectively.
The
Company’s future annual minimum lease payments are as follows for years ending
December 31:
2007
|
|
$ |
52,657
|
|
2008
|
|
|
54,236
|
|
2009
|
|
|
55,863
|
|
2010
|
|
|
57,539
|
|
2011
|
|
|
59,265
|
|
Thereafter
|
|
|
35,170
|
|
Total
|
|
$ |
314,730
|
|
Note
6. Stock Option Plan
In
2006,
the Company adopted the 2006 Stock Incentive Plan which reserves a total
of
3,500,000 common shares to provide the Company with a means of compensating
selected key employees (including officers), directors and consultants. No
options were granted in 2006 under this Plan.
Note
7. Subsequent Events
On
February 7, 2007, the Company entered into an equipment lease agreement with
Mazuma Capital Corp. wherein the Company agreed to a 24-month sale and
lease-back 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 March 29, 2007, the Company
has placed property valued at $737,968 under this lease arrangement with
Mazuma
Capital Corp.
Between
January 1, 2007 and April 14, 2007, the Company issued 574,000 shares of
our
common stock for services rendered by key consultants, officers, and
directors.
On
March
9, 2007, the Company closed on a private placement of 50,000 shares of common
stock for a total of $50,000.
On
April
4, 2007, the Company cancelled and returned to treasury 50,000 shares of
our
common stock.
Item
8. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
The
Registrant’s Board of Directors approved the engagement of Peterson Sullivan,
PLLC (“PS”) as the Registrant’s independent registered public accounting firm to
audit the Company’s financial statements for the year ended December 31,
2006.
The
report issued by PS in connection with the audit for the year ended December
31,
2006 did not contain an adverse opinion or a disclaimer of opinion, nor was
such
report qualified or modified as to audit scope or accounting
principles.
(a)
Evaluation
of Disclosure Controls and Procedures:
Our
President and Chief Financial Officer, after evaluating the effectiveness
of our
“disclosure controls and procedures” (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)), have concluded that, as of
December 31, 2006 our disclosure controls and procedures contained
significant internal control weaknesses that, in the aggregate, represent
material weaknesses.
(b) Management’s
Annual Report on Internal Control Over Financial Reporting:
In
connection with the preparation of our financial statements for the year
ended
December 31, 2006, certain significant internal control deficiencies became
evident to management that, in the aggregate, represent material weaknesses,
including,
(i)
|
Lack
of a control environment that sufficiently promotes effective internal
control over financial reporting throughout the management
structure;
|
(ii)
|
Lack
of independent directors for our audit
committee;
|
(iii)
|
Lack
of training in public company reporting requirements;
|
(iv)
|
Lack
of control processes for recording and approving journal
entries;
|
(v)
|
Lack
of controls over the sales transaction process;
|
(vi)
|
Lack
of controls over invoice posting
process;
|
(vii)
|
Insufficient
policies and procedures over various financial statement
areas;
|
(viii)
|
Insufficient
documentations for accounting or business
transactions;
|
(ix)
|
Lack
of policies and procedures over records retention;
|
(x)
|
Lack
of an audit committee financial
expert;
|
(xi)
|
Insufficient
personnel in our finance/accounting functions;
|
(xii)
|
Insufficient
segregation of duties; and
|
(xiii)
|
Insufficient
corporate governance policies.
|
As
part
of the communications by Peterson Sullivan, PLLC, or Peterson Sullivan, with
our
management with respect to Peterson Sullivan’s audit procedures for fiscal 2006,
Peterson Sullivan informed management that these deficiencies constituted
material weaknesses, as defined by Auditing Standard No. 2, “An Audit of
Internal Control Over Financial Reporting Performed in Conjunction with an
Audit
of Financial Statements,” established by the Public Company Accounting Oversight
Board, or PCAOB.
In
accordance with Section 404 of the Sarbanes-Oxley Act of 2002, we intend to
take appropriate and reasonable steps to make the necessary improvements
to
remediate these deficiencies during 2007. We intend to consider the results
of
our remediation efforts and related testing as part of our year-end 2007
assessment of the effectiveness of our internal control over financial
reporting.
(c) Changes
in Internal Control Over Financial Reporting:
There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2006 that have materially affected, or are reasonably
likely to materially affect our internal controls over financial
reporting.
