UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-KSB
o ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Fiscal Year Ended December 31, 2006
Commission
File Number: 000-26673
ETHOS
ENVIRONMENTAL, INC.
(Name
of
Small Business Issuer in Its Charter)
Nevada
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88-0467241
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(State
or Other Jurisdiction
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IRS
Employer
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of
Incorporation or Organization)
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Identification
Number
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6800
Gateway Park
San
Diego, CA 92154
(619)
575-6800
(Address
and Telephone Number of Principal Executive Offices)
Securities
registered under Section 12(b) of the Exchange Act:
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Title
of each class registered:
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Name
of each exchange on which registered:
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None
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Over-the-Counter
Bulletin Board
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Securities
registered under Section 12(g) of the Exchange Act:
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Common
Stock, par value $0.001
(Title
of class)
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Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities
Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. ¨
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant is a shell company as defined in Rule
12b-2
of the Exchange Act. Yes o No
x
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes o No
x
Revenues
for year ended December 31, 2006: $4,768,013.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was approximately $85,254,407 as of April 16, 2007 based upon
the
average bid and asked price of the registrant’s common stock on the Over the
Counter Bulletin Board.
Number
of
shares of the registrant’s common stock outstanding as of April 16, 2007 was:
23,681,687.
Transitional
Small Business Disclosure Format: Yes o No
x
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s definitive proxy statement for its 2006 Annual Meeting of
Shareholders are incorporated by reference in Part I and III of
this
Form 10-KSB.
Ethos
Environmental, Inc.
ANNUAL
REPORT ON FORM 10-KSB
FOR
THE YEAR ENDED DECEMBER 31, 2006
PART
I
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Description
of Business
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The
Company
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Products
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Trademarks
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Significant
Events
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Properties
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11
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Legal
Proceedings
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11
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Submission
of Matters to a Vote of Security Holders
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11
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PART
II
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Market
for Common Equity and Related Stockholder Matters
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12
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Management’s
Discussion and Analysis or Plan of Operation
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13
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Financial
Statements
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21-30
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
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31
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Controls
and Procedures
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31
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Other
Information
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32
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PART
III
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Directors,
Executive Officers and Corporate Governance
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32
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Executive
Compensation
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33
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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35
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Certain
Relationships and Related Transactions
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36
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Exhibits
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36
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Principal
Accountant Fees and Services
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37
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FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These forward-looking statements are not
historical facts but rather are based on current expectations, estimates and
projections. We use words such as “anticipate,” “expect,” “intend,” “plan,”
“believe,” “foresee,” “estimate” and variations of these words and similar
expressions to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and other factors, some of which are beyond our control, are difficult to
predict and could cause actual results to differ materially from those expressed
or forecasted. These risks and uncertainties include the following:
·
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The
availability and adequacy of our cash flow to meet our
requirements;
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Economic,
competitive, demographic, business and other conditions in our local
and
regional markets;
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Changes
or developments in laws, regulations or taxes in our
industry;
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·
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Actions
taken or omitted to be taken by third parties including our suppliers
and
competitors, as well as legislative, regulatory, judicial and other
governmental authorities;
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Competition
in our industry;
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·
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The
loss of or failure to obtain any license or permit necessary or desirable
in the operation of our business;
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Changes
in our business strategy, capital improvements or development
plans;
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The
availability of additional capital to support capital improvements
and
development; and
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Other
risks identified in this report and in our other filings with the
Securities and Exchange Commission or the
SEC.
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You
should read this report completely and with the understanding that actual future
results may be materially different from what we expect. The forward looking
statements included in this report are made as of the date of this report and
should be evaluated with consideration of any changes occurring after the date
of this Report. We will not update forward-looking statements even though our
situation may change in the future and we assume no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Use
of Term
Except
as
otherwise indicated by the context, references in this report to “Company,”
“ETEV,” “we,” “us” and “our” are references to the pre-merger business of Victor
Industries, Inc. and post-merger business of Ethos Environmental, Inc. All
references to “USD” or “$” refer to the legal currency of the United States of
America.
PART
I
The
Company
Ethos
Environmental manufactures and distributes an array of fuel reformulating
products under the name Ethos
FR®,
Ethos
Fuel Reformulators. Ethos
FR® is
a
unique line of fuel reformulators based on a blend of high quality, non-toxic,
non-petroleum based esters. When added to any fuel, these specially designed
esters add cleaning and lubricating properties. They make engines run more
efficiently-smoother, cooler and cleaner. Ethos
FR®
improves
the formula of commonly used fuels such as gasoline, diesel, methanol, ethanol,
CNG or bio-diesel. Only the elements of carbon, hydrogen and oxygen are used
in
Ethos
FR®
products
and are 99.9% clean upon ignition, ashless upon combustion and free of
carcinogenic compounds.
Ethos
seeks both a cleaner environment and economic success. As the name Ethos
suggests, we are committed to the highest ethical standards - in the product
that we sell, in the relationship with our clients, and in the conduct of our
business. The Company’s approach is to sell Ethos
FR®“one
gallon at a time”, earning the trust and loyalty of each customer by providing
products that perform as promised and make a positive difference in the
world.
Background
Ethos
Environmental, Inc. was originally incorporated under the laws of the State
of
Idaho on January 19, 1926 under the name of Omo Mining and Leasing Corporation.
