UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________________________
FORM
10 – QSB
_______________________________
[mark
one]
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF
1934
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|
For
the quarterly period ended: September 30,
2007
|
o
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TRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF
1934
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|
For
the transition period from ______________ to
______________
|
Commission
File Number 000-30237
_____________________________________________________________
Ethos
Environmental, Inc.
(Exact
name of registrant as specified in its charter)
Nevada
|
88-0467241
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
Number)
|
6800
Gateway Park
San
Diego, CA 92154
(Address
of principal executive offices including zip code)
(619)
575-6800
(Registrant’s
telephone number, including area code)
Paracorp
Incorporated
318
N.
Carson Street, Suite 208, Carson City, NV 89701
(Name
and address of agent for service)
888-972-7273
(Telephone
Number, including area code, of agent for service)
with
a
copy to:
SteadyLaw
Group, LLP
501
W.
Broadway, Suite 800
San
Diego, CA 92101
Telephone
(619) 399-3090
Telecopier
(619) 330-1888
Check
whether the issuer (1) filed all reports required to be filed by Section
13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter
period
that the registrant was required to file such reports), and (2) has been
subject
to such filing requirements for the past 90 days. Yes 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
Number
of
shares outstanding of the issuer’s common stock as of the latest practicable
date: 26,871,687 shares of common stock, $.0001 par value per share, as of
December 7, 2007.
Transitional
Small Business Disclosure Format (check one): Yes o No x
Quarterly
Report on FORM 10-QSB For The Period Ended
September
30, 2007
Ethos
Environmental, Inc.
PART
I. FINANCIAL INFORMATION
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Page
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Financial
Statements
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4
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Management’s
Discussion and Analysis or Plan of Operation
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14
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Controls
and Procedures
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40
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PART
II. OTHER INFORMATION
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Legal
Proceedings
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41
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Unregistered
Sales of Equity Securities and Use of Proceeds
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Defaults
Upon Senior Securities
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Submission
of Matters to a Vote of Security Holders
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Other
Information
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41
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Exhibits
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PART
I.
Item
1. FINANCIAL STATEMENTS
ETHOS
ENVIRONMENTAL, INC.
CONDENSED
BALANCE SHEET
(Unaudited)
ASSETS
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|
September
30,
2007
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CURRENT
ASSETS:
|
|
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Cash
|
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$
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359,306
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Restricted
Cash
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300,000
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Accounts
Receivable (Net of allowance for doubtful accounts)
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6,001,953
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Inventory
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145,998
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Assets
held for Sale
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5,667,451
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Other
Current Assets
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56,500
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Total
Current Assets
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$
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12,531,208
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Property
and Equipment (Net)
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216,137
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Other
Assets
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399,419
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Total
Assets
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$
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13,146,764
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
LIABILITIES:
CURRENT
LIABILITIES:
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Accounts
Payable
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$
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831,249
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Accrued
Expenses
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124,956
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Current
Portion of Long Term Debt
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623,153
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Advances
from Related Party
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115,124
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Total
Current Liabilities
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1,694,482
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Long-Term
Debt, Net of Current Portion
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4,750,000
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Total
Liabilities
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6,444,482
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Commitments
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SHAREHOLDERS’
EQUITY:
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Common
Stock, $.0001 par value; 100,000,000
shares
authorized; 26,309,187 issued and
outstanding
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2,631
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Additional
Paid-in Capital
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25,632,095
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Accumulated
Deficit
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(18,932,444)
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Total
Shareholders’ Equity
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6,702,282
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Total
Liabilities and Shareholders’ Equity
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$
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13,146,764
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See
notes
to condensed financial statements.
ETHOS
ENVIRONMENTAL, INC.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
For
the Three Months Ended September 30, 2007 and 2006
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2007
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2006
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Revenue
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2,299,183
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1,546,078
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Cost
of Sales
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562,931
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810,004
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Gross
Profit
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1,736,252
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736,074
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Operating
Expenses:
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Depreciation(other
than in cost of sales)
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7,924
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0
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Selling
Expenses
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163,100
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123,255
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General
& Administrative (See Note 1)
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2,342,152
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294,589
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Total
Operating Expenses
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2,513,176
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417,844
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Operating
Income (Loss)
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(776,924)
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318,230
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Other
Income
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0
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586
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Interest
Expense
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(120,959)
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(170,902)
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Net
Income (Loss)
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(897,883)
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147,914
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Net
Income (Loss) per Common Share (basic & fully diluted)
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$
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(0.03)
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$
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0.01
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Weighted
average shares used in per share calculation (basic & fully
diluted)
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25,684,187
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18,053,000
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See notes to condensed financial statements.
ETHOS
ENVIRONMENTAL, INC.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
For
the Nine Months Ended September 30, 2007 and 2006
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2007
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2006
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Revenue
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7,596,279
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4,244,020
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Cost
of Sales
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2,272,873
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1,721,110
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Gross
Profit
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5,323,406
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2,522,910
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Operating
Expenses:
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Depreciation(other
than in cost of sales)
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18,197
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0
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Selling
Expenses
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433,194
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593,431
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General
& Administrative
Debt
Extinguishment See Note 2
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6,971,497
6,646,171
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647,285
0
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Total
Operating Expenses
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14,069,059
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1,240,716
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Operating
Income
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(8,745,653)
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1,282,194
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Other
Income/Expense
Gain
on sale of assets
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179,003
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0
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Other
Income
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35
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9,675
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Interest
Expense
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(499,252)
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(393,932)
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Net
Income (Loss)
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(9,065,867)
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897,937
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Net
Income (Loss) per Common Share (basic & fully diluted)
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$
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(0.37)
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$
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0.05
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Weighted
average shares used in per share calculation (basic & fully
diluted)
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24,496,388
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18,053,000
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See
notes to condensed financial statements.
ETHOS
ENVIRONMENTAL, INC.
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CONDENSED
STATEMENTS OF STOCKHOLDERS' EQUITY
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(Unaudited)
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For
the Nine Months Ended September 30, 2007
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Common
Stock
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Number
of Shares
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Amount
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Additional
Paid-in Capital
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Accumulated
Deficit
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Total
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Balance
at December 31, 2006
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23,107,687
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$2,311
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$11,560,535
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($9,866,577)
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$1,696,269
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Common
stock issued for services
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468,000
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47
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2,171,413
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2,171,460
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Common
stock issued for services
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483,500
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48
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1,908,202
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1,908,250
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Cancellation
of shares
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(250,000)
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(25)
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(203,976)
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(204,001)
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Debt
Extinguishment (See Note 2)
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6,646,171
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6,646,171
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Common
stock issued for cash and building impairment
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2,500,000
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250
|
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3,549,750
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3,550,000
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Net
(Loss)
|
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|
|
|
|
|
|
(9,065,867)
|
|
(9,065,867)
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Balance
September 30, 2007
|
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26,309,187
|
|
$2,631
|
|
$25,632,095
|
|
$(18,932,444)
|
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$6,702,282
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|
See
notes
to condensed financial statements.
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ETHOS
ENVIRONMENTAL. INC.
|
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CONDENSED
STATEMENTS OF CASH FLOWS
|
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(Unaudited)
|
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|
|
For
the Nine Months Ended September 30, 2007 and
2006
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
2007
|
|
2006
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
$(9,065,867)
|
|
$897,937
|
|
|
|
Adjustments
to reconcile Net Income (Loss) to Net Cash provided by (used
by) operating
activities:
|
|
|
|
|
|
|
|
|
Gain
on sale of assets
Depreciation
|
|
(179,003)
193,749
|
|
0
0
|
|
|
|
|
Common
stock issued for services
Loss
on debt extinguishment (See Note 2)
|
|
3,875,710
6,646,171
|
|
0
0
|
|
|
|
|
Building
impairment
|
|
1,550,000
|
|
0
|
|
|
|
|
Changes
in operating assets and liabilities:
Assets(Increase)/Decrease:
Accounts
Receivable
|
|
(5,674,629)
|
|
(318,817)
|
|
|
|
|
Inventory
Other
current assets
Other
assets
|
|
264,917
0
(25,435)
|
|
457,571
0
200,000
|
|
|
|
|
Liabilities
Increase/(Decrease):
Accounts
Payable
|
|
327,350
|
|
149,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
23,468
|
|
(43,999)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash (used by) provided by Operating Activities
|
|
(2,063,569)
|
|
1,341,897
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Payments
on notes receivable
|
|
(36,600)
|
|
(50,875)
|
|
|
|
Purchase
of property & equipment
|
|
(244,834)
|
|
(1,451,196)
|
|
|
Proceeds
from sale/leaseback
|
|
368,984
|
|
0
|
|
|
Net
cash provided by (used by) Investing Activities
|
|
87,550
|
|
(1,502,071)
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
705,334
|
|
0
|
|
|
|
Payments
on long-term debt
|
|
(500,000)
|
|
0
|
|
|
|
Proceeds
from related party advances
|
|
103,444
|
|
(13,000)
|
|
|
|
Payments
on related party advances
|
|
(38,320)
|
|
|
|
|
Proceeds
from issuing
common stock
|
|
2,000,000
|
|
0
|
|
|
Net
cash provided by (used by) Financing Activities
|
|
2,270,458
|
|
(13,000)
|
|
|
Net
cash increase (decrease) for period
|
|
294,439
|
|
(173,174)
|
|
|
Cash
at beginning of period
|
|
64,867
|
|
198,498
|
|
|
Cash
at end of period
|
|
$359,306
|
|
$25,324
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets purchased
|
|
|
|
6,201,196
|
|
|
|
|
Less
amount financed
|
|
|
|
(4,750,000)
|
|
|
|
|
Fixed
assets paid in cash
|
|
|
|
1,451,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
499,252
|
|
393,554
|
|
|
|
|
Taxes
paid
|
|
800
|
|
3,338
|
|
|
|
|
|
|
|
|
|
See
notes
to condensed financial statements.