None.
PART
III
Item 9.
Directors, Executive Officers, Promoters, Control
Persons and Corporate Governance; Compliance With Section 16(a) of the
Exchange Act
The
following sets forth the names and ages, as of March 31, 2007, of the
members of the Board of Directors, their respective positions and offices
with
the Company, the period during which each has served as a director of the
Company and their principal occupations or employment during the past five
years.
Directors
Name
|
|
Age
|
|
Position
|
|
Director/Officer
Since
|
Enrique
de Vilmorin
|
|
55
|
|
Chief
Executive Officer, President and Director
|
|
2006
|
Jose
Manuel Escobedo
|
|
66
|
|
Director
|
|
2006
|
Luis
Willars
|
|
65
|
|
Director
|
|
2006
|
All
directors serve until their successors have been duly elected and qualified,
unless they earlier resign.
Enrique
de Vilmorin
Since
2000, Mr. de Vilmorin has served and President, CEO and Director of Ethos
Environmental, Inc. Mr. de Vilmorin has more than 25 years experience
in multi-national corporations. His areas of expertise include finance,
management and manufacturing. His hands-on approach makes him as comfortable
with clients as he is in the warehouse or in the boardroom. His background
includes work with Intel, IBM, First Union Bank, and the World Bank Group
and a
Masters Degree in Economics from the University of Southern
California.
Jose
Manuel Escobedo
Since
2000, Mr. Escobedo has served as Treasurer and Director of Ethos Environmental,
Inc. Mr. Escobedo brings to the Company more than 30 years of
entrepreneurial experience and an MBA from IPADE. Mr. Escobedo has owned
and
managed businesses within the oil and fuels industry. He is a director of
the
Company.
Luis
Willars
Since
2000, Mr. Willars has served as Secretary and Director of Ethos Environmental,
Inc. Mr. Willars, an Economist with more than 30 years experience in
government and private sector corporations, adds a strong knowledge in corporate
finance and administration. Mr. Willars holds a Masters Degree in
Economics from IETSM. He is responsible for Ethos Environmental’s
worldwide Strategic Planning and Finance.
Executive
officers of the company are as follows:
Enrique
de Vilmorin - President and Chief Executive Officer (see
above).
Thomas
W. Maher – Chief Financial Officer
Mr.
Maher
brings to the company over 20 years of senior financial management experience.
Over this period, he has served as Chief Financial Officer for both privately
held and publicly reporting corporations. Over the past 10 years he has served
as a Chief Financial Officer of a publicly traded international sign
manufacturing company, Luminart Corp., and as a Chief Financial Officer of
a
commercial construction general contracting firm RC Vannatta Inc. Mr. Maher
has
a MBA degree in Finance and Economics from the University of
Detroit.
Involvement
in Certain Legal Proceedings
We
are
not currently involved in any legal proceedings.
During
the last five (5) years none of our directors or officers has:
|
(1)
|
any
bankruptcy petition filed by or against any business of which such
person
was a general partner or executive officer either at the time of
the
bankruptcy or within two years prior to that
time;
|
|
(2) |
been
convicted in a criminal proceeding or subject to a pending criminal
proceeding; |
|
(3) |
been
subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting
his
involvement in any type of business, securities or banking activities;
or |
|
(4) |
been
found by a court of competent jurisdiction in a civil action, the
Commission or the Commodity Futures Trading Commission to have violated
a
federal or state securities or commodities law, and the judgment
has not
been reversed, suspended, or vacated. |
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16 of the Securities Exchange Act of 1934 requires the Company’s directors and
certain executive officers and certain other beneficial owners of the Company’s
common stock to periodically file notices of changes in beneficial ownership
of
common stock with the Securities and Exchange Commission. To the best of
the Company’s knowledge, based solely on copies of such reports received by it,
and the written representations of its officers and directors, the Company
believes that for 2006 all required filings were timely filed by each of
its
directors and executive officers.
Code
of Ethics
We
have
adopted a Code of Ethics and Business Conduct for Officers, Directors and
Employees that applies to all of our officers, directors and
employees.