The Company was renamed Omo Mines Corporation on January 19, 1929. The name
was
changed again on November 14, 1936 to Kaslo Mines Corporation and finally Victor
Industries, Inc. on December 24, 1977.
As
Victor
Industries, Inc., the Company developed, manufactured, and marketed products
related to the use of the mineral known as zeolite. Zeolites have the unique
distinction of being nature's only negatively charged mineral. Zeolites are
useful for metal and toxic chemical absorbents, water softeners, gas absorbents,
radiation absorbents and soil and fertilizer amendments.
On
November 2, 2006, the Company completed a reverse acquisition transaction of
Ethos Environmental, Inc., as described herein.
Our
Reverse Acquisition of Ethos
On
November 2, 2006, as part of a two-step reverse merger, the Company merged
with
and into Victor Nevada, Inc. a newly incorporated entity for the purpose of
redomiciling under the laws of the State of Nevada. Concurrently therewith,
we
completed the merger transaction with Ethos Environmental, Inc., a privately
held Nevada corporation “Ethos”). The Company was the surviving entity. To more
adequately reflect the new direction of the Company the Company changed its
name
to Ethos Environmental, Inc. and adopted the business plan of Ethos.
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.
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 Registrant 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 net value recorded equals management’s
estimate of the value of the acquired assets.
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” for financial reporting purposes.
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.
In
connection with the merger, Lana Pope and Dave Boulter voluntarily resigned
from
the board of directors of the Company on November 3, 2006.
Following
such resignations, as a result of the merger, three persons became the Company’s
board of directors: Enrique de Vilmorin, President, Chief Executive Officer,
and
Director, Jose Manuel Escobedo, Director and Secretary, and Luis Willars,
Director and Treasurer.
A
summary
of the merger follows:
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The
Company was the surviving legal
corporation,
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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,
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The
shareholders of the Company received pro rata for their shares of
common
stock of Ethos, 17,718,187 shares of common stock of the Company
in the
merger, and all shares of capital stock of Ethos were
cancelled,
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The
officers and directors of Ethos became the officers and directors
of the
Company,
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The
name of Victor Industries, Inc. was changed to “Ethos Environmental,
Inc.”, and
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Ethos
requested a new symbol for trading on the Over the Counter Bulletin
Board
(“OTCBB”), which also reflects the reverse stock split of 1 for 1,200, the
new symbol of the Company is
“ETEV.”
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Product
Ethos
manufactures a unique line of fuel reformulators that contain a blend of low
and
high molecular weight esters. Ethos
FR®
products
add cleaning and lubricating qualities to any type of fuel or motor oil,
allowing engines to perform cooler, smoother and with more vigor. The overall
benefits are increased fuel mileage, reduced emissions, and reduced maintenance
costs.
Ethos
fuel reformulating products increase fuel mileage and reduce emissions by
burning fuel more completely. Exhaust is essentially unburned fuel - wasted
fuel
- so when that fuel is used more completely, the engine delivers better mileage
from every tank. Efficient fuel use also improves engine performance, because
a
more complete combustion process obtains increased power from every engine
revolution.
Ethos
FR®
products
reduce fuel emissions, benefiting the environment in two notable ways:
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1.
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The
use of Ethos
FR®
products reduce engine exhaust emissions by 30% or more, including
measurable reductions in the emission of hydrocarbons (HC), nitrogen
oxides (Nox), and carbon monoxide (CO). All of these emissions are
highly
toxic and detrimental to the
environment.
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2.
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Ethos
FR®
products reduce emissions of particulate matter, especially in
diesel-powered engines. Diesel fuel is commonly dirty and maintaining
a
diesel engine in the prime condition necessary to reduce emissions
is both
expensive and time-consuming. As a result, diesel engines are a constant
source of air contaminants. In most industrialized countries, including
the U.S., diesel engines are one of the largest sources of air pollution.
When Ethos
FR®
products are added to diesel fuel, the engine runs cleaner, smoother
and
cooler - significantly reducing sooty exhaust. Engines treated with
Ethos
FR®
run with less friction, heat and noise. Fuel and lubricating systems,
filters, tanks, and injectors last longer, reducing maintenance
costs.
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Ethos
FR®
products
provide risk-free benefits with an economic gain to the client. Customers
realize a monetary gain on fuel savings alone, with an average improvement
in
mileage between 7% and 19%, depending on the fuel (gasoline or diesel) and
the
vehicle used. Even greater savings are achieved with the significant increase
in
oil prices.
Trademarks
We
own
the following trademark(s) used in this document: Ethos FR®. Trademark rights
are perpetual provided that we continue to keep the mark in use. We consider
these marks, and the associated name recognition, to be valuable to our
business.
Air
Quality Standards
Ethos
Environmental began the manufacturing and marketing of Ethos FR® products after
ten years of successful product testing. During the early years, widespread
public environmental concerns were only beginning to surface. Air quality
standards were non-existent and fuel costs were low, making penetration of
the
market an uphill battle.
In
recent
years most of the improvements in air quality have come through advancements
in
engine technologies. Through catalytic converters and computer controlled air
and fuel injection systems, engineers have designed cars that use fuel much
more
efficiently and pollute far less than ever before. But as new engine
technologies have reached their limits, the government has turned its attention
to the oil companies to produce cleaner-burning fuels.