ETHOS
ENVIRONMENTAL, INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
Note
1. Organization and Significant Accounting Policies
Organization
Ethos
Environmental, Inc. ("the Company") manufactures and distributes fuel
reformulating products that increase fuel mileage, reduce emissions, and
maintain lower fuel costs. The Company is based in Southern California
and sells
its product, primarily in the United States, Latin America, Europe, Africa,
Australia and Asia.
Acquisition
On
April
20, 2006, Victor Industries, Inc., (Victor) 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, Victor re-domiciled 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 condensed financial
statements are presented on a post-split basis.
The
merger provided for a business combination transaction by means of a merger
of
Ethos with and into Victor, with the Company as the corporation surviving
the
merger. Accordingly, the comparative information presented is that of Ethos
Environmental, Inc.
Going
Concern
The
Company has incurred significant losses from operations in the last two
years,
and as of September 30, 2007 the Company has an accumulated deficit of
$18,932,444. The cumulative net losses incurred for the year ended December
31, 2006 and for the nine months ended September 30, 2007 of
$9,065,867 are mainly due to non-cash transactions for issuance of stock
for
services and loss on impairment of building (see Stock Based Compensation,
following).
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.
Basis
of Presentation
The
accompanying condensed financial statements have been prepared by the Company
pursuant to the rules and regulations of the U.S. Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosure normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed
or
omitted pursuant to such SEC rules and regulations. The interim period
condensed
financial statements should be read together with the
audited financial statements and accompanying notes for the years
ended December 31, 2006 and 2005, included in the Company's annual reports
on Form 10-KSB. In the opinion of management, the unaudited condensed financial
statements contained herein contain all adjustments necessary (consisting
of a
normal recurring nature) to present a fair statement of the results of
the
interim periods presented.
The
results of operations for the three and nine months ended September 30,
2007,
are not necessarily indicative of the results to be expected for the entire
year
ending December 31, 2007.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual
results could differ from the estimated amounts.
Major
Customers
Three
customers accounted for 88% of revenue for the three months and nine months
ended September 30, 2007. The same three customers accounted for 90%
of receivables as of September 30, 2007. Two customers accounted for
88% of revenue for the three and nine months ended September 30,
2006.
Stock
Based Compensation
The
Company accounts for stock-based awards in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based Payment”, which
requires measurement of compensation cost for all stock-based awards at
fair
value on the date of grant and recognition of compensation over the service
period for awards expected to vest. The fair value of stock options is
determined using the Black-Scholes valuation model, which is consistent
with the
Company’s valuation techniques previously utilized for options in footnote
disclosures required under SFAS No. 123, “Accounting for Stock-Based
Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based
Compensation Transition and Disclosure”.
During
the three months ended March 31, 2007, the company issued 468,000 shares
of
common stock. Of this total, 368,000 shares of common stock were
issued for services, and 100,000 shares were issued in compliance with
the
Employment Agreement of Thomas W. Maher, Chief Financial Officer. The
Employment Agreement was filed along with Form 8-K submitted to the SEC
on
December 8, 2006. These shares of stock were valued at the fair value
at date of issuance for $4.54 and $5.00, respectively, and are included
in
general and administrative expenses.
During
the three months ended June 30, 2007, the company issued 483,500 shares
of
common stock and retired 250,000 shares of common stock. The shares
issued were for services and were valued at the fair value at date of issuance
for approximately $3.95, and included in general and administrative expenses.
There was no cash involved in these transactions.
During
the three months ended September 30, 2007, the company issued 2,500,000
shares
of common stock for cash in the amount of $2,000,000, and for impairment
of the
building asset in the amount of $1,550,000. As part of this
transaction, the building was sold to a third party for $7,875,000 of which
$2,000,000 was allocated to the shares mentioned above. The remaining
$5,875,000 was allocated to the building sale, which was settled on October
25,
2007(See Assets held for sale).
Income
Taxes
The
Company accounts for its income taxes under the provisions of Statements
of
Financial Accounting Standards No. 109 (SFAS No. 109). Income taxes are
provided
for the tax effects of transactions reported in the financial statements
and
consist of taxes currently due plus deferred taxes related primarily to
differences between the bases of certain assets and liabilities for financial
and tax reporting. Deferred taxes represent the future tax return consequences
of those differences, which will either be taxable or deductible when the
assets
and liabilities are recovered or settled. No provision for deferred taxes
is
reflected in the financial statements as the valuation allowance offsets
any
deferred tax benefit.
The
Company is liable for taxes in the United States. As of September 30, 2007,
the
Company does not expect to have any income for tax purposes and therefore,
no
tax liability or expense has been recorded in these condensed financial
statements, except for the minimum tax in California amounting to
$800.
The
Company estimates that it has tax losses of approximately
$18,925,000 which may be available to reduce future
taxable income. Any tax loss carry forwards available expire between the
years
2020 and 2026.
The
deferred tax asset associated with the estimated tax loss carry forward
is
approximately $7,500,000. The Company has provided for a valuation allowance
as
an offset against the deferred tax asset as it is unknown at this time
if the
asset will be utilized. Deferred tax assets must be reduced by a valuation
allowance if, based upon the weight of available evidence, it is more likely
than not that some portion or all of the benefit will not be
realized. The Company has taken a conservative approach in that it is
unknown at this time if the tax benefit from these net operating losses
will
ever be realized. Therefore, the entire amount of the deferred tax
benefit has been reduced by a valuation allowance equal to the tax
benefit.
Assets
held for sale
Management
considers an asset held for sale when the following criteria per SFAS No.
144
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”)
are met:
a.
|
Management
commits to a plan to sell the
asset;
|
b.
|
The
asset is available for immediate sale in its present
condition;
|
c.
|
An
active marketing plan to sell the asset has been initiated at
a reasonable
price;
|
d.
|
The
sale of the asset is probable within one year;
and,
|
e.
|
It
is unlikely that significant changes to the plan to sell the
asset will be
made.
|
Upon
designation of a property as an asset held for sale, and in accordance
with the
provisions of SFAS 144, the Company records the carrying value or its estimated
fair value, less estimated selling costs, and the Company ceases depreciating
the assets. (See Note 4).
Earnings
(Loss) Per Share
Basic
earnings (loss) per share is computed by dividing the net income (loss)
available to common shareholders by the weighted average number of common
shares
outstanding in the period. Diluted earnings per share takes into
consideration common shares outstanding (computed under basic earnings
per
share) and potentially dilutive common shares. There were 1,900,000 warrants
outstanding at September 30, 2007 which is not included in the earnings
per
share calculation since their effect would be antidilutive due to the Company’s
net loss. There were no dilutive instruments outstanding in
2006.
Note
2. Debt Extinguishment
On
May
23, 2007 the Company amended the loan agreement for the financing of its
building by extending the maturity date to March 31, 2009, from the original
maturity date of January 26, 2007, and rescinding the convertible
feature. Due to the substantial modification of the agreement, the
original loan is considered extinguished and a new note was
issued. In addition to the new note, the Company issued the lender as
consideration for the modified loan terms a warrant for purchase of 1,900,000
shares of its common stock with an exercise price of $2.50 per share. This
warrant expires on March 31, 2010. The fair value of the warrant was
determined using the Black-Scholes valuation model. The assumptions
included an estimated term of three years, volatility of 383%, discount
rate of
8.25% and a dividend rate of 0%. The resulting fair value of the
warrant totaled $6,646,171, which has been included in the loss on debt
extinguishment in the Company’s condensed statement of operations for the nine
months ended September 30, 2007.
Note
3. Inventory
Inventory
consists primarily of the Company’s fuel reformulating product and is stated at
the lower of cost or market. The Company accounts for its inventory
on a first-in-first-out basis (FIFO).
