UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-KSB/A
Amendment
#1
(Mark
One)
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x ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
o 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 ___________
ETHOS
ENVIRONMENTAL, INC.
(Name of
Small Business Issuer in Its Charter)
Nevada
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88-0467241
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(State
or Other Jurisdiction
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IRS
Employer
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of
Incorporation or Organization)
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Identification
Number
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6800
Gateway Park
(619)
575-6800
(Address
and Telephone Number of Principal Executive Offices)
Securities
registered under Section 12(b) of the Exchange Act:
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Title
of each class registered:
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Name
of each exchange on which registered:
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None
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Over-the-Counter
Bulletin Board
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Securities
registered under Section 12(g) of the Exchange Act:
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Common
Stock, par value $0.0001
(Title
of class)
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Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. ¨
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant is a shell company as defined in Rule 12b-2
of the Exchange Act. Yes o No x
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was approximately $ 20,541,157 as of December 31, 2007 based
upon the average bid and asked price of the registrant’s common stock on the
Over the Counter Bulletin Board.
Transitional
Small Business Disclosure Format: Yes o No x
All
reports filed by the Registrant during 2007, and through the date of filing of
this Annual Report.
ETHOS
ENVIRONMENTAL, INC.
ANNUAL
REPORT ON FORM 10-KSB/A
FOR
THE YEAR ENDED DECEMBER 31, 2007
INDEX
PART
I
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Page
No.
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Description
of Business
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6 |
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The
Company
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Products
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Trademarks
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Significant
Events
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Item
2.
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Properties
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Item
3.
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Legal
Proceedings
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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PART
II
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Item
5.
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Market
for Common Equity and Related Stockholder Matters
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Management’s
Discussion and Analysis or Plan of Operation
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24 |
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Financial
Statements
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30 |
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
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50 |
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Controls
and Procedures
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50 |
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Other
Information
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53 |
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PART
III
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Item
9.
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Directors,
Executive Officers and Corporate Governance
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Item
10.
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Executive
Compensation
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Item
12.
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Certain
Relationships and Related Transactions
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Exhibits
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54 |
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Principal
Accountant Fees and Services
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54 |
We are
filing this first amendment to our Annual Report on Form 10-KSB for the year
ended December 31, 2007 (the “2007 Form 10-K”) to restate our consolidated
financial statements for the years ended December 31, 2007 and 2006. In the
course of preparing our interim financial statements for our quarterly report on
Form 10-Q to be filed with the Securities and Exchange Commission (“SEC”) for the quarter ended
September 30, 2008, we discovered a misclassification of accounts receivable,
associated revenue and other accounting irregularities resulting in a material
misstatement of our 2007 interim financial statements for the previously
reported quarters and annual financial statements for the years ended December
31, 2007 and 2006 (collectively, the “Affected Financial Statements”). The
restatements in the Affected Financial Statements has had a negative effect on
our previously reported net change in cash and cash equivalents and a
significant impact on our previously reported consolidated balance sheets and
consolidated statements of operations contained in the Affected Financial
Statements.
The
restatement of our consolidated financial statements as a result of the errors
described above has led our management to conclude that a material weakness
existed in our internal control over financial reporting as of December 31,
2007, and that Management’s Report on Internal Control over Financial Reporting
should also be restated. Accordingly, this amended filing includes a revised
ITEM 8A(T). CONTROLS & PROCEDURES that reflects management’s conclusion that
our internal control over financial reporting was not effective at
December 31, 2007 for reasons in addition to those previously
discussed.
In
accordance with the rules of the SEC, the affected items of the 2007 Form 10-K,
“Item 1. Description of Business,” “Item 6. Management’s Discussion of Financial
Condition and Results of Operations,” “Item 7. Financial Statements,” “Item
8A(T). Controls and Procedures,” and “Item 14. Principal Accountant Fees &
Services” are being amended and completely restated. No other items have been
amended and, as such, are not included herein.
No
attempt has been made in this Form 10-KSB/A to update other disclosures
presented in the 2007 Form 10-KSB as originally filed except as described above
or as required to reflect the effects of the restatement. This Form 10-KSB/A
does not reflect events occurring after the filing of the 2007 Form 10-K or
modify or update those disclosures, including the exhibits to the 2007 Form 10-K
affected by subsequent events; however, this Form 10-K/A includes as
Exhibits 31.1, 31.2 and 32 new certifications by our principal executive officer
and principal financial officer as required by Rule 12b-15 promulgated
under the Securities Exchange Act of 1934, as amended. Accordingly, this Form
10-K/A should be read in conjunction with our filings made with the SEC
subsequent to the filing of the 2007 Form 10-K, including any amendments to
those filings.
FORWARD-LOOKING
STATEMENTS
This
Annual Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These forward-looking statements are not
historical facts but rather are based on current expectations, estimates and
projections. We use words such as “anticipate,” “expect,” “intend,” “plan,”
“believe,” “foresee,” “estimate” and variations of these words and similar
expressions to identify forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and other factors, some of which are beyond our control, are difficult to
predict and could cause actual results to differ materially from those expressed
or forecasted. These risks and uncertainties include the following:
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The
availability and adequacy of our cash flow to meet our
requirements;
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Economic,
competitive, demographic, business and other conditions in our local and
regional markets;
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Changes
or developments in laws, regulations or taxes in our
industry;
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Actions
taken or omitted to be taken by third parties including our suppliers and
competitors, as well as legislative, regulatory, judicial and other
governmental authorities;
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Competition
in our industry;
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The
loss of or failure to obtain any license or permit necessary or desirable
in the operation of our business;
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Changes
in our business strategy, capital improvements or development
plans;
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The
availability of additional capital to support capital improvements and
development; and
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Other
risks identified in this report and in our other filings with the
Securities and Exchange Commission or the
SEC.