Summary
Compensation Table
The
following table sets forth the overall compensation earned over each of the
past
two fiscal years ending December 31, 2006 by (1) each person who served as
the
principal executive officer of the Company during fiscal year 2006; (2) the
Company’s most highly compensated executive officers as of December 31, 2006
with compensation during fiscal year 2006 of $100,000 or more; and (3) those
individuals, if any, who would have otherwise been in included in section
(2)
above but for the fact that they were not serving as an executive of the
Company
as of December 31, 2006.
The
following executive compensation was paid during 2005 or 2006, if
any.
Salary
Compensation
|
|
|
Name and
Principal
Position
|
|
Fiscal
Year
|
|
Salary ($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Options
Awards
($)(1)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Nonqualified
Deferred
Compensation
Earnings ($)
|
|
All Other
Compensation
Compensation
($) (2)(3)
|
|
Total ($)
|
|
Enrique
de Vilmorin –
CEO
& President
|
|
2006
|
|
$
|
344,325
|
|
$
|
—
|
|
875,000
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
$
|
1,219,325
|
|
|
|
2005
|
|
$
|
--
|
|
$
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
$
|
|
|
Thomas
W. Maher –
CFO
|
|
2006
|
|
$
|
--
|
|
|
--
|
|
--
|
|
|
--
|
|
--
|
|
--
|
|
--
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no stock options granted or exercised by the named executive directors
in
2006.
GRANTS
OF PLAN BASED AWARDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under
Non-Equity
Incentive Plan Awards
|
|
Estimated
Payouts Under
Equity
Incentive Plan Awards
|
|
|
|
|
|
|
|
|
|
Name
|
|
Grant
Date
|
|
Threshold
($)
|
|
Target
($)
|
|
Maximum
($)
|
|
Threshold
(#)
|
|
Target
(#)
|
|
Maximum
(#)
|
|
All
Other Stock Awards; Number of Shares of Stock or Units
(#)
|
|
All
Other Option Awards; Number of Securities Underlying Options
(#)
|
|
Exercise
or Base Price of Option Awards
($/Sh)
|
|
Grant
Date Fair Value of Stock and Option Awards
|
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
--
|
-
|
-
|
-
|
-
|
-
|
-
|
|
There
were no other stock based awards under the Stock Incentive Plan in 2006 to
the
Named Executive Officers.
Executive
Officer Outstanding Equity Awards at Fiscal Year-End
The
following table provides certain information concerning any common share
purchase options, stock awards or equity incentive plan awards held by each
of
our named executive officers that were outstanding as of December 31,
2006.
Option Awards
|
|
Stock Awards
|
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options(#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options(#)
Unexercisable
|
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
|
Option
Exercise
Price ($)
|
|
Option
Expiration
Date
|
|
Number of
Shares or
Units of
Stock That
Have Not
Vested (#)
|
|
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
|
|
Equity
Incentive Plan
Awards:
Market or
Payout Value of
Unearned
Shares, Units or
Other Rights
That Have Not
Vested
|
|
|
Enrique
de Vilmorin
CEO
& President
|
|
|
—
|
|
|
—
|
|
|
—
|
|
$
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Thomas
Maher
CFO
|
|
|
—
|
|
|
—
|
|
|
—
|
|
$
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPTION
EXERCISES AND STOCK VESTED
There
were no options exercised and there was no unvested stock outstanding during
the
year ended December 31, 2006.
PENSION
BENEFITS AND NONQUALIFIED DEFERRED COMPENSATION
The
Company does not maintain any qualified retirement plans or non-nonqualified
deferred compensation plans for its employees or directors.
EMPLOYMENT
AGREEMENTS
On
December 4, 2006, Ethos Environmental, Inc. (the “Company”) entered into an
employment agreement (the “Maher Agreement”) with Thomas W. Maher defining the
terms of his employment with the Company as Chief Financial Officer, effective
December 1, 2006 (the “Effective Date”). The initial term of Mr. Maher’s
employment under the Maher Agreement is through December 1, 2007 (unless
earlier
terminated in accordance with the terms of the Maher Agreement), with automatic
one-year renewals for each of the successive two years following the Effective
Date.
The
Company has no other written employment agreements with any of its named
executive officers or directors.
DIRECTOR
COMPENSATION
Stock
Options
The
Company does not currently have a fixed stock option plan that provides for
the
issuance of incentive and non-qualified stock options to officers, directors,
employees and non-employees.