At
September 30, 2007, inventory is made up of raw materials and finished
goods as
shown below:
Raw
Materials $
23,186
Finished
Goods
122,812
Total
Inventory
$145,998
|
Note
4. Assets held for sale
Subsequent
to September 30, 2007, the Company sold the building which serves as its
main
facility. The property went into escrow on August 7, 2007 and the
transaction was completed on October 25, 2007. Included with the sale
of the building was an issuance for cash of 2,500,000 shares of common
stock
which was realized during the three months ended September 30,
2007.
The
assets held for sale at September 30, 2007 are separately disclosed in
the
accompanying condensed balance sheet. The Company realized a loss
impairment on the building in the amount of $1,550,000, which is the difference
between the stock issuance price and the cash received on August 7 (See
Note 10-
Subsequent Events). The amount the Company will ultimately realize on
these assets could differ from the amount recorded in the condensed financial
statements.
Note
5. Sale and Leaseback
On
February 7, 2007, the Company entered into an equipment lease agreement
with
Mazuma Capital Corp. wherein the Company agreed to a 24-month sale and
leaseback
arrangement for up to $800,000 of its manufacturing equipment. The lease
calls
for a monthly payment based on a factor of .04125 times the average outstanding
loan balance during the month. Through August 20, 2007, the company had
placed
property valued at $737,968 under this lease arrangement with Mazuma Capital
Corp.
The
contract for this sale and leaseback of equipment was accounted for as
an
operating lease per SFAS 13 and 28. There is no bargain purchase
option at the end of the lease, and neither the 75% nor the 90% test has
been
met. The title may pass back to the Company at the end of the lease;
however, the lease may also be continued at the end of the 24 month period
or
the equipment retained by the lessor. The Company feels the appropriate
stance
is to show this as an operating lease in 2007; thereby recording the reduction
of equipment, the corresponding gain, and treating the payments as lease
expense.
Note
6. Related Party Transactions
There
were advances from the CEO to the Company during the nine month period
ended
September 30, 2007. At September 30, 2007 and 2006, the advances owed
to the CEO totaled $115,124 and -0-, respectively.
Note
7. Off Balance Sheet Arrangements
The
Company does 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.
Note
8. Litigation
During
the nine months ended September 30, 2007, ACCUTEK, Inc. filed a lawsuit
against
the Company seeking $60,000 in damages. The Company has filed its
answer, including various counter claims against ACCUTEK, Inc., including
breach
of contractual obligations. There are two other smaller claims
against the Company seeking damages in aggregate of approximately
$24,000. Management has accrued what they believe to be the
appropriate amount representing any potential loss.
Note
9. Recent Accounting Pronouncements
On
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board Interpretation Number 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement
109”. FIN 48 supplements FASB 109, “Accounting for Income
Taxes”, by defining the confidence level that a tax position must meet in
order to be recognized in the financial statements. FIN 48 prescribes a
comprehensive model for how a Company should recognize, measure, present
and
disclose in its financial statements uncertain tax positions that the enterprise
has taken or expects to take on the tax return. FIN 48 requires that
the tax effects of a position be recognized only if it is “more likely than
not” to be sustained based solely on its technical
merits. Management must be able to conclude that the tax law,
regulations, case law and other objective information regarding the technical
merits sufficiently support the position’s sustainability with a likelihood of
more than 50 percent. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company’s evaluation is in
process for the tax years ended December, 2004, 2005, 2006, the tax periods
which remain subject to examination by major tax
jurisdictions.
Note
10. Subsequent Events
On
or
about August 7, 2007, the Company entered into an agreement to sell the
land and
building located at 6800 Gateway Park Drive located in San Diego, CA, as
well as
2,500,000 shares of its common stock in exchange for $7,875,000. The
Company received $2,000,000 for the 2,500,000 shares of stock during this
current period. The remaining $5,875,000 is allocated for the sale of
the building. The Company completed the sale of the building on
October 25, 2007. At September 30, 2007, the Company is showing a
loss on building impairment of $1,550,000 which is the difference between
the
par value of the stock and the fair market value at date of issuance. The
Company’s Form 8-K filed on or about August 10, 2007 is incorporated by
reference herein and provides additional details regarding this
transaction. With the completion of the sale the Company paid
off the accompanying Mortgage and the Current Portion of Long Term
Debt.
Subsequent
to September 30, 2007, the Company has issued 562,500 shares of its common
stock
for consulting, legal, and business services.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATION
This
discussion and analysis should be read in conjunction with the accompanying
Financial Statements and related notes. Our discussion and analysis of our
financial condition and results of operations are based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States
of America requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of any contingent
liabilities at the financial statement date and reported amounts of revenue
and
expenses during the reporting period. On an on-going basis we review our
estimates and assumptions. Our estimates are based on our historical experience
and other assumptions that we believe to be reasonable under the circumstances.
Actual results are likely to differ from those estimates under different
assumptions or conditions, but we do not believe such differences will
materially affect our financial position or results of operations. Our critical
accounting policies, the policies we believe are most important to the
presentation of our financial statements and require the most difficult,
subjective and complex judgments, are outlined below in ‘‘Critical Accounting
Policies,’’ and have not changed significantly.
In
addition, certain statements made in this report may constitute “forward-looking
statements”. These forward-looking statements involve known or unknown risks,
uncertainties and other factors that may cause the actual results, performance,
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by the forward-looking
statements. Specifically, 1) our ability to obtain necessary regulatory
approvals for our products; and 2) our ability to increase revenues and
operating income, is dependent upon our ability to develop and sell our
products, general economic conditions, and other factors. You can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continues" or the negative of these terms or other
comparable terminology. Although we believe that the expectations reflected-in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements.
The
Company and Our Business
Ethos
Environmental, Inc. (“Ethos” or the “Company”) manufactures
and distributes fuel reformulating products designed to enable fuels to burn
cleaner. The products developed by the Company are proprietary and, as such,
protected by the Uniform Trade Secrets Act. Our products, distributed
using our registered trademark, Ethos FR®,
are comprised of a unique line of fuel reformulators that consist of
a
blend of high quality, non-toxic, non-petroleum based esters.
Ethos
products are non-toxic, non-hazardous and work with any fuel and in both
internal and external combustion engines, which includes cars, trucks, buses,
RV’s, ships, trains and generators. Ethos products reduce fuel costs by
producing a net gain in mileage above cost. Our products contain two families
of
esters, a group of cleaning esters and a group of lubricating esters, both
of
which are combined with a mineral oil base. Our products serve to clean and
lubricate the internal parts of an engine without the use of petroleum-derived
products commonly found in fuel additives. The main objective is to make
fuels
self-cleaning and self-lubricating without increasing toxic
emissions. Importantly, since moving parts function more smoothly
with reduced heat and friction, less engine maintenance is required and
horsepower returns closer to the manufacturer specifications. Ethos products
remove carbon deposits, one of the culprits that cause fuel to combust
incompletely, resulting in wasted fuel that creates toxic emissions. The
combination of cleaning and lubricating esters in Ethos products serve to
stabilize fuel without changing its formula or specifications.
Overall,
our products make engines combust fuel more completely. When an engine uses
each
measure of fuel to the maximum degree possible, it has two very important
benefits. First, it reduces fuel consumption and reduces non-combusted residues
that an engine expels in the form of exhaust emissions, such as hydrocarbons,
nitrogen oxides, carbon monoxide, particulate matter and other harmful products
of combustion. Next, unused fuel is saved in the fuel tank, waiting to be
used
efficiently by the engine, instead of exhausted in the form of toxic emissions.
Ethos products reduce emissions without adding any of its own components
to the
exhaust. EPA Laboratory tests confirm that Ethos FR®
is 99.99976% clean upon ignition and ashless upon combustion.
Ethos
seeks both a cleaner environment and economic success. As the name Ethos
suggests, we are committed to the highest ethical standards - in the product
that we sell, in the relationship with our clients, and in the conduct of
our
business. The Company’s approach is to sales is “one gallon at a time,” earning
the trust and loyalty of each customer by providing products that perform
as
promised and make a positive difference in the world.
Overview
The
mission of Ethos Environmental is to be recognized as the industry standard
for
high quality, non-toxic cleaning and lubricating products that increase fuel
mileage and reduce emissions.
Ethos’
customers exist everywhere that budgets are affected by the rising cost of
fuel
and where solutions are sought for the pervasive ills of air pollution. Our
customers are motivated both by cost savings and environmental concerns,
and it
is our mission to provide products to meet their needs, risk free, and at
an
economic gain to every client.
The
management of Ethos Environmental firmly believes that the market for our
product is aggressively expanding. Worldwide fuel consumption is
approximately 85 million barrels per day and projected by the Energy Information
Administration to continue to grow to 97 million barrels per day by 2015,
and
118 million barrels per day by 2030. Much of the dramatic growth over
the past decade has been fueled by the dramatic expansion of India, China
and
Brazil. As additional undeveloped countries begin to expand, so too
will fuel consumption and the Company’s market base. In addition,
consumers are becoming more sensitive to increased fuel economy as oil prices
have increased eight times since the late 1990s.