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You
should read this report completely and with the understanding that actual future
results may be materially different from what we expect. The forward looking
statements included in this report are made as of the date of this report and
should be evaluated with consideration of any changes occurring after the date
of this Report. We will not update forward-looking statements even though our
situation may change in the future and we assume no obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Use
of Term
Except as
otherwise indicated by the context, references in this report to “Company,”
“ETEV,” “we,” “us” and “our” are references to the pre-merger business of Victor
Industries, Inc. and post-merger business of Ethos Environmental, Inc. All
references to “USD” or “$” refer to the legal currency of the United States of
America.
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 as 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
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
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Tests
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Results
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Viscosity @ 37.8º
C,CS
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10.39
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Viscosity @ 100º F,
SSU
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60.2
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Specific Gravity @
15.6/15.6ºC
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0.93
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API Gravity,
Degrees
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26.6
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Flash Point, COC, ºC
(ºF)
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149ºC
(300ºF)
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Color and
Appearance
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Light, bright and
clear
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Sediment
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None
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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:
• Customers report on average
increases in 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 by our customers that use Ethos
FR® have shown 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, and changed its name to Ethos Environmental, Inc.
to more accurately reflect its new direction and business
model.
Additional
Corporate History
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:
•
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•
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The Company acquired
all issued and outstanding shares of Ethos in exchange for 17,718,187
shares of common stock of the Company. Shares of Company common stock,
representing an estimated 97% of the total issued and outstanding shares
of Company common stock, was issued to the Ethos
stockholders,
|
•
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The shareholders of the
Company received pro rata for their shares of common stock of Ethos,
17,718,187 shares of common stock of the Company in the merger, and all
shares of capital stock of Ethos were cancelled,
|
•
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The officers and
directors of Ethos became the officers and directors of the
Company,
|
•
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The name of Victor
Industries, Inc. was changed to “Ethos Environmental, Inc.”,
and
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•
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Ethos requested a new
symbol for trading on the Over the Counter Bulletin Board (“OTCBB”), which
also reflects the reverse stock split of 1 for 1,200, the new symbol of
the Company is “ETEV.”
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Ethos
FR® has been proven through many
thousands of miles of on-the-road testing. On average, customers report that
they 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. 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.
Ethos products reduce fuel
emissions, benefiting the environment in two notable ways:
1. Customers report that 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, most customers have
reported, 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. 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 became effective on January 1, 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
|
|
|
|
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.. 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 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. 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 by
extending the life of any particular vehicle.
Commercial fleets vary in
size from a few to thousands of vehicles. 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% as reported by tests performed by our customers. 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, reduce engine emissions or
to increase the longevity of a vehicle. 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.
Significant 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 results are
for a fleet of trucks for Allied Waste. On our website are results for other
customers, which may be viewed by visiting www.ethosfr.com. In most customer tests,
they have reported 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:
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 as reported
by our customers.
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.
As with our domestic client
base, international customers of Ethos appreciate the benefits of improved
mileage and reduced emissions.
Customers
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.
Supply
Arrangements
We presently obtain our raw
materials 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. 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), 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.
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.
Notwithstanding the above,
the Company is presently engaged in attempting to qualify its products, as
necessary, with the California Air Resources Board (“CARB”), and obtain other
testing and certifications as necessary to further establish the quality of our
products.
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 December 31, 2007, we had ten (10) full time
employees, we had seven (7) consultants that dedicate a significant amount of
time to our Company, and we hire part time employees on an as needed basis to
assist in the production of our products.
Available
Information
We file
electronically with the Securities and Exchange Commission our annual reports on
Form 10-KSB, quarterly reports on Form 10-QSB, and current reports on Form 8-K,
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
You may obtain a free copy of our reports and amendments to those reports on the
day of filing with the SEC by going to http://www.sec.gov.
PART
II
Item
6.
Management's Discussion and Analysis or Plan of Operation.
The following discussion should be
read in conjunction with our audited financial statements and notes thereto
included herein. In connection with, and because we desire to take advantage of,
the “safe harbor” provisions of the Private Securities Litigation Reform Act of
1995, we caution readers regarding certain forward looking statements in the
following discussion and elsewhere in this report and in any other statement
made by, or on our behalf, whether or not in future filings with the Securities
and Exchange Commission. Forward-looking statements are statements not based on
historical information and which relate to future operations, strategies,
financial results or other developments. Forward looking statements are
necessarily based upon estimates and assumptions that are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
many of which are beyond our control and many of which, with respect to future
business decisions, are subject to change. These uncertainties and contingencies
can affect actual results and could cause actual results to differ materially
from those expressed in any forward looking statements made by, or our behalf.
We disclaim any obligation to update forward-looking statements.
Results of
Operations and Analysis of Financial Condition
Results of Operations
The following financial
data compares the balances as relates to Ethos Environmental, Inc. for the
fiscal years ended
December 31, 2007 and
2006. The following
discussion has been updated using the restated financial statement
balances.
Revenues
During the year ended
December 31, 2007,
the Company recognized revenues of $1,355,141 compared with
$1,521,166 for the year ended
December 31, 2006, a decrease of 10.9%. The
decrease in overall sales revenue reflects the fact that
the Company focused its
efforts on the development of its internal processes rather than marketing of
its products and finding new customers and distributors.
The Company’s
primary source of revenue is from the sale of
Ethos FR®. Other
components of revenue include freight and service.
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 for the year
ended
December 31, 2007, defined as revenues less cost of goods sold, was
$610,005 or 45.0% of sales compared with $1,064,995 or 70.0% for the year ended
December 31, 2006. The decrease in gross profit margin was due to
recognition of amortization expense of its building and certain manufacturing
equipment throughout fiscal 2007 compared with only partial year during fiscal
2006 along with a $224,751 write-down in inventory to adjust to physical
inventory value.
Operating
Expenses
The Company’s current
operating expenses are comprised of costs associated with general and
administrative costs such as staff salaries, consulting, marketing, and legal
and accounting, and selling expenses such as marketing and business development.