The
approach of Ethos Environmental is to sell Ethos FR® “one gallon at a time”,
earning the respect and trust of each user. Over the past decade, the Ethos
FR®
product has gone though millions of miles in road tests, and test after test
has
demonstrated the ability of Ethos FR® to significantly reduce emissions while
improving gas mileage. Now, at a time of skyrocketing fuel costs, the value
of
Ethos FR® is paying off for a long list of domestic customers and a growing
contingent of international clients.
Market
Research
Air
pollution caused by cars, trucks and other vehicles burning petroleum-based
fuels is one of the most harmful and ubiquitous environmental problems.
Furthermore, local accumulation in heavy traffic is the greatest source of
community ambient exposure, largely because carbon monoxide is formed by
incomplete combustion of carbon containing fuels.
Diesel
exhaust is a major contributor of particulate matter concentrations.
Representing only 2 percent of the vehicles on the road, diesel powered vehicles
generate more than half of the particulates and nearly a third of the nitrogen
oxides in the air, according to a study by the California Air Resources Board.
Air pollution monitoring efforts by the American Lung Association indicate
that
diesel accounts for 70% of the cancer risk. Furthermore, pioneers in the study
of global warming factors have come to believe that particulate matter, such
as
that emitted by diesel engines, plays a far more critical role in the
development of the “greenhouse effect” than previously suspected.
To
combat
this problem the U.S. Environmental Protection Agency developed a two-step
plan
to significantly reduce pollution from new diesel engines. (New Emission
Standards for Heavy-Duty Diesel Engines Used In Trucks and Buses) (October
1997,
EPA 420-F-97-016). The first step set new emissions standards for diesel engines
beginning in 2000. The second step sets even more stringent emission standards
that will take effect in 2007, combined with mandated reductions in the sulfur
levels of all diesel fuel.
When
blended with fuels, Ethos FR® products reduce the emissions of hydrocarbons
(HC), nitrogen oxides (NOx) carbon monoxide (CO), particulate matter (PM) and
other harmful compounds of combustion. Given these conditions, the commercial
fuels consumer market represents an important target for Ethos Environmental.
Competition
The
primary task for the Company is to distinguish itself as an industry leader
in
the reduction of fuel costs and emission problems at a profit gain to the
commercial user. Part of the challenge before us is to differentiate Ethos
FR®
from two types of products in this industry, additives - that are purported
to
increase fuel mileage and oxygenates - which are mandated to lower emissions.
Both provide short-term benefits at the price of long-term engine or
environmental problems.
Additives
contain highly refined petrochemicals or compressed hydrocarbons that promise
better fuel mileage and sometimes lower emissions, by “cleaning” the engine.
Used mainly by individual consumers, they are expensive and commonly sold at
the
auto parts and retail stores. More than five thousand EPA-registered fuel
additives compete in the retail market and although the EPA requires that such
products be registered, that registration constitutes neither endorsement nor
validation of the product’s claims.
Oxygenates,
such as methyl tertiary butyl ether (MTBE) and Ethanol, are intended to lower
emissions by adding oxygen to the fuel. Ethos FR® products actually complement
federally mandated oxygenates by lowering emissions, but as mentioned earlier,
Ethos FR® is not an oxygenate and cannot be used for the purpose of complying
with current language federal legislation.
In
contrast, Ethos FR® products have cleaning properties that contribute to the
lubrication of the engine instead of destroying it. The ester-based formula
dissolves the gums and residues and adds important lubrication that an engine
needs. The engine stays clean and lubricated, allowing it to run smoothly and
efficiently.
Marketing
Strategy
Ethos
FR®
products are ideally positioned to capitalize on increasing fuel prices and
regulatory pressure to tighten emissions standards. Fuel is a significant
operating cost for companies that use cars, trucks or vessel fleets in their
daily business, especially where competitive markets make it difficult to pass
along fuel increases. Every hike in the price of fuel hurts the profitability
of
that company. For these businesses, obtaining better mileage offers a crucial
competitive edge, and the goal of Ethos Environmental is to help them maximize
their fuel use and maintain profitability.
From
its
earliest days, Ethos has focused on the product demonstration as the most
effective means of introducing Ethos FR® to potential users. During this
demonstration phase, Ethos supplies product to treat a sample of the fleet
at no
cost to the client. It is vital that the customer understand and prove the
effectiveness of Ethos FR® in their fleets. This demonstration phase will last
as long as necessary to quantify the value and projected savings possible once
the entire fleet is treated.
Through
this demonstration process, we prove to each customer that they can realize
the
benefits of reduced emissions, smoother-running vehicles and lower maintenance
costs at virtually no risk, because the reduction in fuel usage will more than
cover the expense of using Ethos FR®. In fact, the addition of Ethos FR® will
result in fuel savings beyond the cost of treatment, resulting in monetary
gain
to the user.
Commercial
fleets vary in size from a few to thousands of vehicles. Such fleets generally
produce immediate sales results because administrative requirements are minimal
and the product demonstration phase is brief. Typically, a sample of the fleet
is treated and the potential customer is quickly able to quantify the value
and
project the savings that the use of Ethos FR® will produce. Usually a fleet’s
oldest and dirtiest vehicles, or vehicles out of warranty, are included in
the
demonstration. Such vehicles amplify the effectiveness of the products and
help
to ease any initial client objections regarding manufacturer warranties. Once
the demonstration is underway, Ethos FR® products sell themselves, increasing
fuel mileage between 7% and 19% and reducing emissions by more than 30%. Once
the effectiveness of the product has been established, a conscientious
customer-service program ensures continued use.