It
is our
goal to continue to aggressively build on our success in the domestic and
international markets, offering the benefits of our products to companies
and
countries around the world. During 2006, our revenue base increased
by 168% over 2005. Since 2004, the company has increased its revenue
base by 450%, and by 573% since 2003. In the second quarter of 2007,
sales increased by 88% over the same quarter from one year prior.
The
company’s management is directed to continued growth with its attention focused
on comparative savings in marketing and production costs. Our
attention going forward is to increase market awareness of our name and the
benefits provided by our product line.
During
2007, the company will be directing concerted focus to full compliance with
Sarbanes-Oxley requirements, as revised in Audit Standard No. 5 for small
businesses, in implementing Section 404(a) of the Act.
Business
Summary
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 these ecologically damaging emissions from vehicles, and
at a
price everyone can afford. The goal of the company is to make the
world a better place, “one gallon at a time”. According to the Environmental
Protection Agency (EPA), “The burning of fuels releases carbon dioxide (CO2) into
the
atmosphere and contributes to climate change [Global Warming], but these
emissions can be reduced by improving your car’s fuel
efficiency.” 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.
Ethos
Environmental manufactures and distributes a unique line of fuel reformulators
that contain a blend of low and high molecular weight esters. The
product adds cleaning and lubrication qualities to any type of fuel or motor
oil. The overall benefits are increased fuel mileage, reduced
emissions and reduced maintenance costs as the product allows engines to
perform
cooler, smoother and with more vigor.
Esters
In
the
simplest terms, esters can be defined as the reaction products of acids and
alcohols. Thousands of different kinds of esters are commercially produced
for a
broad range of applications. Within the realm of synthetic lubrication, a
relatively small substantial family of esters have been found to be very
useful
in severe environment applications.
Esters
lubricants have already captured certain niches in the industrial market
such as
reciprocating air compressors and high temperature industrial oven chain
lubricants. When one focuses on high temperature extremes and their telltale
signs such as smoking, wear, and deposits, the potential applications for
the
problem solving ester lubricants are virtually endless.
In
many
ways esters are very similar to the more commonly known and used synthetic
hydrocarbons or PAOs. Like PAOs, esters are synthesized form relatively pure
and
simple starting materials to produce predetermined molecular structures designed
specifically for high performance lubrication. Both types of synthetic base
stocks are primarily branched hydrocarbons which are thermally and oxidatively
stable, have high viscosity indices, and lack the undesirable and unstable
impurities found in conventional petroleum based oils. The primary structural
difference between esters and PAOs is the presence of multiple ester linkages
(COOR) in esters which impart polarity to the molecules. This polarity affects
the way esters behave as lubricants in the following ways:
Volatility:
The polarity of the ester molecules causes them to be attracted to one another
and this intermolecular attraction requires more energy (heat) for the esters
to
transfer from a liquid to a gaseous state. Therefore, at a given molecular
weight or viscosity, the esters will exhibit a lower vapor pressure which
translates into a higher flash point and a lower rate of evaporation for
the
lubricant. Generally speaking, the more ester linkages in a specific ester
the
higher its flash point and the lower its volatility.
Lubricity:
Polarity also causes the ester molecules to be attracted to positively charged
metal surfaces. As a result, the molecules tend to line up on the metal surface
creating a film which requires additional energy (load) to penetrate. The
result
is a stronger film which translates into higher lubricity and lower energy
consumption on lubricant applications.
Detergency/Dispersency:
The polar nature of esters also makes them good solvents and dispersants.
This
allows the esters to solubilize or disperse oil degradation by-products which
might otherwise be deposited as varnish or sludge, and translates into cleaner
operation and improved additive solubility in the final lubricant.
Biodegradability:
While stable against oxidative and thermal breakdown, the ester linkage provides
a vulnerable site for microbes to begin their work of biodegrading the ester
molecule. This translates into very high biodegradability rates for ester
lubricants and allows more environmentally friendly products to be
formulated.
Ethos
Environmental manufactures and distributes Ethos FR, a unique combination
of
high-quality, non-toxic, specially designed esters that uses only the elements
of carbon, hydrogen and oxygen. It significantly reduces emissions, fuel
consumption, and engine maintenance costs. Ethos FR provides an immediate,
cost-effective strategy for fighting air pollution caused by fossil fuels
and
the internal combustion engine. This combination of low molecular cleaning
esters and the high molecular lubricating esters, reformulates any fuel whether
it’s gasoline, diesel, methanol, ethanol, LNG, compressed natural gas or
bio-diesel. When blended with fuels, Ethos FR reduces the emissions of
hydrocarbons (HC), nitrogen oxides (NOx), carbon monoxide (CO), particulate
matter (PM) and other harmful products of combustion. Yet, the emission of
O2 is
significantly increased. An EPA registered laboratory, confirms that Ethos
FR is
99.99976% clean upon ignition and ashless upon combustion. Ethos FR is free
of
carcinogens.
Ethos
FR
is a light colored, multi-functional fuel reformulator. It is designed for
use
in all fuels to increase power and mileage, dissolve gums and varnishes,
lubricate upper cylinder components and keep the entire fuel system clean
and
highly lubricated. It is recommended for use at 1 part in 1280, which is
equal
to 1 fluid ounce of Ethos FR per 10 gallons of fuel.
Typical
Specifications
|
Tests
|
Results
|
Viscosity
@ 37.8º C,CS
|
10.39
|
Viscosity
@ 100º F, SSU
|
60.2
|
Specific
Gravity @ 15.6/15.6ºC
|
0.93
|
API
Gravity, Degrees
|
26.6
|
Flash
Point, COC, ºC (ºF)
|
149ºC
(300ºF)
|
Color
and Appearance
|
Light,
bright and clear
|
Sediment
|
None
|
Ethos
Environmental offers a cost-effective solution to relieve skyrocketing fuel
prices and help lessen environmental regulatory pressures. Ethos products
address one problem that has two side effects, wasted fuel and air
pollution. Fuel burns inefficiently in an internal combustion engine and
that inefficiency leads to wasted fuel transformed into toxic emissions.
Ethos
products make fuel burn more efficiently so it significantly improves both
of
the aforementioned adverse effects. Most important, the use of Ethos results
in
fuel cost savings to the customer.
Fuel
and Maintenance Costs Savings:
•
Increases Miles-Per-Gallon between 7% and 19% Fleet-Wide
•
Enhances Engine Performance by Reducing Heat Produced by Friction
Fines
and Downtime are Reduced Due To Air Pollution:
•
Reduces
Toxic Emissions By 30% or More
•
Free
Of
Carcinogens
•
Non-Toxic & Non-Hazardous
•
Not
a
Petrochemical
•
99.99976% Ashless upon Combustion
Repairs:
•
Improves Combustion
•
Cleans
Fuel System
•
Lubricates Moving Components
•
Extends
Engine Life by Reducing Friction
How
Do Ethos Products Work?
Ethos
products reformulate any fuel, resulting in two important benefits. The first
benefit is the added lubricity to the engine. The second is adding cleansing
properties to the fuel. All of the internal components benefit from the
cleansing and lubricating action including the fuel lines, filters, carburetors,
spark plugs and injectors. Ethos also conditions the engine seals, keeping
them
tighter for a longer period of time. A cleaner, more lubricated engine runs
smoother, requires less maintenance and reduces engine heat significantly,
thereby returning horsepower closer to the manufacturer’s specifications. Ethos
removes carbon deposits that cause fuel to combust incompletely, resulting
in
wasted fuel that creates toxic emissions. The combination of cleaning and
lubricating esters in our products stabilize the fuel without changing its
specifications.
In
Ethos
FR®, for example, a group of low molecular weight esters clean the dirty
deposits formed by fuels and the combustion process. These deposits lower
performance of an engine making it less fuel-efficient. Causing it to exhaust
raw fuel, which is the primary contributor to pollution. A group of high
molecular weight esters lubricate the engine surfaces as the fuel runs through
it. Their molecular structure is small enough to penetrate the metal and
form a
lubricating layer between surfaces. This process allows the moving components
of
an engine to operate smoother and with less power-robbing friction and
heat.
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
products 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 additives and oxygenates 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 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.
Both
E85
and biodiesel, such as B5, are alternative measures currently being considered
for use by the federal government. However, these alternative
measures rely entirely on agricultural resources such as corn, barley, wheat
and
vegetable oils. Realistically, the agricultural sector of the economy
cannot hope to produce sufficient quantities of these products to cause an
appreciable effect on global warming. This is a problem not facing
Ethos as the product is readily available and continuously produced at a
lower
price.