Depreciation Expense
For the year ended
December 31, 2007,
the Company incurred depreciation expense of $201,092
compared to $292,096 for the year ended
December 31, 2006. The decrease in
depreciation expense was attributed to the sale leaseback of
the Company’s
building and certain manufacturing equipment during 2007.
The Company’s
amortization policy is to amortize production and office equipment on a
straight-line basis over a 5-year period, and amortize building costs
straight-line basis over a 25-year period. The majority of the
depreciation expense for the years ended
December 31, 2007 and
2006 was charged
to cost of sales as the assets used were directly resulting in the production of
revenue-producing goods.
General and
Administrative
For the year ended
December 31, 2007,
the Company incurred general and administrative expense of
$17,655,463 compared with $12,925,739 for the year ended
December 31,
2006. The increase in general and administrative expense is attributed to
the issuance of share purchase warrants in May 2007 to replace the
convertibility feature of its Promissory Note secured by the purchase of the
Company’s building that resulted in a charge to operations of $6,646,171 for the
fair value of the warrants using Black-Scholes Option Pricing
Model.
Selling Expense
For the year ended
December 31, 2007,
the Company incurred selling expense of $6,861,554 compared
with $4,609,910 for the year ended
December 31, 2006 and is related to marketing
and business development expenditures that were settled by the issuance of
common shares with a fair value of $4,500,000. In fiscal 2007,
the Company
limited its selling expense based on the fact that
the Company’s focus was on
internal operations and strategic development rather than marketing and
promotion of
the Company’s products.
Other Income
(Expenses)
Interest Expense
For the year ended
December 31, 2007,
the Company incurred interest expense of $618,084 compared
with $620,244 for the year ended
December 31, 2006. Interest expense is
associated with an interest-only loan of $4,750,000 that was used to finance the
purchase of
the Company’s building and the sale-leaseback of the building.
Other Income
During the year ended
December 31, 2007,
the Company recorded other income of $390,206 compared with
$730,813 for the year ended
December 31, 2006. Other Income in fiscal 2007
was related to the proceeds from the sale leaseback transactions for its
manufacturing facility and certain manufacturing equipment whereas Other Income
for fiscal 2006 was attributed to $670,200 from the settlement of debt with one
of
the Company’s vendors.
Net Loss
For the year ended
December 31, 2007,
the Company incurred a net loss of $24,582,613 compared with
a net loss of $16,474,909 for the year ended
December 31, 2006. The
increase in the net loss is attributed to the fair value of share purchase
warrants of $6,646,171 which was charged to operations in May 2007, and a
decrease of $454,990 in gross margins resulting from lower sales
revenue.
Common Shares
During the year ended
December 31, 2007,
the Company issued 11,214,000 common shares to settle
services incurred on behalf of
the Company and issued 2,500,000 common shares
for cash proceeds of $2,050,000.
In August 2007, the
Company issued 2,500,000 common shares to Greenbridge Capital Partners
(
“Greenbridge”) as part of the sale leaseback transaction where
the Company sold
the rights to its’ manufacturing facility to Greenbridge and 2,500,000 common
shares in exchange for proceeds of $7,875,000. The sale price was
allocated as $5,825,000 to the building and $2,050,000 to the common shares as
fair value under a arms-length transaction.
Of the common shares
issued for settlement of services, 5,000,000 common shares were issued to
Enrique de Vilmorin,
the Company’s Chief Executive Officer for the year ended
December 31, 2007 and as at
September 5, 2008 before his resignation. The
common shares were issued as part of compensation for his duties as President,
Chief Executive Officer, and Directors of
the Company and were issued at the
closing share price of $0.95 per common share which represented a fair
value of $4,750,000.
The remaining 6,214,000
common shares were issued for consulting services and professional fees at
varying periods throughout the year and were assessed at fair value using the
end-of-day share price of
the Company’s common stock. Share issuances
ranged from $0.95 - $5.00 per common share and the 6,914,000 common shares were
reported at a fair value of $8,464,960.
Liquidity and Capital Resources
At
December 31, 2007, we
had cash of $74,178, current assets of $760,823, total assets of $1,279,158,
total liabilities of $929,712, and stockholders’ equity of $349,446.
As at
December 31, 2007,
we had a working capital deficit of $168,889 compared with a working capital
deficit of $4,838,812 for the year ended
December 31, 2006. The
increase in the working capital was attributed to the payment and settlement of
a $4,750,000 Promissory Note (the
“Note”) that was used to finance the
acquisition of the building, which is recorded as a current liability for the
year ended
December 31, 2006.
Subsequent to
December 31,
2006,
the Company and the lender agreed to modify the Note and extended the due
date from January 2007 to
March 31, 2009, and a reduction of the interest rate
from 14% per annum to 12% per annum. Furthermore, the original conversion
feature of the promissory note was replaced by a share purchase warrant which
allows the warrant holder to purchase up to 1,900,000 common shares of the
Company at an exercise price of $2.50 per common share expiring
March 31,
2010. The transaction has been filed in a Form 8-K on
May 24, 2007.
Cash Flows from Operating
Activities
For the year ended
December 31, 2007,
the Company used $3,454,124 of cash flows for operating
activities compared with $1,737,600 for the year ended
December 31, 2006.
The increase in cash flows used for operations are attributed to net cash loss
for the year ended
December 31, 2007 of $2,592,859 compared with net cash loss
of $1,219,075 for the year ended
December 31, 2006. Furthermore, the
Company had slower turnover with respect to collection of accounts receivable
and had higher net purchases of inventory given the fact that sales revenue
decreased by over 10% for the year ended
December 31, 2007.
Cash Flows from Investing
Activities
For the year ended
December 31, 2007,
the Company received cash flows of $6,034,731 for investing
activities compared with cash outflow of $6,359,285 for the year ended
December
31, 2006. The increase in cash flows provided by investing activities is
attributed to the net proceeds from the sale leaseback transactions of its
building and manufacturing equipment during fiscal 2007 of $6,233,411 whereas in
fiscal 2006,
the Company purchased a building for
the Company’s office and
production totaling approximately $5,820,000 in addition to purchases of
additional office equipment.