The
Ethos
Environmental strategy has been to approach each market from the perspective
of
the customer’s strongest motivation, whether to reduce fuel costs or reduce
engine emissions. From a marketing standpoint, it is most cost-effective for
Ethos Environmental to focus on commercial fuel users that keep track of
maintenance and operating expenses. These consumers are more sensitive to
pressures from rising fuel costs and more concerned about meeting emissions
standards.
Rising
fuel costs will always be a marketing advantage for Ethos. Higher fuel prices
decrease the cost to treat each gallon of fuel; resulting in even greater
savings to Ethos clients. The Company’s marketing strategy strengthens as the
price of fuel increases. Even where cost savings are a client’s primary
motivator, the use of Ethos FR® identifies the user as an environmentally
conscientious business. It also creates goodwill within the community through
the reduction of unhealthful and unsightly exhaust emissions.
Target
Markets
Domestic
According
to the American Petroleum Institute, the United States fuels consumer market
is
comprised of the following segments: retail consumer 27%, government agencies
16%, ground fleets 14%, industrial users 10%, aircraft 9%, maritime 6%,
miscellaneous 4%.
The
Company’s typical customers use cars, trucks or vessels in their day-to-day
operations. Fuel is a significant operating cost, and consequently these fleets
are particularly sensitive to fuel price fluctuations and strict emissions
standards. The ideal clients are those with fleet managers and are conscientious
about keeping track of operating expenses. They understand that every hike
in
fuel price hurts their profitability, this being a critical factor wherever
competitive markets make it difficult to pass on the price increases to their
clients. Making it critical for businesses to obtain better mileage as a
competitive advantage.
Maritime
and government agencies are desirable for their large fuel volume use and
industry credibility. They offer the Company medium to long-term sales, since
the process requires a longer lead-time to close. The product demonstration
phase and administrative requirements are generally more complex, particularly
with large government institutions. At the same time, they offer large volume
sales and a continual source of staged orders that promote production
stability.
Marine
vessels run on bunker fuel that is less refined than diesel. A mid-size ship
will use more than half a ton per hour of operation, or 125 gallons of fuel
per
hour. For example, a mid-size vessel running on bunker on a typical trip to
Japan from Los Angeles will require a half a ton per hour, or 180 tons. This
represents a total of 45,000 gallons of fuel that requires 4,500 oz. (35
gallons) of Ethos FR®. This vessel would use approximately one drum (55gals.) of
Ethos FR® per month. Accordingly, maritime customers represent a large and solid
client base.
Like
the
United States, countries all around the world are endeavoring to deal with
the
high costs of petroleum products and the detrimental effects of those products
on the environment. The Company has found broad and enthusiastic acceptance
of
its Ethos FR® products globally. During the past three years, the Company has
opened markets in Asia, Latin America, Canada and Europe, often dealing directly
with government entities that possess the power to implement widespread use
of
Ethos FR® - whether in citywide public transportation systems or countrywide
fuel distribution structures.
As
with
our domestic client base, international customers of Ethos FR® appreciate the
benefits of improved mileage and reduced emissions. And in countries that lack
the regulatory structures necessary to control vehicle emissions and fuel
efficiency, the benefits of Ethos FR® are even more pronounced.
Customers
We
have a
very diversified customer list. Although we have many customers utilizing
products, the broadly diversified base means there is no significant
concentration in any industry. We derive revenue from our customers as discussed
in Note 1, "Organization and Significant Accounting Policies: Revenue
Recognition" of the consolidated financial statements. 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.
Supply
Arrangements
We
presently obtain our raw materials on an exclusive basis from five (5)
suppliers. However, these arrangements are not governed by any formal written
contract. Accordingly, either party can terminate the arrangement at any time,
including the exclusivity aspect of the arrangement. If this supplier is not
able to provide us with sufficient quantities of the product, or chooses not
to
provide the product at all (for any reason), or if exclusivity is lost, business
and planned operations could be adversely affected. Although management has
identified alternate suppliers of the products, no assurance can be given that
the replacement products will be comparable in quality to the product presently
supplied to us by these companies, or that, if comparable, that it can be
acquired under acceptable terms and conditions.
Revenue
and Fixed Assets
Most
of
our revenue is generated in the United States through our San Diego, California
office, and all of our fixed assets are located in the San Diego, California
office.
Vendors
We
maintain strong relationships with all of our vendors. We are not dependent
upon
any one vendor for our business.
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.
Employees
As
of
March 29, 2007, we had 25 full-time and 10 part-time employees.
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.
We
are
not currently involved in any legal proceedings
Item
4. Submission of Matters to a Vote of
Security Holders
None.
PART
II
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.
Overview
The
mission of Ethos Environmental is to be recognized as the industry standard
for
high quality, non-toxic cleaning and lubricating products that increase fuel
mileage and reduce emissions.
