For the
Three Months Ended March 31, 2008 and
2007
|
|
|
2008
|
|
|
2007
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
Net Income
|
|
|
(585,839 |
) |
|
(924,407 |
) |
Adjustments to reconcile Net
Income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Gain on sale
of
assets
|
|
|
0 |
|
|
(131,073 |
) |
Depreciation
|
|
|
19,679 |
|
|
64,411 |
|
Common stock for
expenses
|
|
|
454,266 |
|
|
0 |
|
Stock Issued for
Services
|
|
|
164,607 |
|
|
2,171,460 |
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(954,839 |
) |
|
(2,360,485 |
) |
Inventory
|
|
|
198,999 |
|
|
(34,820 |
) |
Other
Assets
|
|
|
(5,000 |
) |
|
(20,100 |
) |
Accounts Payable & Accrued
Expenses
|
|
|
(37,025 |
)
|
|
802,693 |
|
Net cash used by
Operating Activities
|
|
|
(745,152 |
) |
|
(432,321 |
) |
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
Purchase of Property &
Equipment
|
|
|
(17,163 |
) |
|
(33,543 |
) |
Net Cash used by Investing
Activities
|
|
|
(17,163 |
) |
|
0 |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds from
Sale/Leaseback
|
|
|
0 |
|
|
386,411 |
|
Proceeds from Notes
Payable
|
|
|
1,300,000 |
|
|
82,181 |
|
Payments to Note Payable, Related
Party
|
|
|
(61,765 |
) |
|
(19,876 |
) |
Repayment of Note
Payable
|
|
|
(350,000 |
) |
|
0 |
|
Net cash provided
by Financing
Activities
|
|
|
888,235 |
|
|
448,716 |
|
Net cash increase for
period
|
|
|
125,920 |
|
|
(17,148 |
) |
Cash at beginning of
period
|
|
|
74,176 |
|
|
64,867 |
|
Cash at end of
period
|
|
|
200,096 |
|
|
47,719 |
|
SUPPLEMENTAL NON
CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Value of equipment sold then
leased back Taxes
|
|
$
$
|
0
0
|
|
$
$
|
637,075
0
|
|
See notes to consolidated
financial statements
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
Three months ended March 31,
2008
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 redomiciled to Nevada, and changed its name to
Ethos Environmental, Inc. In addition thereto, and as part of the merger, Victor
set a record date of November 16, 2006 for a reverse stock split of 1 for 1,200
of the issued and outstanding shares of Victor. Prior to the reverse stock split
and subsequent merger, Victor issued 47,685,805 shares to reduce its liabilities
by $257,503 based on the pre-merger stock price of $0.0054 per share. All of the
per share data in these consolidated financial statements are presented on a
post-split basis.
The merger provides for a
business combination transaction by means of a merger of Ethos with and into
Victor, with Victor as the corporation surviving the merger. Under the terms of
the merger, Victor acquired all issued and outstanding shares of Ethos in
exchange for 17,718,187 shares of common stock of Victor. Shares of Victor
common stock, representing an estimated 97% of the total issued and outstanding
shares of Victor common stock, were 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 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 was recognized by Victor 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. Accordingly the operations of the company are
included in these financial statements as of November 2, 2006. In accordance
with guidance applicable to these circumstances, the merger was considered to be
a capital transaction in substance. Accordingly, for accounting purposes, the
merger was treated as a recapitalization of Victor. The assets and liabilities of
Victor have been included in these consolidated financial statements at their
net book value.
The assets acquired and
liabilities assumed of Victor were as follows:
Assets
|
|
|
|
|
Liabilities
|
|
|
62,931
|
|
Net Recapitalization
|
|
|
|
|
The accounting effect of the reverse acquisition
is reflected in the consolidated statements of stockholders’
equity.
The historical financial
statements prior to the reverse merger transaction have been restated to be
those of the accounting acquirer and historical stockholders' equity prior to
the reverse merger has been retroactively restated for the equivalent number of
shares received in the merger after giving effect to the difference in par value
of the issuer's and acquirer's stock with an offset to additional paid-in
capital.