Cash Flows from Financing
Activities
During the year ended
December 31, 2007 the Company used cashflow of $2,571,298 for financing
activities compared with cash inflows of $7,663,254 for the year ended
December
31, 2006. During the year,
the Company incurred $5,167,819 for the
repayment of two promissory notes that were issued for the purchase of the
Company’s building in 2006. In fiscal 2006, the cash flows received from
financing activities were attributed to the issuance $4,750,000 for the purchase
of
the Company’s building, capital contributions of $957,616 and the issuance of
776,225 common shares of
the Company for cash proceeds of $1,550,819.
Loan
Facilities
On
February 7, 2007, the
Company entered into an equipment lease agreement with Mazuma Capital Corp.
wherein
the Company agreed to a 24-month sale and leaseback arrangement for up
to $800,000 of its manufacturing equipment. The lease calls for a monthly
payment based on a factor of .04125 times the average outstanding loan balance
during the month. Through
March 29, 2007,
the company has placed property valued
at $737,968 under this lease arrangement with Mazuma Capital Corp.
The
contract for this sale
and leaseback of equipment should be accounted for as an operating lease per
SFAS 13 and 28, and will be shown as such in 2007. There is no
bargain purchase option at the end of the lease, and neither the 75% nor the 90%
test has been met. The title may pass back to
the Company at the end
of the lease; however, the lease may also be continued at the end of the 24
month period.
The Company feels the appropriate stance is to show this as an
operating lease in 2007; thereby recording the reduction of equipment, the
corresponding loss, and treating the payments as lease expense.
Inflation has not
significantly impacted
the Company’s operations.
Going
Concern
As at
December 31, 2007,
the Company had a cash balance of $74,178. For the years ended
December
31, 2007 and
2006,
the Company recorded sales revenue of $1,355,141 and
$1,521,166 and had gross profit of $610,005 and $1,064,995, respectively.
The Company recorded a net loss of $24,582,613 for the year ended
December 31,
2007 compared with a net loss of $16,474,909 for the year ended
December 31,
2006.
Based on the above
factors, there is substantial doubt regarding
the Company’s ability to continue
as a going concern. The continuation of
the Company as a going concern is
dependent on the continuation of
the Company’s profitability from its’
operations, continued financial support from its shareholders, and the ability
to raise additional equity or debt financing to sustain operations. The
consolidated financial statements presented in the Form 10-K/A does not include
any adjustments to the recoverability and classification of recorded asset
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Off-Balance
Sheet Arrangements
We do not have any
off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our investors.
Critical Accounting Policies
Use of Estimates
The preparation of these
consolidated financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period.
The Company regularly evaluates estimates and assumptions
related to valuation allowances on accounts receivable and inventory, valuation
and amortization policies on property and equipment, and valuation allowances on
deferred income tax losses.
The Company bases its estimates and assumptions on
current facts, historical experience and various other factors that it believes
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities and the
accrual of costs and expenses that are not readily apparent from other sources.
The actual results experienced by
the Company may differ materially and
adversely from
the Company’s estimates. To the extent there are material
differences between the estimates and the actual results, future results of
operations will be affected.
Revenue
Recognition
The Company will recognize
revenue from the sale of its fuel reformulating products in accordance with
Securities and Exchange Commission Staff Bulletin No. 104 (
“SAB 104”),
“Revenue Recognition in Financial
Statements”. Revenue will be recognized only when the price is fixed or
determinable, persuasive evidence of an arrangement exists, the service is
provided, and collectibility is assured.
Stock-Based
Compensation
The Company records
stock-based compensation in accordance with SFAS No. 123R “
Share-Based Payments”, using
the fair value method. All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. Equity
instruments issued to employees and the cost of the services received as
consideration are measured and recognized based on the fair value of the equity
instruments issued.
Recent
Accounting Pronouncements
In
March 2008, the Financial Accounting Standards Board (
“FASB”) issued SFAS No.
161, “
Disclosures about
Derivative Instruments and Hedging Activities – an amendment to FASB Statement
No. 133”. SFAS No. 161 is intended to improve financial standards for
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. Entities are required to
provide enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. It is effective for
financial statements issued for fiscal years beginning after
November 15, 2008,
with early adoption encouraged.
The Company is currently evaluating
the impact of SFAS No. 161 on its financial statements, and the adoption of this
statement is not expected to have a material effect on
the Company’s financial
statements.
In December 2007, the FASB
issued SFAS No. 141R, “
Business
Combinations”. This statement replaces SFAS 141 and defines
the acquirer in a business combination as the entity that obtains control of one
or more businesses in a business combination and establishes the acquisition
date as the date that the acquirer achieves control. SFAS 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date. SFAS 141R also requires the acquirer to
recognize contingent consideration at the acquisition date, measured at its fair
value at that date. This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after
December 15, 2008, and
earlier adoption is prohibited. The adoption of this statement is not expected
to have a material effect on
the Company's financial statements.
In December 2007, the FASB
issued SFAS No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements Liabilities –an Amendment of ARB No.
51”. This statement amends ARB 51 to establish accounting and
reporting standards for the Noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after
December
15, 2008, and earlier adoption is prohibited. The adoption of this statement is
not expected to have a material effect on
the Company's financial
statements.
In February 2007, the
Financial Accounting Standards Board (FASB) issued SFAS No. 159,
"The Fair Value
Option for Financial Assets and Financial Liabilities-Including and amendment of
FASB Statement No. 115". SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS No. 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. As such,
the Company is required to adopt these provisions at
the beginning of the fiscal year ending
February 28, 2009.
The Company is
currently evaluating the impact of SFAS No. 159 on its consolidated financial
statements.