Ethos’
customers exist everywhere that budgets are affected by the rising cost of
fuel
and where solutions are sought for the pervasive ills of air pollution. Our
customers are motivated both by cost savings and environmental concerns, and
it
is our mission to provide products to meet their needs, risk free, and at an
economic gain to every client.
It
is our
goal to build on our success in the domestic U.S. market and continue to grow
internationally, offering the benefits of our products to companies and
countries around the world.
Our
Corporate History
We
were
originally incorporated under the laws of the State of Idaho on January 19,
1926
under the name of Omo Mining and Leasing Corporation. The Company was renamed
Omo Mines Corporation on January 19, 1929. The name was changed again on
November 14, 1936 to Kaslo Mines Corporation and finally Victor Industries,
Inc.
on December 24, 1977.
As
Victor
Industries, Inc., the Company developed, manufactured, and marketed products
related to the use of the mineral known as zeolite. Zeolites have the unique
distinction of being nature's only negatively charged mineral. Zeolites are
useful for metal and toxic chemical absorbents, water softeners, gas absorbents,
radiation absorbents and soil and fertilizer amendments.
In
November of 2006, and as part of a two-step reverse merger, the Company merged
with and into Victor Nevada, Inc. a newly incorporated entity for the purpose
of
redomiciling under the laws of the State of Nevada. Concurrently therewith,
we
completed the merger transaction with Ethos Environmental, Inc., a privately
held Nevada corporation “Ethos”). The Company was the surviving entity. To more
adequately reflect the new direction of the Company the Company changed its
name
to Ethos Environmental, Inc. and adopted the business plan of Ethos.
The
proposed merger was submitted to the shareholders of Victor Industries, Inc.
pursuant to a Proxy Statement first filed with the Commission on March 25,
2006.
As fully described in the Company’s Form 8-K filed on November 11, 2006 with the
Commission, the shareholders of the Company and Ethos approved the merger,
and
the merger was legally effected on November 2, 2006.
Pursuant
to the agreement of merger between the Company and Ethos,
· |
The
Company was the surviving
corporation,
|
· |
The
Company acquired all issued and outstanding shares of Ethos in exchange
for 17,718,187 shares of common stock of the Company. Shares of Company
common stock, representing an estimated 97% of the total issued and
outstanding shares of Company common stock, shall be issued to the
Ethos
stockholders,
|
· |
The
shareholders of Concierge received pro rata for their shares of common
stock of Ethos, 17,718,187 shares of common stock of the Company
in the
merger, and all shares of capital stock of Ethos were
cancelled,
|
· |
The
officers and directors of Ethos became the officers and directors
of the
Company,
|
· |
The
name of Victor Industries, Inc. was changed to “Ethos Environmental,
Inc.”, and
|
· |
Ethos
requested a new symbol for trading on the Over the Counter Bulletin
Board
(“OTCBB”), which also reflects the reverse stock split of 1 for 1,200, the
new symbol of the Company is
“ETEV.”
|
Business
Description
Ethos
Environmental manufactures and distributes an array of fuel reformulating
products under the name Ethos
FR®,
Ethos
Fuel Reformulators. Ethos
FR® is
a
unique line of fuel reformulators based on a blend of high quality, non-toxic,
non-petroleum based esters. When added to any fuel, these specially designed
esters add cleaning and lubricating properties. They make engines run more
efficiently smoother, cooler and cleaner. Ethos
FR®
improves
the formula of commonly used fuels such as gasoline, diesel, methanol, ethanol,
CNG or bio-diesel. Only the elements of carbon, hydrogen and oxygen are used
in
Ethos
FR®
products
and are 99.9% clean upon ignition, ashless upon combustion and free of
carcinogenic compounds.
Over
the
last decade, the unmatched value of Ethos
FR®
products
has been proven through millions of miles of on-the-road testing. On average,
customers have achieved a 7% to 19% increase in fuel mileage, and more than
a
30% reduction in emissions.
Ethos
seeks both a cleaner environment and economic success. As the name Ethos
suggests, we are committed to the highest ethical standards - in the product
that we sell, in the relationship with our clients, and in the conduct of our
business. The Company’s approach is to sell Ethos
FR®“one
gallon at a time”, earning the trust and loyalty of each customer by providing
products that perform as promised and make a positive difference in the
world.
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.
Revenues
We
recognized revenues of $4,768,013 for the year ended December 31, 2006 compared
to revenues of $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 is from the sale of Ethos FR®.
We
expect
our tremendous growth to continue as sales increase and the sales and marketing
strategies are implemented into the targeted markets and we create an
understanding and awareness of our technology through proof of performance
demonstrations with potential customers.
Our
future growth is significantly dependent upon our ability to generate sales.
Our
main priorities relating to revenue are: (1) increase market awareness of Ethos
FR® product through our sales and marketing plan, (2) growth in the number of
customers and vehicles per customer, and (3) providing extensive customer
service and support.
Gross
Profit
Gross
profit, defined as revenues less cost of goods sold, was $3,427,878 or 72%
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. In terms of absolute dollars, gross
profit increased 173% for the 2006 calendar year compared to the 2005 calendar
year due primarily to the sales of the Ethos FR® product.
Cost
of
goods sold was $1,340,135 for the 2006 calendar year, which represented 28%
of
revenues compared to $526,459 for the 2005 calendar year, which represented
30%
of revenues.