As part of the reverse
acquisition, the prior activities of the Company were discontinued. No
discontinued operations are presented in these financial statements since
there
were no expenses
or revenues incurred after November 2, 2006 related to these
operations.
The Company agreed to acquire
Ethos Environmental, Inc. because of its anticipated future growth in a
marketplace that is in strong demand for its product, and it was believed that
the acquisition would benefit the existing shareholders of both
companies.
Of the 4,910,000 shares
issued in 2006, 3,600,000 shares represented a pre-merger commitment by the
entity then known as Ethos Environmental, Inc. The entity then known as Ethos
Environmental, Inc. committed to issue the shares on October 15, 2006, and the
shares were to be issued regardless of the outcome of the then pending merger as
such shares were not for services in any way associated with the then pending
merger. As such, the shares were valued at fair value as determined by the
pre-merger Ethos Board of Directors.
On the date that the
pre-merger Ethos Environmental, Inc. committed to issue the shares, there was
not a public market for Ethos’ common stock, and the most readily determinable
value of the stock was fair value. Of the 3,600,000 shares, 100,000 were issued
for services rendered by an outside consultant prior to, and unrelated to, the
merger. As this was the number of shares that said consultant was willing to
accept as payment for services rendered valued at $25,000, we believe that the
value of $0.25 approximated the fair value of the shares on the date of the
commitment and therefore was the appropriate value to be
used.
The remaining 3,500,000
shares (the “Bonus Shares”) were issued to our Chief Executive Officer as a
one-time bonus by the pre-merger entity known as Ethos Environmental,
Inc. The Bonus Shares were not subject to any performance and/or
service conditions, and there was no pre-existing arrangement or agreement
regarding the Bonus Shares.
Since the 3,600,000 shares
were due and payable in the 4th quarter of 2006 by the pre merger Ethos, these
shares have been recorded on the year end financial statements of the
post-merger entity. All 3,600,000 shares were deemed fully paid and
non-assessable as of the date authorized by the pre-merger Ethos Board of
Directors, October 15, 2006.
The 3,600,000 shares were
accounted for at the fair value of $0.25 and charged against general and
administrative expenses in accordance with Generally Accepted Accounting
Principles (GAAP). The remaining 1,310,000 shares were issued in
compliance with prior consulting agreements and valued at the market price at
the date of issue, $5.10. The value of these shares was charged
against selling expenses and general and administrative expenses. There was no
cash involved in these transactions.
Going
Concern
The Company has incurred
significant losses from operations in the last two years. The Company's ability
to continue as a going concern is in substantial doubt and is dependent upon
obtaining additional financing and/or achieving a sustainable profitable level
of operations.
Management of the Company has
undertaken steps as part of a plan with the goal of sustaining the Company
operations for the next twelve months and beyond. These steps include: (a)
attempting to raise additional capital and/or other forms of financing; (b)
controlling overhead and operating expenses; and (c) continuing to increase the
sales of its fuel reformulating product. There can be no assurance that any of
these efforts will be successful.
Principles
of Consolidation
These consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary.
All material inter-company accounts have been eliminated in
consolidation.
Interim
Disclosure
The interim period
consolidated financial statements have been prepared by the Company pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission (the
"SEC"). Certain information and footnote disclosure normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or
omitted pursuant to such SEC rules and regulations. The interim period
consolidated financial statements should be read together with the audited
consolidated financial statements and accompanying notes for the year ended
December 31, 2007, included in the Company's annual report on Form 10-KSB.
In the opinion of the Company, the unaudited consolidated financial statements
contained herein contain all adjustments necessary (consisting of a normal
recurring nature) to present a fair statement of the results of the interim
periods presented.
The results of operations for
the three months ended March 31, 2008, are not necessarily indicative of the
results to be expected for the entire year ending December 31,
2008.