In September 2006, the SEC issued Staff
Accounting Bulletin (
"SAB") No. 108,
"Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB No. 108 addresses how the effects of prior year
uncorrected misstatements should be considered when quantifying misstatements in
current year financial statements. SAB No. 108 requires companies to quantify
misstatements using a balance sheet and income statement approach and to
evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors. SAB No. 108
is effective for periods ending after
November 15, 2006. The adoption of SAB No.
108 did not have a material effect on its consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 158
"Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB
Statements No. 87, 88, 106 and 132 (R)" SFAS No. 158 requires employers
to recognize the over funded or under funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization. SFAS No. 158 also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. The provisions of SFAS No. 158 are effective for
employers with publicly traded equity securities as of the end of the fiscal
year ending after
December 15, 2006. As such,
the Company is required to adopt
these provisions effective this fiscal year end. The adoption of this statement
has no material effect on
the Company's reported financial position or results
of operations.
In September 2006, the FASB issued SFAS No.
157,
"Fair Value
Measurements". SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (
"GAAP"),
and expands disclosures about fair value measurements. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after
November 15,
2007, and interim periods within those fiscal years. As such,
the Company is
required to adopt these provisions at the beginning of the fiscal year ending
February 28, 2009.
The Company is currently evaluating the impact of SFAS No.
157 on its consolidated financial statements.
In June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48,
"Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statements No. 109" (FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes by prescribing a two-step method of first evaluating whether a tax
position has met a more likely than not recognition threshold and second,
measuring that tax position to determine the amount of benefit to be recognized
in the financial statements. FIN 48 provides guidance on the presentation of
such positions within a classified statement of financial position as well as on
de-recognition, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of this standard did not have a material effect
on
the Company's results of operations or financial position.
Item 7. Financial Statements
Ethos
Environmental, Inc.
|
Index |
Report of
Independent Auditor |
F-1 |
|
|
Consolidated
Balance Sheets |
F-2 |
|
|
Consolidated
Statements of Operations |
F-3 |
|
|
Consolidated
Statements of Cash Flows |
F-4 |
|
|
Statement of
Consolidated Stockholders’ Equity |
F-5 |
|
|
Notes to the
Consolidated Financial Statements |
F-6 |
|
|
|
|
MOORE
& ASSOCIATES, CHARTERED
ACCOUNTANTS AND
ADVISORS
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors
Ethos
Environmental Inc.
We have
audited the accompanying restated consolidated balance sheets of Ethos
Environmental Inc. as of December 31, 2007 and December 31, 2006, and the
related restated consolidated statements of operations, stockholders’ equity and
cash flows for the years ended December 31, 2007 December 31, 2006. These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the restated consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ethos
Environmental Inc. as of December 31, 2007 and December 31, 2006, and the
related restated consolidated statements of operations, stockholders’ equity and
cash flows for the years ended December 31, 2007 December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America.
The
accompanying restated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has incurred a net loss of $24,582,613 and
$16,474,909, which raises substantial doubt about its ability to continue as a
going concern. Management’s plans concerning these matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
Moore & Associates, Chartered
Moore
& Associates Chartered
Las
Vegas, Nevada
Ethos Environmental, Inc.
Consolidated Balance Sheets
(expressed in U.S. dollars)
|
|
$
(Restated
– Note 11)
|
|
|
$
(Restated
– Note 11)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
74,176 |
|
|
|
64,867 |
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable, net of allowance of doubtful accounts
|
|
|
84,248 |
|
|
|
295,932 |
|
|
|
|
|
|
|
|
|
|
Inventory
(Note 3)
|
|
|
602,399 |
|
|
|
410,915 |
|
|
|
|
|
|
|
|
|
|
Other
Current Assets
|
|
|
– |
|
|
|
19,900 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
760,823 |
|
|
|
791,614 |
|
|
|
|
|
|
|
|
|
|
Property
and Equipment (Note 4)
|
|
|
118,916 |
|
|
|
6,354,740 |
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
399,419 |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
1,279,158 |
|
|
|
7,151,354 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
223,891 |
|
|
|
311,119 |
|
|
|
|
|
|
|
|
|
|
Accrued
Liabilities
|
|
|
109,300 |
|
|
|
101,488 |
|
|
|
|
|
|
|
|
|
|
Notes
Payable (Note 5)
|
|
|
350,000 |
|
|
|
5,167,819 |
|
|
|
|
|
|
|
|
|
|
Demand
Loan (Note 5(a))
|
|
|
246,521 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
929,712 |
|
|
|
5,630,426 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock (Note 6)
Authorized:
100,000,000 common shares, par value: $0.0001 per common
share
Issued
and outstanding: 37,998,562 and 24,334,562 common shares,
respectively
|
|
|
3,800 |
|
|
|
2,434 |
|
|
|
|
|
|
|
|
|
|
Additional
Paid-In Capital (Note 6)
|
|
|
44,779,632 |
|
|
|
21,369,867 |
|
|
|
|
|
|
|
|
|
|
Accumulated
Deficit
|
|
|
(44,433,986 |
) |
|
|
(19,851,373 |
) |
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
349,446 |
|
|
|
1,520,928 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
1,279,158 |
|
|
|
7,151,354 |
|
|
|
|
|
|
|
|
|
|
Commitments
(Note 9)
Restatement
(Note 12)
Subsequent Events (Note
13)
(The accompanying notes are an integral part of these consolidated
financial statements)
Ethos Environmental, Inc.