Cash
Compensation
Directors
receive no cash compensation for services rendered.
Item
11.
Security
Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters
The
following table sets forth certain information regarding beneficial ownership
of
common stock as of December 31, 2006, by:
·
|
Each
person known to us to own beneficially more than 5%, in the aggregate,
of
the outstanding shares of our common
stock;
|
·
|
Each
of our chief executive officer and our other two most highly compensated
executive officers; and
|
·
|
All
executive officers and directors as a
group.
|
The
number of shares beneficially owned and the percent of shares outstanding
are
based on 23,107,669 shares outstanding as of December 31, 2006. Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities.
|
|
|
|
|
|
|
|
|
Shares of Common Stock Number
|
|
|
Beneficially Owned Percent
|
|
Enrique
de Vilmorin
|
|
10,500,000
|
|
|
45.44
|
%
|
Jose
Manuel Escobedo
|
|
250,000
|
|
|
1.08
|
%
|
|
|
|
|
|
|
%
|
All such directors
|
|
|
|
|
|
|
and
executive
|
|
|
|
|
|
|
Officers as a group
|
|
10,750,000
|
|
|
46.52
|
%
|
Total
|
|
10,750,000
|
|
|
46.52
|
%
|
Changes
in Control
We
know
of no plans or arrangements that will result in a change of control at our
company.
Item
12. Certain Relationships and Related
Transactions
During
2006, there was one Loan Payable to the President of the Company in the amount
of $50,000. The loan has no stated repayment terms, is due on demand,
is unsecured and does not bear interest.
EXHIBIT
NUMBER
|
DESCRIPTION
|
LOCATION
|
3.1
- 3.2
|
Articles
of Incorporation and Bylaws
|
Incorporated
by reference as Exhibits to the Form 8-K filed on December 12,
2004 as
amended on February 3, 2005.
|
10.1
|
Agreement
and Plan of Merger by and between the Company and Ethos Environmental,
Inc.
|
Incorporated
by reference as an Exhibit to the Form 8-K filed on April 24,
2006.
|
10.2
|
2006
Definitive Proxy Statement.
|
As
filed with the Commission on October 4, 2006.
|
10.3
|
Sale/Leaseback
Agreement with Mazuma Capital Corp.
|
Filed
herewith.
|
10.4
|
Amendment
No.1 to Agreement with Mazuma Capital Corp.
|
Filed
herewith.
|
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
|
Item
14. Principal Accounting Fees and
Services
During
the year ended December 31, 2006, we engaged Peterson Sullivan PLLC as our
independent auditor. For the year ended December 31, 2006, we incurred
fees to Peterson Sullivan PLLC as discussed below.
·
|
Audit
Fees: Fees for audit and quarterly review services totaled
$81,868 and $20,076 for 2006 and 2005, respectively, including
fees
associated with consents and the review of this
report.
|
·
|
Tax
Fees: We did not engage PETERSON SULLIVAN PLLC, for any tax
related services during 2006 or
2005.
|
·
|
All
Other Fees: Fees for other services not included in the above
were $0in both 2006 and 2005.
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 19th day of
November, 2007.
|
Ethos
Environmental, Inc.
a
Nevada Corporation
|
|
|
|
|
|
/s/
Enrique de Vilmorin
|
|
|
Enrique
de Vilmorin
Chief
Executive Officer
|
Pursuant
to the requirements of the
Securities Exchange Act of 1934, the following persons on behalf of the
Registrant and in the capacities and on the dates indicated have signed this
report below.
Signature
|
|
Position
|
|
Date
|
/s/
Enrique de Vilmorin
|
|
Chief
Executive Officer and Director
|
|
November
19, 2007
|
Enrique
de Vilmorin
|
|
|
|
|
|
|
|
|
|
/s/
Jose Manuel Escobedo
|
|
Director
|
|
November
19, 2007
|
Jose
Manuel Escobedo
|
|
|
|
|
|
|
|
|
|
/s/
Luis Willars
|
|
Director
|
|
November
19, 2007
|
Luis
Willars
|
|
|
|
|
|
|
|
|
|
/s/
Thomas W. Maher
|
|
Principal
Accounting Officer
|
|
November
19, 2007 |
Thomas
W. Maher
|
|
Chief
Financial Officer
|
|
|
|
|
|
|
|