Use
of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the
United
States requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Actual results could differ from the estimated
amounts.
Cash
Cash includes a payroll
account and an operating checking account held at a financial institution. The
Company's cash balances exceed federally insured limits from time to
time.
Accounts
Receivable
Accounts receivable are
stated at their principal balances, do not bear interest and are generally
unsecured. Management considers all balances over 30 days old to be past due.
However, if credit is extended management conducts a periodic review of the
collectability of its accounts receivable. If an account is determined to be
uncollectible based on historical experience and the current economic climate,
an allowance is established and the account is written off against the
allowance. The Company determined that an allowance of $111,362 at
March 31, 2008 was necessary. At March31, 2008, 74% of accounts
receivable is due from one customer.
Inventory
Inventory consists primarily
of the Company's fuel reformulating product and is stated at the lower of cost
or market. At March 31, 2008, inventory consisted of $90,621 in
finished goods and $1,086,410 in raw materials.
Property
and Equipment
Property and equipment are
recorded at cost. Depreciation is calculated on the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
over the shorter of the anticipated lease term or the estimated useful life. The
Company's policy is to capitalize items with a cost greater than $4,000 and an
estimated useful life greater than one year. The Company reviews all property
and equipment for impairment at least annually.
Fair
Value of Financial Instruments
The carrying value of the
Company's accounts receivable, accounts payable, accrued expenses, note payable,
and note payable related party approximate their estimated fair value due to the
relatively short maturities of those instruments.
Revenue
Recognition
Revenue from the sale of fuel
reformulating products is recorded when the product is shipped, the price is
fixed and determinable, collection is reasonably assured, and no further
obligations of the Company remain.
One U. S. customer accounted for 90%
of revenue for the quarter ended March 31, 2008.
Stock
Based Compensation
The Company accounts for
stock based awards in accordance with SFAS No. 123(R) “share-based payment”,
which requires measurement of compensation cost for all stock-based awards at
fair value on the date of grant and recognition of compensation over the service
period for awards expected to vest. The fair value of stock options is
determined using the Black-Scholes valuation model, which is consistent with the
Company’s valuation techniques previously utilized for options in footnote
disclosures required under SFAS No. 123, “Accounting for Stock Based
Compensation”, as amended by SFAS No. 148, “Accounting for Stock Based
Compensation Transition and Disclosure”.
Since the Company did not
issue stock options to employees during the year ended December 31, 2007 or
2006, nor during the quarter ended March 31, 2008, there is no effect on net
loss or earnings per share had the Company applied the fair value recognition
provisions of SFAS No. 123(R) to stock-based employee compensation. When the
Company issues shares of common stock to employees and others, the shares of
common stock are valued based on the market price at the date the shares of
common stock are approved for issuance.
Earnings
Per Share
Basic earnings per share is
computed by dividing the net income 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 2,900,000 dilutive securities outstanding at March 31, 2008 and at March
31, 2007. The convertible feature of the Notes Payable is not included in the
calculation of diluted earnings per share since it would not have an appreciable
effect on the earnings per share.
Common
Stock
During the three month period
ended March 31, 2008, the Company issued 369,322 shares of stock for the
payment of expenses, valued at $454,266, and 106,550 shares ofstock for services, valued at
$155,607.
Note 2. New Accounting
Pronouncements
In March 2008, the FASB
issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No.133”. The Statement requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation. The statement is
effective for interim periods beginning after November 15, 2008 although early
adoption is encouraged. The Company has not determined the impact this standard
will have on its consolidated operating results or financial position upon
adoption.
In December 2007, the FASB
issued SFAS No. 141R, “Business
Combinations”. This statement is effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The Company has not determined the impact this standard
will have on its consolidated operating results or financial position upon
adoption.
In December 2007, the FASB
issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51”. This statement addresses
the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent’s equity. The statement is effective as
of the beginning of an entity’s first fiscal year that begins after December 15,
2008. The Company has not determined the impact this standard will
have on its consolidated operating results or financial position upon
adoption.