Consolidated Statements of Operations
(expressed in U.S. dollars)
|
|
|
|
|
|
|
|
|
$
(Restated
– Note 11)
|
|
|
$
(Restated
– Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
1,355,141 |
|
|
|
1,521,166 |
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
745,136 |
|
|
|
456,471 |
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
610,005 |
|
|
|
1,064,995 |
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
20,193 |
|
|
|
18,865 |
|
Bad
Debt Expense (Note 2(d))
|
|
|
427,530 |
|
|
|
– |
|
General
and Administrative
|
|
|
17,655,463 |
|
|
|
12,925,739 |
|
Impairment
of Property and Equipment
|
|
|
– |
|
|
|
36,728 |
|
Selling
Expense
|
|
|
6,861,554 |
|
|
|
4,609,910 |
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
24,964,740 |
|
|
|
17,591,242 |
|
|
|
|
|
|
|
|
|
|
Total
Operating Loss
|
|
|
(24,354,735 |
) |
|
|
(16,526,547 |
) |
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
(618,084 |
) |
|
|
(620,244 |
) |
Other
Expense
|
|
|
– |
|
|
|
(58,931 |
) |
Other
Income
|
|
|
390,206 |
|
|
|
730,813 |
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
|
(24,582,613 |
) |
|
|
(16,474,909 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share – Basic and Diluted
Net
Loss Per Share – Basic and Diluted
|
|
|
(0.87 |
) |
|
|
(0.78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
28,197,683 |
|
|
|
21,188,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The
accompanying notes are an integral part of these consolidated financial
statements)
F-3
Ethos Environmental, Inc.
Consolidated Statements of Cash Flows
(expressed in U.S. dollars)
|
|
|
|
|
|
|
|
|
$
(Restated
– Note 11)
|
|
|
$
(Restated
– Note 11)
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss For The Year
|
|
|
(24,582,613 |
) |
|
|
(16,474,909 |
) |
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
201,093 |
|
|
|
292,096 |
|
Bad
Debt Expense
|
|
|
427,530 |
|
|
|
– |
|
Common
Stock Issued for Services
|
|
|
13,214,960 |
|
|
|
14,927,010 |
|
Impairment
from Sale Leaseback of Building
|
|
|
1,500,000 |
|
|
|
– |
|
Impairment
from Sale of Property and Equipment
|
|
|
– |
|
|
|
36,728 |
|
Share
Purchase Warrants Issued for Debt Extinguishment
|
|
|
6,646,171 |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(215,846 |
) |
|
|
(5,875 |
) |
Inventory
|
|
|
(191,484 |
) |
|
|
(151,351 |
) |
Other
Assets
|
|
|
(374,519 |
) |
|
|
67,209 |
|
Accounts
Payable and Accrued Liabilities
|
|
|
(79,416 |
) |
|
|
(428,508 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Used In Operating Activities
|
|
|
(3,454,124 |
) |
|
|
(1,737,600 |
) |
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of Property and Equipment
|
|
|
(198,680 |
) |
|
|
(6,359,874 |
) |
Proceeds
on Sale of Equipment, net
|
|
|
6,233,411 |
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided By (Used in) Investing Activities
|
|
|
6,034,731 |
|
|
|
(6,359,285 |
) |
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Capital Contribution
|
|
|
– |
|
|
|
957,616 |
|
Proceeds
from Issuance of Common Shares
|
|
|
2,050,000 |
|
|
|
1,550,819 |
|
Proceeds
from Issuance of Note Payable
|
|
|
350,000 |
|
|
|
5,167,819 |
|
Proceeds
from Related Parties
|
|
|
196,521 |
|
|
|
50,000 |
|
Repayment
of Note Payable
|
|
|
(5,167,819 |
) |
|
|
(13,000 |
) |
Repurchase
of Common Shares
|
|
|
– |
|
|
|
(50,000 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
(2,571,298 |
) |
|
|
7,663,254 |
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in Cash
|
|
|
9,309 |
|
|
|
(433,631 |
) |
|
|
|
|
|
|
|
|
|
Cash
– Beginning of Period
|
|
|
64,867 |
|
|
|
498,498 |
|
|
|
|
|
|
|
|
|
|
Cash
– End of Period
|
|
|
74,176 |
|
|
|
64,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
|
– |
|
|
|
– |
|
Income
tax paid
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The
accompanying notes are an integral part of these consolidated financial
statements)
F-4
Ethos
Environmental, Inc.
Consolidated
Statement of Stockholders’ Equity
(expressed
in U.S. dollars)
|
Common
Stock
|
|
Additional
|
|
Accumulated
|
|
|
|
Shares
|
|
Par
Value
|
|
Paid-In
Capital
|
|
Deficit
|
|
Total
|
|
#
|
|
$
|
|
$
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
17,609,992
|
|
1,761
|
|
3,805,764
|
|
(2,324,827)
|
|
1,482,698
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares for cash
|
5,108,395
|
|
511
|
|
175,689
|
|
–
|
|
176,200
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
–
|
|
–
|
|
–
|
|
(1,051,637)
|
|
(1,051,637)
|
|
|
|
|
|
|
|
|
|
|
|
22,718,387
|
|
2,272
|
|
3,981,453
|
|
(3,376,464)
|
|
607,261
|
|
|
|
|
|
|
|
|
|
|
Repurchase
of common shares
|
(5,000,200)
|
|
(500)
|
|
(49,500)
|
|
–
|
|
(50,000)
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
of Victor Industries Inc.