Operating
Expenses
Our
current operating expenses are comprised of costs associated with
administrative, salary, marketing, legal and business development. We will
have
additional operating expenses for additional staff members as they are hired.
We
have allocated funds in our capital structure for our current expenses.
General
& Administrative expenses incurred during the year ended December 31, 2006
totaled $5,346,409. These expenses were incurred primarily for the following
reasons:
Legal
fees of approximately $ 136,598
Accounting,
audit, bookkeeping and director fees totaling $ 57,676
Business
consulting fees of $ 4,862,976
Outside
Services of $159,749
Office
expenses of $ 129,410
Similar
expenses incurred for the year ended December 31, 2005 were $1,821,160 and
were
incurred primarily for consulting services of a similar nature.
Also,
for
comparison purposes, there were 4,910,000 newly issued shares 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.
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.
Net
Loss
We
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 comparable prior year period.
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.
Interest expense increased to $620,244 during the 12 months ended December
31,
2006 from $0 in 2005. The interest was directly associated with the
interest-only loan for $4,750,000, related to the purchase of our new building.
Other expenses increased to $58,931 in 2006 versus none in
2005.
Liquidity
and Capital Resources
On
December 31, 2006, we had a working capital of $49,801 and stockholders’ equity
of $6,096,938 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 $11,920,143 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.
We
anticipate, based on currently proposed plans and assumptions relating to our
operations, that our current cash and cash equivalents together with projected
cash flows from operations and projected revenues will be sufficient to satisfy
our contemplated cash requirements for the next 12 months. Our contemplated
cash
requirements for 2007 and beyond will depend primarily upon the level of sales
of our products, inventory levels, product development, sales and marketing
expenditures and capital expenditures.
Management
of the Company has undertaken steps as part of a plan with the goal of
sustaining the Company operations for the next twelve months and beyond. These
steps include: (a) attempting to raise additional capital and/or other forms
of
financing; (b) controlling overhead and operating expenses; and (c) continuing
to increase the sales of its fuel reformulating product. There can be no
assurance that any of these efforts will be successful.
Loan
Facilities
On
February 7, 2007, we entered into an equipment lease agreement with Mazuma
Capital Corp. wherein the Company agreed to a 24-month sale and leaseback
arrangement for up to $800,000 of its manufacturing equipment. The lease calls
for a monthly payment based on a factor of .04125 times the average outstanding
loan balance during the month. Through March 29, 2007, the company has placed
property valued at $737,968 under this lease arrangement with Mazuma Capital
Corp.
Inflation
has not significantly impacted the Company’s operations.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our investors.
Critical
Accounting Policies
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make a wide variety of estimates
and assumptions that affect (i) the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the
financial statements, and (ii) the reported amounts of revenues and expenses
during the reporting periods covered by the financial statements. Our management
routinely makes judgments and estimates about the effect of matters that are
inherently uncertain. As the number of variables and assumptions affecting
the
future resolution of the uncertainties increases, these judgments become even
more subjective and complex. The most significant accounting policies that
are
most important to the portrayal of our current financial condition and results
of operations are as follows:
Revenue
Recognition
The
Company recognizes revenue in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial
Statements”. Revenue consists of the sale of products and is recognized only
when the price is fixed or determinable, persuasive evidence of an arrangement
exists, the product is shipped, and collectability is reasonably assured.
Acquired
Goodwill
Goodwill
represents the excess of the purchase price of acquired assets over the fair
values of the identifiable assets acquired and liabilities assumed. Pursuant
to
SFAS No. 141, “Business Combinations” the Company does not amortize goodwill,
but tests for impairment of goodwill on an annual basis and at any other time
if
events occur or circumstances indicate that the carrying amount of goodwill
may
not be recoverable. Circumstances that could trigger an impairment test include
but are not limited to: a significant adverse change in the business climate
or
legal factors; an adverse action or assessment by a regulator; unanticipated
competition and loss of key personnel. Goodwill is tested for impairment using
present value techniques of estimated future cash flows; or using valuation
techniques based on multiples of earnings. If the carrying amount of goodwill
exceeds the implied fair value of that goodwill, an impairment loss is charged
to operations.
Customer
Relationships
The
Company used the replacement cost approach for accounting for customer
relationships. This approach uses an estimate of what a notional purchaser
would
likely pay for the intangible asset in order to be in the same position of
the
Company at the date of the closing of the Asset Purchase Agreement described
above in “Acquired Goodwill”.
![](psgraphic.jpg)
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.
/S/
PETERSON SULLIVAN PLLC
Seattle,
Washington
April 15,
2007
ETHOS
ENVIRONMENTAL, INC.
CONSOLIDATED
BALANCE SHEET
ASSETS
|
|
December
31,
2006
-------------------
|
CURRENT
ASSETS:
|
|
|
Cash
|
|
$
64,867
|
Restricted
Cash
|
|
300,000
|
Accounts
Receivable (Net )
|
|
327,324
|
Inventory
|
|
410,915
|
Other
Current Assets
|
|
19,900
----------------
|
Total
Current Assets
|
|
$
1,123,006
|
|
|
|
Property
and Equipment, Net
|
|
6,380,308
|
Goodwill
|
|
2,411,103
|
Customer
List, Net
|
|
1,934,036
|
Other
Assets
|
|
5,000
|
|
|
--------------
|
Total
Assets
|
|
$
11,853,453
========
|
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, $.001 par value; 100,000,000
shares
authorized; 23,107,687 issued and
outstanding
|
|
2,311
|
Additional
Paid-in Capital
|
|
15,961,204
|
Accumulated
Deficit
|
|
(9,933,267)
------------------
|
Total
Shareholders’ Equity
|
|
6,030,248
----------------
|
Total
Liabilities and Shareholders’ Equity
|
|
$
11,853,453
==========
|
See
notes
to consolidated financial statements.