Stock
Issuances
Subsequent to the quarter
ended March 31, 2008 there were 1,896,106 shares issued for expenses and 61,321
shares issued for 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.
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 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 major suppliers. The mineral oil used in the Ethos
FR® is obtained, primarily, from major suppliers.
Ethos FR® can be used in any
fuel. Ethos BFC is used for Bunker Fuel, which is used in external combustion
engines.
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
|
· Particulate
emissions
|
· Water in the
fuel
|
· Bacterial
growth
|
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 U.S. annual consumption of fuel
will continue to escalate through the year 2030.
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 2006.
Sales of Distillate
Fuel Oil by End Use 2006
|
(Thousands of
Gallons)
|
|
|
|
|
|
|
|
Residential
|
|
|
4,984,826
|
Commercial
|
|
|
2,808,786
|
Industrial
|
|
|
2,463,676
|
Oil
Company
|
|
|
636,788
|
Farm
|
|
|
3,261,345
|
Electric
Power
|
|
|
656,355
|
Railroad
|
|
|
3,552,430
|
Vessel
Bunkering
|
|
|
1,903,138
|
On-Highway
|
|
|
39,118,301
|
Military
|
|
|
327,827
|
Off-Highway
|
|
|
2,478,554
|
All
Other
|
|
|
0
|
|
|
|
62,192,026
|
|
|
|
|
Notes: Totals
may not equal sum of components due to independent
rounding.
|
|
|
|
Sources: Energy
Information Administration Form EIA-821, "Annual
Fuel
|
Oil and Kerosene Sales
Report for 2002-2006.
|
|
|
|
|
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:
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:
Following is a summary of the
test results for Ethos Bunker Fuel Conditioner, tested at Esmeraldas,
Ecuador.
1.) O2 levels increased by
41.53
% after the
application of the Ethos Bunker Fuel Conditioner.
2.) CO2 levels decreased by 7.79%
after the application of the Ethos BFC.
3.) CO levels decreased by 91.75
% after the application of the Ethos Bunker Fuel
Conditioner.
4.) SO2 levels decreased by 1.69%
after the applications of the Ethos BFC.
5.) NO levels decreased by .82%
after the application of the Ethos BFC.
6.) NO2 levels remained constant
at 0.
7.) Nox levels decreased by .82%
after the application of the Ethos BFC.
8.) tf levels decreased by 9.18%
after the application of the Ethos BFC.
9.) ta levels decreased by 1.16%
after the application of the Ethos BFC.
10.) CO2 max levels decreased by
..69% after the application of Ethos BFC.
11.) Excess air readings increased
by 48.14% after the application of the Ethos BFC.
Ethos FR – Proof of
Performance Demonstrations
Ethos
Environmental’s
fuel reformulating products reduce emissions by burning fuel more completely,
which improves fuel mileage. Exhaust is essentially unburned fuel, wasted fuel,
so when the fuel is used more completely the engine delivers better mileage from
every tank. Efficient fuel use also means improved engine performance because a
more complete combustion process obtains increased power from each engine
revolution.
In the last decade hundreds
of thousands of miles in road tests have been conducted. Test after test, Ethos
products have proven to reduce engine exhaust emissions by 30% and more,
including measurable reductions in the emissions of hydrocarbons (HC), nitrogen
oxides (NOx), carbon monoxide (CO), and sooty exhaust or particulate matter
(PM). All of these emissions are highly toxic and as a result, fuel mileage
increases have been significant, ranging from 7% to 19% fleet
wide.
Ethos
Environmental
uses an opacity meter, a detection device for diesel vehicles that measures the
percentage of opacity (light obstructed from passage through an exhaust smoke
plume), to demonstrate dramatic reductions in emissions. In more that 1,000
heavy-duty diesel vehicles treated (a motor vehicle having a manufacturer’s
maximum gross vehicle weight rating (GVWR) greater than 6,000 pounds), emissions
were lowered by as much as 90%. The Society of Automotive Engineers (SAE)
recommended practice SAE J1667 “Snap Acceleration Smoke Test Procedure” to be
used for heavy-duty diesel powered vehicles. Attached are samples of opacity
test sheets, taken from diesel-powered engines, demonstrating the positive
results after using Ethos FR®.