|
479,500
|
|
48
|
|
(48)
|
|
–
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net
assets assumed in recapitalization
|
–
|
|
–
|
|
3,131
|
|
–
|
|
3,131
|
|
|
|
|
|
|
|
|
|
|
Capital
Contribution
|
–
|
|
–
|
|
957,616
|
|
–
|
|
957,616
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares to settle services
|
4,910,000
|
|
491
|
|
13,574,499
|
|
–
|
|
13,574,990
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares for cash
|
776,225
|
|
78
|
|
1,550,741
|
|
–
|
|
1,550,819
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares for services
|
350,650
|
|
35
|
|
751,985
|
|
–
|
|
752,020
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares for services
|
100,000
|
|
10
|
|
599,990
|
|
–
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
–
|
|
–
|
|
–
|
|
(16,474,909)
|
|
(16,474,909)
|
|
|
|
|
|
|
|
|
|
|
|
24,334,562
|
|
2,434
|
|
21,369,867
|
|
(19,851,373)
|
|
1,520,928
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares for services
|
11,214,000
|
|
1,121
|
|
13,213,839
|
|
–
|
|
13,214,960
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common shares for cash
|
2,500,000
|
|
250
|
|
2,049,750
|
|
–
|
|
2,050,000
|
|
|
|
|
|
|
|
|
|
|
Fair
value of share purchase warrants
|
–
|
|
–
|
|
6,646,171
|
|
–
|
|
6,646,171
|
|
|
|
|
|
|
|
|
|
|
Impairment
of Sale Leaseback of Equipment
|
–
|
|
–
|
|
1,500,000
|
|
–
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of common shares
|
(50,000)
|
|
(5)
|
|
5
|
|
–
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net
loss for the year
|
–
|
|
–
|
|
–
|
|
(24,582,613)
|
|
(24,582,613)
|
|
|
|
|
|
|
|
|
|
|
|
37,998,562
|
|
3,800
|
|
44,779,632
|
|
(44,433,986)
|
|
349,446
|
(The
accompanying notes are an integral part of these consolidated financial
statements)
F-5
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
Ethos
Environmental, Inc. (the “Company”) was incorporated under the laws of the State
of Nevada on January 19, 1926 as Omo Mining and Leasing
Corporation. On January 19, 1929, the Company changed its name to Omo
Mines Corporation. On November 14, 1936, the Company changed its name
to Kaslo Mines Corporation. On December 24, 1977, the Company changed
its name to Victor Industries, Inc., focused on the development, manufacturing,
and marketing of products related to zeolite, a metal used
for the production of toxic chemical absorbents, water softeners, gas
absorbents, radiation absorbents and soil and fertilizer
amendments.
On
November 2, 2006, the Company signed and executed the Plan of Merger (the
“Merger”) with Ethos Environmental, Inc., a company incorporated in the State of
Nevada which manufactures and distributes fuel reformulating products that
increase fuel mileage, reduce emissions, and maintain lower fuel
costs. Under the terms of the Agreement, the Company acquired 100% of
the issued and outstanding common shares of Ethos Environmental, Inc. in
exchange for the issuance of 17,718,187 common shares of the
Company. As a result of the Agreement, the former owners of Ethos
Environmental, Inc. hold approximately 97% of the issued and outstanding common
shares of the Company. The acquisition is, in substance, a capital
transaction and is outside of the scope of SFAS No. 141, Business Combinations, and
the acquisition has been accounted for as a continuation of the Ethos
Environmental, Inc. business in accordance with EITF 98-3, Determining Whether a Non-Monetary
Transaction Involves a Receipt of Productive Assets or a
Business. Under recapitalization accounting, Ethos
Environmental, Inc. is considered the acquirer for accounting and financial
reporting purposes, and acquired the assets and assumed the liabilities of
Victor Industries, Inc.
In
addition, as part of the Merger agreement, the Company agreed to a reverse stock
split of its’ issued and outstanding common shares at a rate of 1 for 1,200
common shares. This reverse stock split was approved and finalized on
November 16, 2006. All common share amounts listed are shown
subsequent to the reverse stock split.
These
consolidated financial statements have been prepared on a going concern basis,
which implies that the Company will continue to realize its assets and discharge
its liabilities in the normal course of business. During the year ended December
31, 2007 and 2006, the Company recognized sales revenue of $1,355,141 and
$1,521,166 but incurred a net loss of $24,582,613 and $16,474,909,
respectively. As at December 31, 2007, the Company had an accumulated
deficit of $44,433,986. The continuation of the Company as a going
concern is dependent upon the continued financial support from its shareholders,
the ability to raise equity or debt financing, and the attainment of profitable
operations from the Company's future business. These factors raise substantial
doubt regarding the Company’s ability to continue as a going concern. These
consolidated financial statements do not include any adjustments to the
recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue
as a going concern.
The
Company’s plan of action over the next twelve months is to continue its
operations to manufacture and distribute fuel reformulating products and raise
additional capital financing, if necessary, to sustain operations.
2.
|
Summary
of Significant Accounting Policies
|
These
consolidated financial statements and related notes are presented in accordance
with accounting principles generally accepted in the United States, and are
expressed in US dollars. The Company’s fiscal year-end is December
31.
The
preparation of these consolidated financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. The Company regularly
evaluates estimates and assumptions related to valuation allowances on accounts
receivable and inventory, valuation and amortization policies on property and
equipment, and valuation allowances on deferred income tax losses. The Company
bases its estimates and assumptions on current facts, historical experience and
various other factors that it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities and the accrual of costs and expenses that are
not readily apparent from other sources. The actual results experienced by the
Company may differ materially and adversely from the Company’s estimates. To the
extent there are material differences between the estimates and the actual
results, future results of operations will be affected.
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
|
c)
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid instruments with maturity of three months or
less at the time of issuance to be cash equivalents. As at December 31, 2007 and
2006, the Company had no cash equivalents.
|
Accounts
receivable are stated at their principal balances and are non-interest
bearing and unsecured. Management conducts a periodic review of
the collectability of accounts receivable and deems all unpaid amounts
greater than 30 days to be past due. If uncertainty exists with
respect to the recoverability of certain amounts based on historical
experience or economic climate, management will establish an allowance
against the outstanding receivables. For the year ended
December 31, 2007, the Company recorded bad debt expense of $427,530
related to one customer who has defaulted on their amount
owing. As at December 31, 2007 and 2006, the Company recorded
an allowance for doubtful accounts of $111,362 and $126,485,
respectively.
|
|
Inventory
is comprised of raw materials and finished goods of its fuel reformulating
products and is recorded at the lower of cost or net realizable value on a
first in first out (FIFO) basis. The Company establishes inventory
reserves for estimated obsolete or unmarketable inventory equal to the
differences between the cost of inventory and the estimated realizable
value based upon assumptions about future and market conditions. Shipping
and handling costs are classified as a component of cost of sales in the
statement of operations.