While
the
debate on emissions reduction solutions continues, Ethos Environmental is
making
a difference in cleaning the air today while reducing fuel costs to its
customers. Extensive road tests with Ethos FR® have
proven that
commercial fleets, on average, increase fuel mileage between 7% and 19% and
reduce emissions by more than 30%. Ethos FR® is non-toxic,
non-hazardous and works with any fuel used in cars, trucks, buses, RV’s, ships,
trains and generators.
The
overall result is that Ethos FR® makes
engines
combust fuel more efficiently. When an engine uses each measure of
fuel to the maximum degree possible, it has two very important
benefits. It reduces fuel consumption and reduces non-combusted
residues that an engine expels in the form of exhaust emissions such as
hydrocarbons, nitrogen oxides, carbon monoxide, particulate matter and other
harmful products of combustion. Unused fuel is saved in the fuel
tank, waiting to be used efficiently by the engine, instead of exhausted
in the
form of toxic emissions. Ethos FR® reduces
emissions
without adding any of its own components to the exhaust since it is 99.99976%
ash-less upon combustion, and free of carcinogenic compounds.
Ethos
Environmental is also at the forefront in the development of new blending
methods and is positioned to become an industry leader with new products
currently under development.
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.
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 name was
changed to Ethos Environmental, Inc. and the Company 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 the 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
shares issued by the registrant (17,718,187) were revalued at the new par
value
of $.0001. Another adjustment to common stock and additional paid in
capital was generated due to the cancellation of pre-merger shares
(17,717,477). Due to the effect of the reverse merger, the Buyer’s
shares outstanding (479,500) were converted to common stock and the effect
of
the net assets acquired was adjusted to additional paid in
capital. During the year, another 4,910,000 shares of common stock
were issued for services based upon the price at date of
issuance.
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:
·
|
The
Company was the surviving legal 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, was issued to the Ethos
stockholders,
|
·
|
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,
|
·
|
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.”
|
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.
Products
Ethos
manufactures a unique line of fuel reformulators that contain a blend of
low and
high molecular weight esters. Ethos 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, i.e.
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
due
to the fact that a more complete combustion process obtains increased power
from
every engine revolution.
The
management of Ethos Environmental firmly believes that the market for our
product is aggressively expanding. Worldwide fuel consumption is
approximately 85 million barrels per day and projected by the Energy Information
Administration to continue to grow to 97 million barrels per day by 2015,
and
118 million barrels per day by 2030. Much of the dramatic growth over
the past decade has been fueled by the dramatic expansion of India, China
and
Brazil. As additional undeveloped countries begin to expand, so too
will fuel consumption and the Company’s market base. In addition,
consumers are becoming more sensitive to increased fuel economy as oil prices
have increased eight times since the late 1990s.
Ethos
products reduce fuel emissions, benefiting the environment in two notable
ways:
|
1.
|
The
use of Ethos products reduce engine exhaust emissions by 30%
or more, including measurable reductions in the emission of hydrocarbons
(HC), nitrogen oxides (Nox), and carbon monoxide (CO). All of
these emissions are highly toxic and detrimental to the
environment.
|
|
2.
|
Ethos
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 products are added to diesel fuel, the engine
runs
cleaner, smoother and cooler - significantly reducing sooty exhaust.
Engines treated with Ethos run with less friction, heat and noise.
Fuel
and lubricating systems, filters, tanks, and injectors last longer,
reducing maintenance costs.
|
Ethos
has
two products, Ethos FR® and Ethos Bunker Fuel Conditioner (“Ethos BFC”). There
are two esters used in each product, a light ester and a heavy ester. For
the Ethos FR®, we obtain the esters from Hatco and Cognis. The mineral oil
used in the Ethos FR® is obtained, primarily, from Chevron, and, at times, from
Proctor and Gamble.
Ethos
FR®
can be used in any fuel. Ethos BFC is primarily used for Maritime Diesel
Fuels
and Power Plant Diesel Fuel, or external combustion engines. Ethos BFC
uses two esters distinct from those used in the Ethos FR® as the diesel fuel
used in external combustion engines is heavier and thicker than normal diesel
fuel. We obtain the heavy ester for the Ethos BFC from Tekat (a Netherlands
Company headquartered in the UK). The light ester is purchased from
Cognis. While there is no toxicity in the Ethos FR®, Ethos BFC has some degree
of toxicity, though not much.
Ethos
products provide risk-free benefits with an economic gain to the client.
To
date, all customers have testified, either verbally or in writing, that they
experienced a monetary gain on fuel savings, with all stating that they
experienced an average improvement in mileage per gallon between 7% and 19%,
depending on the fuel (gasoline or diesel), the vehicle used, and the individual
driver’s practices and driving traits.
Trademarks
We
own
the following trademark(s) used in this document (which is registered with
the
United States Patent and Trademark Office under Registration Number 3,015,561):
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
It
is
believed that with the increased worldwide focus on the greenhouse effects
of
petroleum products, the ability of Ethos to reduce emissions by 30% can only
increase the Company’s market presence. Political and
media pressures are causing more people to become concerned about our
environment and the effects of global warming. For example, per the
National Snow and Ice Data Center in Boulder, Colorado, the ice cover in
the
Arctic Ocean has shattered the all-time low record during the summer months
of
2007. Most researchers had anticipated the complete disappearance of
the Arctic ice pack during the summer months would not happen until after
the
year 2070, but now believe it could happen as early as 2030.
Ethos
Environmental began the manufacturing and marketing of Ethos 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 our products “one gallon at a time”,
earning the respect and trust of each user. Over the past decade, our products
have gone though extensive miles of road tests, with all such testing verifying
the ability of our products to significantly reduce emissions while improving
gas mileage. Now, at a time of skyrocketing fuel costs, the value of
Ethos products 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.
As
crude
oil is heated, various components evaporate at increasingly higher temperatures.
First to evaporate is butane, the lighter-than-air gas used in cigarette
lighters, for instance. The last components of crude oil to evaporate, and
the
heaviest, include the road tars used to make asphalt paving. In between are
gasoline, jet fuel, heating oil, lubricating oil, bunker fuel (used in ships),
and of course diesel fuel. The fuel used in diesel engine applications such
as
trucks and locomotives is a mixture of different types of molecules of hydrogen
and carbon and include aromatics and paraffin. Diesel fuel cannot burn in
liquid
form. It must vaporize into its gaseous state. This is accomplished by injecting
the fuel through spray nozzles at high pressure. The smaller the nozzles
and the
higher the pressure, the finer the fuel spray and vaporization. When more
fuel
vaporizes, combustion is more complete, so less soot will form inside the
cylinders and on the injector nozzles. Soot is the residue of carbon, partially
burned and unburned fuel.
Sulfur
is
also found naturally in crude oil. Sulfur is a slippery substance and it
helps
lubricate fuel pumps and injectors. It also forms sulfuric acid when it burns
and is a catalyst for the formation of particulate matter (one of the exhaust
emissions being regulated). In an effort to reduce emissions, the sulfur
content
of diesel fuel is being reduced through the refinery process, however, the
result is a loss of lubricity.
Diesel
fuel has other properties that affect its performance and impact on the
environment as well. The main problems associated with diesel fuel
include:
·
|
Difficulty
getting it to start burning o Difficulty getting it to burn completely
o
Tendency to wax and gel
|
·
|
With
introduction of low sulfur fuel, reduced
lubrication
|
·
|
Soot
clogging injector nozzles
|
Today’s
advanced diesel engines are far cleaner than the smoke-belching diesels of
recent decades. Unfortunately, even smokeless diesel engines are not clean
enough to meet current stricter air pollution regulations.
While
diesel engines are the only existing cost-effective technology making
significant inroads in reducing “global warming” emissions from motor vehicles,
it is not sufficient to satisfy regulators and legislators. Diesel engines
will
soon be required to adhere to stringent regulatory/legislative guidelines
that
meet near “zero” tailpipe emissions, especially on smog-forming nitrogen oxides
(NOx), particulate matter (PM) and “toxins”; the organic compounds of diesel
exhaust.
The
U.S.
Department of Energy, Energy Information Administration (“EIA”) estimates that
worldwide annual consumption of diesel fuel approximates 210 billion U.S.
gallons. A breakdown of this estimate is summarized as follows:
Based
o
further EIA published data, the following table* depicts domestic distillate
fuel oil consumption by energy use for 2001.
*
Sources: Energy Information Administration’s Form EIA-821, “Annual Fuel Oil and
Kerosene Sales Report,” for 1997-2001 and “Petroleum Supply Annual,” Volume 1,
1997-2001. Totals may not equal sum of components due to independent
rounding.
When
blended with fuels, Ethos 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
market for products and services that increase diesel fuel economy, reduce
emissions and engine wear is rapidly evolving and intensely competitive and
management expects it to increase due to the implementation of stricter
environmental standards. Competition can come from other fuel additives,
fuel
and engine treatment products and from producers of engines that have been
modified or adapted to achieve these results. In addition, we believe that
new
technologies, including additives, will further increase
competition.