Target
Markets
According to the American
Petroleum Institute, the United States fuels consumer market is
comprised of the following segments: retail consumer 27%, government agencies
16%, ground fleets 14%, industrial users 10%, aircraft 9%, maritime 6%,
miscellaneous 18%.
The Company’s typical
customers use cars, trucks or vessels in their day-to-day operations. Fuel is a
significant operating cost, and consequently these fleets are particularly
sensitive to fuel price fluctuations and strict emissions standards. The ideal
clients are those with fleet managers and are conscientious about keeping track
of operating expenses. They understand that every hike in fuel price hurts their
profitability, this being a critical factor wherever competitive markets make it
difficult to pass on the price increases to their clients; thereby making it
critical for businesses to obtain better mileage as a competitive
advantage.
Maritime and government
agencies are desirable for their large fuel volume use and industry
credibility. They offer the Company medium to long-term sales, since
the process requires a longer lead-time to close. The product demonstration
phase and administrative requirements are generally more complex, particularly
with large government institutions. At the same time, they offer large volume
sales and a continual source of staged orders that promote production
stability.
Marine vessels run on bunker
fuel that is less refined than diesel. A mid-size ship will use more
than half a ton per hour of operation, or 125 gallons of fuel per hour. For
example, a mid-size vessel running on bunker on a typical trip to Japan from Los Angeles will require a half ton per
hour, or 180 tons. This represents a total of 45,000 gallons of fuel
that requires 4,500 oz. (35 gallons) of Ethos BFC. This vessel would use
approximately one drum (55gals.) of Ethos BFC per month. Accordingly, maritime
customers represent a large and solid client base.
Countries all around the
world are endeavoring to deal with the high costs of petroleum products and the
detrimental effects of those products on the environment, much like the
United
States. The Company has
found broad and enthusiastic acceptance of its Ethos products
globally. During the past three years, the Company has opened markets
in Asia, Latin America, Canada, Australia, Africa and Europe, often dealing directly with
government entities that possess the power to implement widespread use of Ethos
products – whether in citywide public transportation systems or countrywide fuel
distribution structures.
As with our domestic client
base, international customers of Ethos appreciate the benefits of improved
mileage and reduced emissions. In countries that lack the regulatory
structures necessary to control vehicle emissions and fuel efficiency, the
benefits of Ethos are even more pronounced.
Customers
We have a very diversified
customer list. Although we have many customers utilizing products, the broadly
diversified base means there is no significant concentration in any industry. We
derive revenue from our customers as discussed in Note 1, "Organization and
Significant Accounting Policies: Revenue Recognition" of the consolidated
financial statements. One U. S. customer accounted for 90%
of our revenues for the period ended March 31, 2008.
Supply
Arrangements
We presently obtain our raw
materials on an exclusive basis from five (5) suppliers. However, these
arrangements are not governed by any formal written contract. Accordingly,
either party may terminate the arrangement at any time, including the
exclusivity aspect of the arrangement. If a supplier is not able to provide us
with sufficient quantities of the product, or chooses not to provide the product
at all (for any reason), or if exclusivity is lost, business and planned
operations could be adversely affected. Although management has identified
alternate suppliers of the products, no assurance can be given that the
replacement products will be comparable in quality to the product presently
supplied to us by current suppliers, or that, if comparable, products can be
acquired under acceptable terms and conditions.
Revenue and Fixed
Assets
The Company’s revenue is
generated in the United States and abroad through our
San
Diego,
California office, which at present is
our only operating office. All of the fixed assets are located in the
San
Diego,
California office. In
February, 2007, the Company entered into a sale and leaseback arrangement as
outlined below under Loan Facilities. In October 2007, the Company
completed the Commercial Property Purchase Agreement executed in August 2007,
and reported on Form 8-K on August 13, 2007.