ETHOS
ENVIRONMENTAL, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Years Ended December 31, 2006 and 2005
|
|
2006
|
|
2005
|
Revenues
|
$
4,768,013
|
$
1,780,825
|
Cost
of Sales
|
1,340,135
--------------
|
526,459
---------------
|
Gross
Profit
|
3,427,878
|
1,254,366
|
|
|
|
Operating
Expenses:
|
|
|
Selling
Expenses
General
and Administrative
Total
Operating Expenses
|
4,689,910
5,346,409
-------------
10,036,319
-------------
|
483,953
1,821,160
-------------
2,305,113
------------
|
Operating
Loss
|
(6,608,441)
|
(1,050,747)
|
|
|
|
Other
Income
Interest
Expense
Other
Expense
|
730,813
(620,244)
(58,931)
--------------
|
0
(890)
0
-------------
|
Net
Loss
|
$
(6,556,803)
========
|
$
(1,051,637)
========
|
|
|
|
Net
Loss per Common Share
|
$
(6.83)
|
$
(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 as restated
|
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 as restated
|
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
|
Shares
cancelled as part of reverse acquisition
|
|
(17,717,477)
|
|
(17,718)
|
|
|
|
|
|
(17,718)
|
Common
Stock issued to effect reverse acquisition
|
|
17,718,187
|
|
1,772
|
|
4,427,775
|
|
|
|
4,429,547
|
Effects
of Reverse acquisition
|
|
479,500
|
|
48
|
|
(11,208)
|
|
|
|
(11,160)
|
Common
stock issued for services
|
4,910,000
|
|
491
|
|
7,580,499
|
|
|
|
7,580,990
|
Net
Loss
|
|
|
|
|
|
|
|
(6,556,803)
|
|
(6,556,803)
|
Balance
at December 31, 2006
|
|
23,107,687
|
|
$2,311
|
|
$15,961,204
|
|
($9,933,267)
|
|
$6,030,248
|
|
|
|
|
|
|
|
|
|
|
|
See
notes
to consolidated financial statements.
ETHOS
ENVIRONMENTAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2006 and 2005
|
2006
-----------
|
2005
------------
|
Cash
Flows from Operating Activities
|
|
|
Net
Loss
|
$
(6,556,803)
|
$
(1,051,637)
|
Adjustments
to Reconcile net Loss to net Cash provided by (used in) operating
activities
|
|
|
Common
Stock Issued for Expenses
|
7,580,990
|
0
|
Depreciation
|
292,096
|
83,209
|
Amortization
|
66,690
|
0
|
Changes
in allowance for bad debts
Changes
in Operating Assets and Liabilities
|
(450,297)
|
527,847
|
Accounts
Receivable
|
413,030
|
(451,030)
|
Inventory
|
(151,351)
|
(200,816)
|
Other
assets
|
67,209
|
(10,000)
|
Accounts
Payable
|
(246,658)
|
567,575
|
Accrued
Expenses
|
10,929
|
90,559
|
|
-------------
|
--------------
|
Net
Cash Provided by (used in) 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
|
0
|
|
------------
|
-----------
|
Net
Cash Used in 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 Contributions
|
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
|
$
64,867
|
$
198,498
|
Restricted
Cash
|
300,000
--------------
|
300,000
--------------
|
|
$
364,867
========
|
$
498,498
========
|
See
notes
to consolidated financial statements.
Supplemental
Disclosure of Non-Cash Investing Activities:
|
|
|
2006
|
Acquisition
of Ethos Environmental, Inc.:
|
|
|
Accounts
Receivable acquired
|
$
|
48,972
|
Accounts
Payable assumed
|
|
(60,720)
|
Goodwill
acquired
|
|
2,411,103
|
Customer
List acquired
|
|
2,000,726
|
Common
stock issued for acquisition net of shares cancelled and effects
of
Reverse
acquisition, net of cash acquired
|
|
(4,400,669)
|
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 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 net value recorded equals management’s
estimate of the value of the acquired assets.
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 effects of the reverse
acquisition accounting is reflected in the consolidated statement 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 no expenses or revenue were 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. Valuation of the Ethos Environmental, Inc. working capital
approximated $4,412,000, or $0.25 per share of issued common stock. The fair
valuation of the purchase was determined to be $4,412,000 of which $2,000,700
was attributable to the value of the Customer List and the remainder to
Goodwill.
The
following unaudited pro forma financial information presents the operations
of
Victor Industries, Inc. ("the Company") and Ethos Environmental, Inc. ("Ethos")
as if the acquisition had occurred on January 1, 2006 and 2005, respectively.
This pro forma data is presented for informational purposes only and is not
necessarily indicative of what the results of operations would have been had
the
acquisition been completed the acquisition at the date indicated. In addition,
the unaudited pro forma condensed combined statement of operations does not
purport to project the future operating results of the combined company. The
balance sheet information is not presented since the two companies are
consolidated at December 31, 2006.