Alternative
fuels, gasoline oxygenates and ethanol production methods are continually
under
development. A number of automotive, industrial and power generation
manufacturers are developing more efficient engines, hybrid engines and
alternative clean power systems using fuel cells or clean burning gaseous
fuels.
Vehicle manufacturers are working to develop vehicles that are more fuel
efficient and have reduced emissions using conventional gasoline. Vehicle
manufacturers have developed and continue to work to improve hybrid technology,
which powers vehicles by engines that utilize both electric and conventional
gasoline fuel sources. In the future, the emerging fuel cell industry offers
a
technological option to address increasing worldwide energy costs, the long-term
availability of petroleum reserves and environmental concerns.
The
diesel fuel additive business and related anti-pollutant businesses are subject
to rapid technological change, especially due to environmental protection
regulations, and subject to intense competition. We compete with both
established companies and a significant number of startup enterprises. We
face
competition from producers and/or distributors of other diesel fuel additives
(such as Lubrizol Corporation, Chevron Oronite Company, Octel Corp., Clean
Diesel Technologies, Inc. and Ethyl Corporation), from producers of alternative
mechanical technologies (such as Algae-X International, Dieselcraft, Emission
Controls Corp. and JAMS Turbo, Inc.) and from alternative fuels (such as
bio-diesel fuel and liquefied natural gas) all targeting the same markets
and
claiming increased fuel economy, and/or a decrease in toxic emissions and/or
a
reduction in engine wear.
Ethos
FR®
and Ethos BFC are
unique, and comparative fuel reformulators do not exist. 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 products 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
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 unhealthy and unsightly exhaust
emissions.
Ethos
FR – Proof of Performance
An
integral part of our sales process is to conduct proof of performance
demonstrations for potential customers wherein we accumulate historical data
that documents the effects of the use of Ethos FR® (i.e.
advantages in
terms of increased fuel economy, a decrease in engine wear and reductions
in
toxic emissions) on that customer’s specific vehicles or vessels. In connection
with the proof of performance demonstrations, we provide fleet monitoring
services and forecasts of fuel consumption for purposes of the prospective
customer’s own analysis.
The
results below
are test results of customer experiences using Ethos FR®. The
first results are for a fleet of trucks for Allied Waste. The second
results are for Ecuador for Ethos BFC used in external combustion
engines. On our website are results for other customers
including: US Department of Justice; LA Transport; Lucar Transport;
Mission Linen Supply; Vista City; China City Bus Company; Oceanside School
District; San Diego Port District; and the Shenzhen Public Transport
Group. In all tests the results have been consistent, with a 7% to
19% cost saving, and an over 30% reduction in emissions.
Following
is a Management Report outlining the process and methodology of the testing
of
Ethos
FR®
for Allied Waste Services:
MANAGEMENT
REPORT
Testing
of Ethos Fuel Reformulator
Allied
Waste Services, Southwestern Region
Overview
Ethos
FR
has been used, without interruption, at multiple Allied Waste locations in
Southern California since the year 2001.
Based
on
the positive results realized at those locations (estimated at a 10% reduction
in fuel consumption plus significant reductions in maintenance/repair costs
and
emissions) an initial test was conducted at one location in the Southwestern
Region of Allied Waste during the months of July and August,
2006. The results of this initial 4 week test showed an estimated
reduction in fuel consumption of 10.35%, as measured by gallons per engine
hour,
compared to a baseline period of the previous 12 months (July 2005 through
June
2006).
Based
on
these positive results, a second phase of testing was initiated in May 2007
encompassing 4 locations in the Southwestern Region. The period of
testing was generally the months of May, June and July 2007, however, one
location continued Ethos use through August. The detailed data
obtained from this testing period is content of this report.
Testing
Procedures and Data Compilation & Reporting
Methodology
Upon
initiation of the testing period, fuel consumption and engine hour data was
obtained from each location for a baseline period in order to establish a
point
of comparison for the test. The baseline period for each location was
generally the period of January through March, 2007.
The
standard CFA report obtained from each location was the “Fuel Transaction Detail
by Equipment #” report. This report provides the most comprehensive
daily listing of fuel dispensed and engine hours recorded for each vehicle
during each time period. It is important to note that
detailed reports were used throughout the compilation of the
data contained in this analysis because every report from every location
contains several “anomalies” which could distort the accuracy of any data from
any report.
Most
common among these “anomalies” are:
1.
|
Vehicles
showing fuel consumed but few or no engine hours recorded (which
would
result in a higher fuel per hour calculation than is actually the
case),
|
2.
|
Vehicles
showing no fuel consumed yet have engine hours recorded (which
would
result in a lower fuel per hour calculation than is actually the
case),
or
|
3.
|
Vehicles
that do not have recorded data for both comparative
periods. This would
include:
|
·
|
new
vehicles that have been added to the fleet (and therefore have
no baseline
data)
|
·
|
vehicles
that have been retired from the fleet or are out of service for
repairs or
maintenance (these vehicles will have baseline data but no data
in one or
more of the test periods).
|
Raw
Data vs. Comparable Data
Due
to
the frequency and significance of the anomalies outlined above, a detailed
process was implemented to ensure that any such reporting inaccuracies did
not
undermine the validity of the comparative data obtained during this
test.
The
procedures utilized by Green Fleet Associates were as follows:
1.
|
Every
CFA report that was obtained from every location for every time
period as
reviewed line-by-line, vehicle-by-vehicle to assure the validity
of the
data. Any obvious anomalies were highlighted on the raw CFA
report.
|
2.
|
This
raw data from the CFA report was transferred to a spreadsheet in
order to
facilitate ongoing side-by-side, vehicle-by-vehicle comparisons
of
baseline to test period data. Any anomalies or missing data for
any vehicle was highlighted on the spreadsheet for reach comparative
period.
|
3.
|
A
true “apples-to-apples” comparison was obtained for each time period by
removing all highlighted items.
|
Verification
of Ethos Use
Equally
important in assuring the validity of the data collected was making best
efforts
to verify that all of the fuel being consumed by each location during the
testing period was being treated with Ethos. The method utilized to
check this compliance was a detailed tracking of fuel deliveries compared
the
Ethos inventory at each location during the testing period. While
almost all locations maintained a consistent treatment schedule throughout
the
three month testing period, there were some minor exceptions.
The
spreadsheets detailing the baseline & test period data, for each month at
each location are as follows:
![](ppethos2.jpg)
On
or
about August 7, 2007, the Company agreed to sell the land and building located
at 6800 Gateway Park Drive located in San Diego, CA, as well as 2,500,000
shares
of its common stock in exchange for $7,875,000. The Company’s Form
8-K filed on or about August 10, 2007 is incorporated by reference herein
and
provides additional details regarding this transaction.
Critical
Accounting Policies and Estimates
We
believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management’s judgments and estimates. These significant accounting policies
relate to revenue recognition, research and development costs, valuation
of
inventory, valuation of long-lived assets and income taxes. For a summary
of our
significant accounting policies (which have not changed from December 31,
2006),
see our annual report on Form 10-KSB for the period ended December 31,
2006.
Income
Taxes
The
Company accounts for its income taxes under the provisions of Statements
of
Financial Accounting Standards No. 109 (SFAS No. 109). Income taxes are provided
for the tax effects of transactions reported in the financial statements
and
consist of taxes currently due plus deferred taxes related primarily to
differences between the bases of certain assets and liabilities for financial
and tax reporting. Deferred taxes represent the future tax return consequences
of those differences, which will either be taxable or deductible when the
assets
and liabilities are recovered or settled. No provision for deferred taxes
is
reflected in the financial statements as the valuation allowance offsets
any
deferred tax benefit.
The
Company is liable for taxes in the United States. As of September 30, 2007,
the
Company does not expect to have any income for tax purposes and therefore,
no
tax liability or expense has been recorded in these condensed financial
statements, except for the minimum tax in California amounting to
$800.
The
Company estimates that it has tax losses of approximately
$18,925,000 which may be available to reduce future
taxable income. Any tax loss carry forwards available expire between the
years
2020 and 2026.
The
deferred tax asset associated with the estimated tax loss carry forward is
approximately $7,500,000. The Company has provided for a valuation allowance
as
an offset against the deferred tax asset as it is unknown at this time if
the
asset will be utilized. Deferred tax assets must be reduced by a valuation
allowance if, based upon the weight of available evidence, it is more likely
than not that some portion or all of the benefit will not be
realized. The Company has taken a conservative approach in that it is
unknown at this time if the tax benefit from these net operating losses will
ever be realized. Therefore, the entire amount of the deferred tax
benefit has been reduced by a valuation allowance equal to the tax
benefit.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007
AS
COMPARED WITH THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,
2006
The
following analysis of historical financial condition and results of operations
are not necessarily reflective of the on-going operations of the
Company.