Vendors
The Company maintains strong
relationships with all vendors. We are not dependent upon any one vendor for our
business.
Governmental
Regulation
In the United States, fuel and fuel additives are
registered and regulated pursuant to Section 211 of the Clean Air Act. 40 CFR
Part 79 and 80 specifically relates to the registration of fuels and fuel
additives. Typically, there are
registration and regulation requirements for fuel additives in each country in
which they are sold. In accordance with the Clean Air Act regulations at 40 CFR
79, manufacturers (including importers) of gasoline, diesel fuel and
additives for gasoline or diesel fuel,
are required to have their products registered by the EPA prior to their
introduction into commerce.
However, EPA registered
additives are derived from petroleum while Ethos FR® is a reformulator. Even
though you “add it” to the fuel, Ethos FR® is not derived from
petroleum and is non-toxic and non-hazardous and therefore not subject to
governmental regulations. There could be unforeseen future changes to
the registration requirements under the Clean Air Act and Ethos FR® may have to seek
registration under such new requirements. In addition, we currently
sell our product outside of the United States and intend to further expand
our sales efforts internationally. We may need to seek registration
in other countries for the Ethos FR® product.
At this time the Company is
not aware of any present or pending rules or regulations that would require the
Company to seek registration of the Ethos FR® product either domestically
or internationally.
Research and Development
Costs
Research and development
costs are charged to operations when incurred and are included in operating
expenses.
Following is the Ethos
FR® Material Safety Data Sheet
(MSDS)
Employees
As of May 12, 2008, we had 25 full-time and 10
part-time employees.
Available
Information
We file electronically with
the Securities and Exchange Commission our annual reports on Form 10-K,
quarterly reports on Form 10-Q, and current reports on Form 8-K, pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934. You may
obtain a free copy of our reports and amendments to those reports on the day of
filing with the SEC by going to http://www.sec.gov.
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, 2007), see our annual report on Form 10-KSB
for the period ended December 31, 2007.
RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2008 AS COMPARED WITH THE THREE MONTHS ENDED MARCH
31, 2007
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 $
1,104,467 for the period ended March 31, 2008 compared to revenues of $
2,697,133 for the same period in the prior year, a decrease of $ 1,592,666 or
59%. The primary source of revenue for the period ended March 31,
2008 was from the sale of Ethos FR®. During 2007, the Company had a
large order of Ethos Bunker Fuel to Ecuador which was not repeated in
the first quarter of 2008.
We expect our tremendous
growth to continue as sales increase and the sales and marketing strategies are
implemented into the targeted markets and we create an understanding and
awareness of our technology through proof of performance demonstrations with
potential customers.
Our future growth is
significantly dependent upon our ability to generate sales. Our main priorities
relating to revenue are: (1) increase market awareness of Ethos FR® product
through our sales and marketing plan, (2) growth in the number of customers and
vehicles per customer, and (3) providing extensive customer service and
support.
Gross Profit
Gross profit, defined as
revenues less cost of goods sold, was $ 757,278 or 69% of sales for the period
ended March 31, 2008, compared to $ 1,772,408 or 66% of sales for the period
ended March 31, 2007. In terms of absolute dollars, gross profit decreased 57%
for the period ended March 31, 2008 compared to same period in the prior year
due primarily to the reduction in gross revenue.
Cost of goods sold was $
347,189 for the period ended March 31, 2008, which represented 31% of revenues
compared to $ 924,725 for the comparable period in the prior year, which
represented 34% of revenues.
Operating
Expenses
Our current operating
expenses are comprised of costs associated with administrative, salary,
marketing, legal and business development. We will have additional operating
expenses for additional staff members as they are hired. We have allocated funds
in our capital structure for our current expenses.
General & Administrative
expenses incurred during the period ended March 31, 2008 totaled $ 1,175,427.