Pro-forma
Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
$
4,768,013
|
|
$
1,785,210
|
|
|
Net
Loss
|
|
|
|
(7,175,207)
|
|
(1,705,951)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share, Basic and Diluted
|
|
|
|
|
|
$
(7.47)
|
|
$
(8.74)
|
|
|
|
|
|
|
|
|
|
|
Weighted
number of shares outstanding
|
|
|
|
|
|
960,685
|
|
195,204
|
|
|
Going
Concern
The
Company has incurred significant losses from operations in the last two years.
The Company's ability to continue as a going concern is in substantial doubt
and
is dependent upon obtaining additional financing and/or achieving a sustainable
profitable level of operations.
Management
of the Company has undertaken steps as part of a plan with the goal of
sustaining the Company operations for the next twelve months and beyond. These
steps include: (a) attempting to raise additional capital and/or other forms
of
financing; (b) controlling overhead and operating expenses; and (c) continuing
to increase the sales of its fuel reformulating product. There can be no
assurance that any of these efforts will be successful.
Principles
of Consolidation
These
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary. All material inter-company accounts have been
eliminated in consolidation.
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 exceed federally insured limits from
time to time.
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 collectability 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 determined that an allowance of $126,485 and $576,782
at
December 31, 2006 and 2005, respectively, was necessary. 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.
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.
Goodwill
Goodwill
represents the excess of the purchase price of the estimated fair value of
the
net identified tangible and intangible assets of the acquired business. Goodwill
must be tested for impairment at least on an annual basis, or if an event occurs
or circumstances change prior to the annual test of impairment, then the
carrying value of goodwill must be tested on an interim basis. The Company
has
determined there is no impairment at December 31, 2006.
Customer
List
As
a
result of the acquisition, the Company acquired a customer list which has an
identifiable defined life. The customer lists is amortized on a straight-line
basis over a five-year period. The Company will continue to amortize the
identifiable intangible asset over the life of the asset unless an event occurs
or circumstances change that indicate that the carrying value of this asset
may
not be recoverable. The following table reflects the cost of the customer list
and the accumulated amortization related to this asset as of December 31,
2006:
Customer
list
|
|
$2,000,726
|
Accumulated
Amortization
|
|
(66,690)
|
|
|
$1,934,036
|
For
the
year ending December 31, 2006, the Company recorded $66,690 as amortization
expense. The Company expects to record annual amortization expense of
approximately $400,000 in 2007, $400,000 in 2008, $400,000 in 2009, $400,000
in
2010 and 333,000 in 2011 related to the customer list.
Notes
Payable
On
December 26, 2006, the company entered into a Demand Loan Agreement 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.
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 holder 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 our revenues for the fiscal year ended December
31, 2006. One customer accounted for 40% and the second 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 are expenses as incurred and are 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 in these consolidated financial
statements. 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. The deferred taxes represent the future tax return
consequences of those differences, which will either be taxable when the assets
and liabilities are recovered or settled.
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.
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. Prior Period Adjustments
The
December 31, 2004 balances have been restated to correct for an error related
to
vehicles that were incorrectly recorded as assets in 2003 and 2004. The value
of
the assets removed was $282,366, less $25,440 of accumulated depreciation.
In
addition, the December 31, 2004 balances have been restated to reduce accrued
expenses by $38,917 due to a settlement that was reached with a vendor in
2004.
The
net
effect of the combined adjustments was to increase the accumulated deficit
and
decrease total stockholders’ equity by $218,009. There was no effect on earnings
per share.
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
|
|
(402,837)
|
|
(63,153)
|
|
|
$
6,380,308
|
|
$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 $12,300,000 which
may
be available to reduce future taxable income. Any tax loss carry forward
available expires between the years 2022 and 2025.
The
deferred tax asset associated with the estimated tax loss carry forward is
approximately $4,182,000. The Company has provided a valuation allowance against
the deferred tax asset. The valuation allowance increased by $2,370,000 and
$358,000 for 2006 and 2005, respectively.
The
use
of any loss carry forwards may be limited under the Internal Revenue Code due
to
the change in control of the Company in 2006.
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, after evaluating the effectiveness of our “disclosure controls and
procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), has
concluded that, as of 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
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
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
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 or stock vested 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 23,107,669shares 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.
|
|
|
|
|
|
|
Beneficial
Owner
|
|
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.
|
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 17th
day of
April 2007.
|
Ethos
Environmental, Inc.
a
Nevada Corporation
|
|
By:
|
|
|
|
/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
|
|
April
17, 2007
|
Enrique
de Vilmorin
|
|
|
|
|
|
|
|
|
|
/s/
Jose Manuel Escobedo
|
|
Director
|
|
April
17, 2007
|
Jose
Manuel Escobedo
|
|
|
|
|
|
|
|
|
|
/s/
Luis Willars
|
|
Director
|
|
April
17, 2007
|
Luis
Willars
|
|
|
|
|
|
|
|
|
|
/s/ Thomas W. Maher
|
|
|
|
|
Thomas
W. Maher
|
|
Chief
Financial Officer
|
|
April
17, 2007
|
|
|
|
|
|