Revenues
We
recognized revenues of $2,299,183 for the three months ended September 30,
2007
and $7,596,279 for the nine months ended September 30, 2007 compared to revenues
of $ 1,546,078 and $4,244,020 for the same periods in the prior
year. For the nine months ended September 30, 2007 this represents an
increase of $3,352,259 or 79%. The primary source of revenue for the nine
months
ended September 30, 2007 is from the sale of Ethos FR® to Ecuadorean
companies.
Other
components of revenue include freight and service. Freight is billed
to the customer and compared to the amount of freight recorded in cost of
sales,
so that the Company is adequately capturing the cost of freight and billing
to
the client appropriately.
During
the three months ended September 30, 2007, the Company continued its dramatic
growth in sales to Latin America. In addition, the Company has
contracted additional sales through 2007 to Africa, Latin America and
Australia.
The
management of Ethos Environmental firmly believes that the market for our
product is aggressively expanding. Worldwide fuel consumption is
approximately 85 million barrels per day and projected by the Energy Information
Administration to continue to grow to 97 million barrels per day by 2015,
and
118 million barrels per day by 2030. Much of the dramatic growth over
the past decade has been fueled by the dramatic expansion of India, China
and
Brazil. As additional undeveloped countries begin to expand, so too
will fuel consumption and the Company’s market base. In addition,
consumers are becoming more sensitive to increased fuel economy as oil prices
have increased eight times since the late 1990s.
It
is our
goal to continue to aggressively build on our success in
the domestic and international markets, offering the
benefits of our products to companies and countries around the
world. During 2006, our revenue base increased by 168% over
2005. Since 2004, the company has increased its revenue base by 450%,
and by 573% since 2003.
The
company’s management is directed to continued growth with its attention focused
on comparative savings in marketing and production costs. Our
attention going forward is to increase market awareness of our name and the
benefits provided by our product line.
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) increase
growth in the number of customers and vehicles per customer, and (3) provide
extensive customer service and support.
Gross
Profit
Gross
profit, defined as revenues less cost of goods sold, was $1,736,252 or 75%
of
sales for the three months ended September 30, 2007 and $5,323,406 or 70%
for
the nine months ended September 30, 2007, compared to $ 736,074 or 48% of
sales
for the three months ended September 30, 2006 and $2,522,910 or 59% for the
nine
months ended September 30, 2006. In terms of absolute dollars, gross profit
increased 111% for the nine months ended September 30, 2007 compared to same
period in the prior year due primarily to the increasing sales of the Ethos
FR® product. During 2006 the company experienced very high
freight expenses.
Cost
of
sales was $562,931 for the three months ended September 30, 2007 and $810,004
for the three months ended September 30, 2006. Cost of sales represented
25% of
revenues for the three months ended September 30, 2007. For the nine
months ended September 30, 2007, Cost of sales was $2,272,873 or 30% of sales
compared to $1,721,110 and 41% for the nine months ended September 30,
2006. The increase in cost of sales at September 30, 2006 was
unusually high due to large freight expenses. In 2007 depreciation
increased due to the purchase of the building in 2006.
Management
continues to direct attention to increasing production efficiency and thereby
reducing cost of sales as a
percentage of sales. Cost of sales includes the following
components: material, labor, depreciation, and freight.
Operating
Expenses
The
Company’s current operating expenses are comprised of costs associated with
administration; including salaries, consulting, marketing, and legal and
business development. We will incur additional operating expenses for
new staff members as they are hired.
Depreciation
expense incurred for the three months ended September 30, 2007 was
$66,761. The increase in depreciation is due to the purchase in
2006 of the new building. The majority of the depreciation ($58,837)
is shown in cost of sales. Production and office equipment are
depreciated on a 5-year basis, and the building is depreciated on a 25-year
basis. Much of the equipment was sold under a sale/leaseback transaction
during
the first six month of 2007, thereby reducing depreciation significantly
for the
current three months ended September 30, 2007 as compared to the three and
six
month periods ended March 31 and June 30, 2007, respectively.
Operating
expenses incurred during the three months and nine months ended September
30,
2007, and September 30, 2006 are shown below. These expenses were
incurred primarily in the following categories:
Description/Dates
|
9/30/07
|
9/30/07
|
9/30/06
|
9/30/06
|
|
Three
months
|
Nine
months
|
Three
months
|
Nine
months
|
Common
stock – a non cash item for prior services – See Note 1
|
-
|
3,875,710
|
-
|
-
|
Debt
extinguishment – See Note 2
|
-
|
6,646,171
|
-
|
-
|
Building
impairment – a non cash item – See Note 4
|
1,550,000
|
1,550,000
|
-
|
-
|
Business
consulting fees
|
172,475
|
262,887
|
74,278
|
165,426
|
Outside
services
|
214,303
|
227,103
|
1,645
|
8,265
|
Office
expenses, including occupancy
|
178,309
|
450,937
|
62,230
|
193,612
|
Depreciation
(other than in cost of sales)
|
7,924
|
18,197
|
-
|
-
|
Research
and development
|
-
|
7,500
|
91,893
|
204,552
|
Taxes
– property, franchise and other
|
4,671
|
48,584
|
53
|
3,338
|
Salaries
and wages
|
206,207
|
532,624
|
63,890
|
63,890
|
Bad
debt expense
|
16,187
|
16,152
|
600
|
600
|
Other
|
|
|
|
7,602
|
Sub-total
– General and Administrative
|
2,350,076
|
13,635,865
|
294,589
|
647,285
|
Selling
expenses
|
163,100
|
433,194
|
123,255
|
593,431
|
Total
– Operating expenses
|
2,513,176
|
14,069,059
|
417,844
|
1,240,716
|
|
|
|
|
|
Research
and Development Costs
Research
and development costs are charged to operations when incurred and are included
in operating expenses. The amounts charged for three months ended September
30,
2007 amounted to $0, compared to $91,893 for the three months ended September
30, 2006. For the nine month periods ended September 30, 2007 and
2006, R&D costs totaled $7,500 and $204,552, respectively. All of these
costs are borne by the Company. Research and development (R&D) costs have
continued to decrease during 2007 due to the completion of much of the R&D
of the Ethos FR® product.
The
company continues to strive to improve its products, packaging, etc., and
develops new products for the future.
Net
Loss
The
Company incurred a net loss for the three months ended September 30, 2007
of
$897,883 as compared to net income of $147,914 for the comparable prior year
period. For the nine months ended September 30, 2007, the Company
incurred a net loss of $9,065,867 as compared to net income of $897,937 for
the
comparable period of the prior year. The net loss for the nine months
ended September 30, 2007 is a direct result of the issuance of a Common Stock
and Purchase Warrant to purchase 1,900,000 shares of the Company’s common stock
at a purchase price of $2.50, as well as, the issuance of 1,651,500 net shares
of common stock for cash and services. For the three months ended
September 30, 2007, the net loss is a direct result of a loss impairment
on the
building due to the issuance of stock and simultaneous sale of the
building.
The
change in terms of the Note Payable during the period ended June 30, 2007
resulted in Debt Extinguishment of $6,646,171 as calculated using the
Black-Scholes methodology. The corresponding entry increased expenses
and equity.
None
of
these transactions affected cash except for the $2,000,000 received during
the
three months ended September 30, 2007 for issuance of common stock.
NON-OPERATING
INCOME AND EXPENSES
Non-operating
expenses increased for the nine months ended September 30, 2007compared to
the
same period in 2006, as a result of the financing of the new
building. Interest expense totaled $499,252 during the nine months
ended September 30, 2007 from $393,932 for the comparable period in 2006.
The
interest was directly associated with the interest-only loan for $4,750,000,
related to the purchase of the new building and interest-only
$500,000 and $700,000 working capital loans.
In
addition, non-operating income increased for the nine months ended September
30,
2007 compared to the same period in 2006, due to the sale and leaseback
transaction with Mazuma Capital. The Company sold assets of $737,968
to Mazuma, and leased back these assets during the first two quarters in
2007. This transaction was treated as a sale and the Company
recognized a gain upon the sale of the equipment of $179,003 which is shown
in
other income. (See Loan Facilities below).
Also,
for
comparison purposes, there were 2,500,000 newly issued shares for cash during
the three months ended September 30, 2007 (See Note 1), compared to 30,823
shares issued during the three months ended September 30,
2006.
Liquidity
and Capital Resources
During
the nine months ended September 30, 2007, the Company had working capital
of
$10,836,726 and stockholders’ equity of $6,702,282 compared to working capital
of $49,801 and stockholders’ equity of $1,696,269 for the year ended December
31, 2006.
On
September 30, 2007, the Company had $659,306 in cash of which $300,000
is restricted, total assets of $13,146,764 and total liabilities of $6,444,482,
compared to $64,867 in cash and $300,000 in restricted cash, total assets
of
$7,519,474 and total liabilities of $5,823,205 for the year ended December
31,
2006.