These expenses were incurred primarily for the following
reasons:
Accounting, audit,
bookkeeping and director fees totaling $ 1,600
Business consulting fees of $
13,092
Outside Services of $
18,280
Office expenses of $
16,610
Depreciation of $
2,139
Stock Issued for expenses $
454,266
Stock Issued for services $
164,607
Salaries and Wage expense of
$135,302
Taxes $
39,681
Rent $ 202,392
Equipment Rental $
91,323
Research &
Development $ 36,135
Similar expenses incurred for
the period ended March 31, 2007 were $ 2,513,895 and were incurred primarily for
expenses of a similar nature.
Also, for comparison
purposes, there were 369,322 newly issued shares for the payment of expenses,
and 106,550 shares newly issued for services during the period ended March 31,
2008, compared to 468,000 shares issued for services during the period ended
March 31, 2007.
Research and Development
Costs
Research and development
costs are charged to operations when incurred and are included in general and
administrative expenses. The amounts expensed for the period ended March 31,
2008 and 2007 amounted to $ 36,135 and $ 7,500,
respectively.
Net
Profit
We realized a net loss for
the period ended March 31, 2008 of $ 585,839 as compared to a net loss of $
924,407 for the comparable prior year period.
NON-OPERATING INCOME AND
EXPENSES
Non-operating income, net of
expenses, increased in the quarter ended March 31, 2008 to $ 2,500 versus $ 0 in
2007. Interest expense decreased to $ 80,040 during the 3 months ended March 31,
2008 from $ 177,660 the comparable period in 2007. The interest difference was
directly associated with promissory notes issued during the quarter ended March
31, 2008 versus an interest only note in the amount of $4,750,000 during
2007. The latter note was paid in October 2007.
Liquidity and Capital
Resources
During the three months ended
March 31, 2008, we had a working capital of $6,507,319 and stockholders’ equity
of $7,432,674 compared to a working capital deficit of $ 3,191,269 and
stockholders’ equity of $ 2,943,322 during the comparable period in the prior
year.
On March 31, 2008, the
Company had $ 200,096 in cash, total assets of $ 9,213,595 and total liabilities
of $1,780,922, compared to $ 47,719 in cash and $ 300,000 in restricted cash,
total assets of $ 9,655,854 and total liabilities of $ 6,712,532 on March 31,
2007.
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
2008 and beyond will depend primarily upon the level of sales of our products,
inventory levels, product development, sales and marketing expenditures and
capital expenditures.
Management of the Company has
undertaken steps as part of a plan with the goal of sustaining the Company
operations for the next twelve months and beyond. These steps include: (a)
attempting to raise additional capital and/or other forms of financing; (b)
controlling overhead and operating expenses; and (c) continuing to increase the
sales of its fuel reformulating product. There can be no assurance that any of
these efforts will be successful.
Loan
Facilities
In exchange for an aggregate of
$150,000 cash investment received on January 18, 2008, the Company issued a
promissory note. The promissory note is in the original principal amount of
$150,000 and bears no interest. The promissory note is due on January 18, 2009,
or upon completion of a financing for an amount equal to or greater than
$150,000, whichever comes first. This Note was paid in full
January 30, 2008.
In exchange for an aggregate
amount of $1,000,000 cash investment received on January 30, 2008, on March 26,
2008, the Company issued a Secured Promissory Note (the “Note”). The Note is in
the original principal amount of $1,000,000 and bears interest at 12% per annum.
The promissory note is due on July 30, 2008.
In connection with the Note
and to secure its obligations thereunder, the Company entered into a Security
Agreement (the "Security Agreement") on March 26, 2008 in favor of the
noteholder, pursuant to which certain inventory, assets and accounts receivable
of the Company have been pledged to secure the obligations of the Company under
the Amended Loan Agreement.
In exchange for an aggregate
amount of $300,000 cash investment received on March 31, 2008, the Company
issued a promissory note. The promissory note is in the original principal
amount of $300,000 and bears interest at 12% per annum, which is payable monthly
in arrears. The promissory note is due on March 31,
2009.
Inflation has not
significantly impacted the Company’s operations.
Off-Balance Sheet
Arrangements
We do not have any
off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our
investors.
PLAN OF OPERATIONS FOR THE
NEXT TWELVE MONTHS
Since inception in 2000,
Ethos Environmental has grown its customer base to thousands of diverse clients
in over 21 countries worldwide In addition to an effective and desirable
product, the company’s success also derives from the careful development and
tenacious implementation of a structured “proof-of-concept” marketing
strategy.
Throughout this
“proof-of-concept” sales and marketing phase, gross sales for Ethos
Environmental have consistently exceeded forecasts, reaching more than $1.78
million by the end of 2005, $4.77 million by the end of 2006 and $10.38 million
in 2007. Even more significant growth is anticipated for 2008, with sales in
established markets in the U.S., China, Latin America, Europe and
the Middle
East expected to
top current forecasts. Furthermore, market implementation plans anticipate gross
multi million sales in 2008 and beyond. 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.
The management of Ethos
Environmental is excited by the enthusiastic acceptance that Ethos FR®
products have
received - domestically and all around the world. We are proud to provide a
product that is part of the solution to the high cost of fuel and the health
costs of environmental pollutants. Since inception management has been focused
on the development of a solid infrastructure, building relationships and
establishing the foundation of a business that will continue to grow - non-stop
- into the future.
Critical Accounting
Policies
The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make a wide variety of estimates and assumptions that affect (i)
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements, and (ii) the
reported amounts of revenues and expenses during the reporting periods covered
by the financial statements. Our management routinely makes judgments and
estimates about the effect of matters that are inherently uncertain. As the
number of variables and assumptions affecting the future resolution of the
uncertainties increases, these judgments become even more subjective and
complex. The most significant accounting policies that are most important to the
portrayal of our current financial condition and results of operations are as
follows:
Revenue
Recognition
The Company recognizes
revenue in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements”.
Revenue consists of the sale of products and is recognized only when the price
is fixed or determinable, persuasive evidence of an arrangement exists, the
product is shipped, and collectability is reasonably
assured.
ITEM 4(T).
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 March 31, 2008 due to the material
weaknesses in our internal control over financial reporting identified in our
2007 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 2007 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 2008 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 March
31, 2008 that have materially affected, or are reasonably likely to materially
affect our internal controls over financial reporting.
During 2008, 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.
ITEM
1. LEGAL PROCEEDINGS
From time to time, we are
involved in routine legal matters incidental to our business. In the opinion of
management, the ultimate resolution of such matters will not have a material
adverse effect on our financial position, results of operations or
liquidity.
During 2007, the company
became a defendant in a lawsuit filed by Accutek, Inc. of Vista, CA for an outstanding balance
on equipment purchased in the amount of $43,000. The
company has filed a cross-complaint asserting that the contractual
obligations of the supplier, Accutek were not fulfilled. The case was
still open at December 31, 2007, and the company is confident that the court
will find in our favor.
During 2007, the company
became a defendant in a lawsuit filed by Groovie Like A Movie in the amount of
$19,950. The Preliminary Trial Date is in April 2008. The
company has filed a cross-complaint claiming non-delivery of goods and services
and is confident that the court will find in our favor.
Not
required.
ITEM
2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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.
During the period ended March
31, 2008, we filed the reports on Form 8-K on the following
dates:
(1) January 24,
2008
(2) January 24,
2008
(3) January 24,
2008
(4) March 27,
2008
Subsequent to the period
ended March 31, 2008, we filed reports on Form 8-K on the following
dates:
(1) April 4,
2008
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.
|
ETHOS ENVIRONMENTAL,
INC.
(Registrant)
|
|
|
|
|
|
Date:May
15,
2008
|
By:
|
/s/
Enrique de Vilmorin |
|
|
|
Enrique
de Vilmorin |
|
|
|
President and
CEO
|
|
|
|
|
|