The
Company purchased a building in 2006. The initial term of the
building loan was for a period of one year with a maturity date of January,
2007. In 2006, the note was assigned to a new note holder with
reduced interest of 14% compared to the original 17%. In May, 2007
negotiations began to modify the terms of the promissory note and extend
the
maturity for a period of two additional years through March 31, 2009, as
well
as, a reduced interest rate of 12%. On May 23, 2007, an agreement to
modify the promissory note was negotiated. Terms of the modified note
include an extension to March 31, 2009, and a reduction of interest to
12%. The conversion feature was replaced with a three-year warrant to
purchase up to 1.9 million shares of common stock at an exercise price of
$2.50. The warrant expires March 31, 2010. This transaction is
reflected in the Form 8K which was filed May 24, 2007.
In
July,
2007, the Company entered into an agreement to sell the building for a price
of
$7,875,000. (See Loan Facilities Below).
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.
The
net
loss incurred at September 30, 2007 increased due to issuance of stock for
services in the amount of $3,875,710 as reflected within the cash flow, as
well
as, a loss impairment on the issuance of stock related to the sale of building
transaction in the amount of $1,550,000. Debt extinguishment due to
the new terms of the Note Payable affected the net loss by
$6,646,171. These were non-cash transactions that increased expenses
and increased equity. In addition, depreciation expense increased due
to the purchase of a building in 2006. Approximately, $250,000 of new
equipment was purchased during the nine months ended September 30,
2007. Receivables have increased significantly due to a significant
growth in sales for each quarter and lack of collection of Ecuadorian
receivables. Payables have increased as well due to the need for
additional cost of goods materials and labor to provide product for the growth
in sales. Proceeds from the sale and leaseback provided for an influx
of cash, although 50% of the proceeds were held back as a security deposit.
Proceeds from the sale of 2,500,000 shares of common stock provided for an
influx of cash during the three months ended September 30, 2007, in the amount
of $2,000,000. In conclusion, cash increased by approximately
$300,000 for the quarter ended September 30, 2007.
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, the Company entered into an equipment lease agreement with
Mazuma Capital Corp. wherein the Company agreed to a 24-month sale and leaseback
arrangement for up to $800,000 of its manufacturing equipment. The lease
calls
for a monthly payment based on a factor of .04125 times the average outstanding
loan balance during the month. Through August 20, 2007, the company had placed
property valued at $737,968 under this lease arrangement with Mazuma Capital
Corp.
The
contract for this sale and leaseback of equipment was accounted for as an
operating lease per SFAS 13 and 28. There is no bargain purchase
option at the end of the lease, and neither the 75% nor the 90% test has
been
met. The title may pass back to the Company at the end of the lease;
however, the lease may also be continued at the end of the 24 month period
or
the equipment may be retained by the lessor. The Company feels the appropriate
stance is to show this as an operating lease in 2007; thereby recording the
reduction of equipment, the corresponding gain, and treating the payments
as
lease expense.
In
July,
2007, the Company entered into an agreement to sell the building for a price
of
$7,875,000. As part of the property sale agreement, the purchase price was
allocated as follows: $5,875,000 for purchase of the premises and
$2,000,000 for purchase of 2,500,000 shares of common stock. This
transaction resulted in a loss impairment to the building upon the issuance
of
the stock. Simultaneously, the Company agreed to lease back the building
for a
period of 15 years, starting October 1, 2007. This transaction is
reflected in the Form 8K which was filed August 10, 2007.
Inflation
has not significantly impacted the Company’s operations.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our
investors.
PLAN
OF OPERATIONS FOR THE NEXT TWELVE MONTHS
Since
inception in 2000, Ethos Environmental has grown its customer base to thousands
of diverse clients on six continents 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
on
six continents expected to top current forecasts. Furthermore, market
implementation plans anticipate growth in 2007 and beyond, leading to gross
multi million sales in 2008. These projections are based on the product’s proven
ability to improve fuel efficiency while reducing emissions, the Company’s
proven ability to penetrate new markets and build a solid base of loyal
customers, and the world’s increasing costs in the petro-economic
markets.
Looking
forward, marketing will constitute a significant portion of company expenditures
as Ethos Environmental continues to develop sales of new ester-based fuel
and
engine enhancing products. We are in the process of developing new products
covering areas of synthetic oils, sulfur substitutes, and varied formulations
of
the original Ethos FR® and its enhancements.
In
addition, we will continue to initiate patents to cover ongoing development
of a
new engine design that combines past, present and state-of-the-art technologies.
This new system generates rotary shaft power using only a fraction of the
fuel
consumed by today’s internal combustion engines, and testing has yielded power
output that rivals current technologies with just a fraction of the emissions.
We have great hope that this project will revolutionize power generation
as we
know it, significantly easing pollution from the usage of fossil
fuels.
The
management of Ethos Environmental is excited by the enthusiastic acceptance
that
Ethos FR® products have received - domestically and all around the
world. We are proud to provide a product that is part of the solution to
the
high cost of fuel and the health costs of environmental pollutants. Since
inception management has been focused on the development of a solid
infrastructure; building relationships and establishing the foundation of
a
business that will continue to grow - non-stop - into the future.
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.
ITEM
3. CONTROLS AND PROCEDURES
(a)
Evaluation
of Disclosure Controls and Procedures:
Our
President and Chief Financial Officer, after evaluating the effectiveness
of our
“disclosure controls and procedures” (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)), have concluded that, as of September 30,
2007 due to the material weaknesses in our internal control over financial
reporting identified in our 2006 Form 10-KSB, our disclosure controls and
procedures were not effective in providing reasonable assurance that information
we are required to disclose in reports we file is recorded, processed,
summarized and reported within the periods specified.
(b) Management’s
Annual Report on Internal Control Over Financial Reporting:
While
we
have continued our efforts to address each of the material weaknesses identified
in our 2006 Form 10-KSB, there were no material changes in our internal control
over financial reporting during the most recently completed
quarter. We have not identified any additional material weaknesses
during this quarter. We are not planning to report on whether there
has been full remediation of the identified material weaknesses until our
2007
report on internal control over financial reporting is complete.
(c) Changes
in Internal Control Over Financial Reporting:
There
were no changes in our internal control over financial reporting during the
three months ended September 30, 2007 that have materially affected, or are
reasonably likely to materially affect our internal controls over financial
reporting.
During
2007, the company will be directing concerted focus to full compliance with
Sarbanes-Oxley requirements, as revised in Audit Standard No. 5 for small
businesses, in implementing Section 404(a) of the Act.
PART
II.
During
the nine months ended September 30, 2007, ACCUTEK, Inc. filed a lawsuit against
the Company seeking $60,000 in damages. . There are two other smaller
claims against the Company seeking damages in aggregate of approximately
$24,000. Management has accrued what they believe to be the
appropriate amount representing any potential loss. The Company has filed
its
answer, including various counter claims against ACCUTEK, Inc., including
breach
of contractual obligations
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE
OF PROCEEDS.
As
a
result of a Private Placement that was concluded on August 7, 2007, the Company
issued 2,500,000 shares of common stock. The complete details of this
transaction are referenced in the Company’s Form 8-K filed on August 10, 2007,
which is incorporated by reference herein.
Between
July 1, 2007 and September 30, 2007, the Company issued no shares of its
common
stock to consultants, officers, directors and/or key employees for services
rendered.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
On
or
about August 7, 2007, the Company agreed to sell the land and building located
at 6800 Gateway Park Drive located in San Diego, CA, as well as 2,500,000
shares
of its common stock in exchange for $7,875,000. The Company’s Form
8-K filed on or about August 10, 2007 is incorporated by reference herein
and
provides additional details regarding this transaction.
On
October 25, 2007, the sale of the building was completed.
ITEM
6. EXHIBITS AND REPORTS ON FORM
8-K
(a)
Exhibits.
EXHIBIT
NUMBER
|
DESCRIPTION
|
LOCATION
|
3.1
- 3.2
|
Articles
of Incorporation and Bylaws
|
Previously
Filed.
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification (CEO)
|
Filed
herewith
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification (CFO)
|
Filed
herewith
|
32.1
|
Section
1350 Certification (CEO)
|
Filed
herewith
|
32.2
|
Section
1350 Certification (CFO)
|
Filed
herewith
|
(b) Reports
on Form 8-K.
The
following reports on Form 8-K are
incorporated by reference herein:
(a)
|
Form
8-K filed on or about August 10,
2007.
|
(b)
|
Form
8-K filed on or about August 30,
2007.
|
(c)
|
Form
8-K filed on or about November 8,
2007.
|
(d)
|
Form
8-K filed on December 6, 2007.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
DATE:
December 7, 2007 |
ETHOS
ENVIRONMENTAL, INC.
(Registrant)
By:
/s/ Enrique de Vilmorin
|
|
Enrique
de Vilmorin
Director,
CEO and CFO
|