|
|
f)
|
Property
and Equipment
|
|
Property
and equipment are recorded at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the anticipated
lease term or the estimated useful life. The Company's policy is to
capitalize items with a cost greater than $4,000 and an estimated useful
life greater than one year. The Company reviews all property and equipment
for impairment at least annually. Typically, the company depreciates its
assets over a 5 year period except for the building which is depreciated
on a 25 year basis.
|
|
The
Company will recognize revenue from the sale of its fuel reformulating
products in accordance with Securities and Exchange Commission Staff
Bulletin No. 104 (“SAB 104”), “Revenue Recognition in
Financial Statements”. Revenue will be recognized only when the
price is fixed or determinable, persuasive evidence of an arrangement
exists, the service is provided, and collectibility is
assured.
|
|
h)
|
Basic
and Diluted Net Income (Loss) Per
Share
|
The
Company computes net income (loss) per share in accordance with SFAS No. 128,
"Earnings per Share".
SFAS No. 128 requires presentation of both basic and diluted earnings per share
(EPS) on the face of the income statement. Basic EPS is computed by dividing net
income (loss) available to common shareholders (numerator) by the weighted
average number of shares outstanding (denominator) during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during the
period using the treasury stock method and convertible preferred stock using the
if-converted method. In computing Diluted EPS, the average stock price for the
period is used in determining the number of shares assumed to be purchased from
the exercise of stock options or warrants. Diluted EPS excludes all dilutive
potential shares if their effect is anti dilutive.
SFAS No.
130, “Reporting Comprehensive
Income,” establishes standards for the reporting and display of
comprehensive loss and its components in the consolidated financial statements.
As at December 31, 2007 and 2006, the Company did not record any comprehensive
income or loss.
The fair
value of financial instruments, which include cash, accounts receivable, other
current assets, accounts payable, and accrued liabilities were estimated to
approximate their carrying value due to the immediate or relatively short
maturity of these instruments.
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
|
2.
|
Summary
of Significant Accounting Policies
(continued)
|
|
k)
|
Foreign
Currency Translation
|
The
Company’s functional and reporting currency is the United States dollar.
Monetary assets and liabilities denominated in foreign currencies are translated
in accordance with SFAS No. 52 “Foreign Currency Translation”
using the exchange rate prevailing at the balance sheet date. Gains and losses
arising on translation or settlement of foreign currency denominated
transactions or balances are included in the determination of income. Foreign
currency transactions are primarily undertaken in Canadian dollars. The Company
has not, to the date of these financials statements, entered into derivative
instruments to offset the impact of foreign currency fluctuations.
l) Advertising
Costs
Advertising
costs are expensed as incurred and are recorded in the consolidated financial
statements as selling expense. For the years ended December 31, 2007
and 2006, the Company recorded advertising costs of $283,470 and $132,955,
respectively.
m) Income
Taxes
|
Potential
benefits of income tax losses are not recognized in the accounts until
realization is more likely than not. The Company has adopted SFAS No. 109
“Accounting for Income
Taxes” as of its inception. Pursuant to SFAS No. 109 the Company is
required to compute tax asset benefits for net operating losses carried
forward. The potential benefits of net operating losses have not been
recognized in these consolidated financial statements because the Company
cannot be assured it is more likely than not it will utilize the net
operating losses carried forward in future
years.
|
|
n)
|
Stock-Based
Compensation
|
|
The
Company records stock-based compensation in accordance with SFAS No. 123R
“Share Based Payments”, using the fair value method. All transactions in
which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. Equity instruments issued to
employees and the cost of the services received as consideration are
measured and recognized based on the fair value of the equity instruments
issued.
|
o)
|
Recent
Accounting Pronouncements
|
In March
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161,
“Disclosures about Derivative
Instruments and Hedging Activities – an amendment to FASB Statement No.
133”. SFAS No. 161 is intended to improve financial standards for
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. Entities are required to
provide enhanced disclosures about: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations; and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. It is effective for
financial statements issued for fiscal years beginning after November 15, 2008,
with early adoption encouraged. The Company is currently evaluating
the impact of SFAS No. 161 on its financial statements, and the adoption of this
statement is not expected to have a material effect on the Company’s financial
statements.
In
December 2007, the FASB issued SFAS No. 141R, “Business
Combinations”. This statement replaces SFAS 141 and defines
the acquirer in a business combination as the entity that obtains control of one
or more businesses in a business combination and establishes the acquisition
date as the date that the acquirer achieves control. SFAS 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree at the acquisition date, measured at
their fair values as of that date. SFAS 141R also requires the acquirer to
recognize contingent consideration at the acquisition date, measured at its fair
value at that date. This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008, and
earlier adoption is prohibited. The adoption of this statement is not expected
to have a material effect on the Company's financial statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements Liabilities –an Amendment of ARB No.
51”. This statement amends ARB 51 to establish accounting and
reporting standards for the Noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December
15, 2008, and earlier adoption is prohibited. The adoption of this statement is
not expected to have a material effect on the Company's financial
statements.
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
2. Summary
of Significant Accounting Policies (continued)
|
o)
|
Recent
Accounting Pronouncements
(continued)
|
In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including and amendment of FASB Statement No. 115". SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. SFAS No. 159 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. As such, the Company
is required to adopt these provisions at the beginning of the fiscal year ending
February 28, 2009. The Company is currently evaluating the impact of SFAS No.
159 on its consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements." SAB No. 108 addresses how the effects of prior year
uncorrected misstatements should be considered when quantifying misstatements in
current year financial statements. SAB No. 108 requires companies to quantify
misstatements using a balance sheet and income statement approach and to
evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors. SAB No. 108
is effective for periods ending after November 15, 2006. The adoption of SAB No.
108 did not have a material effect on its consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 158 "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements
No. 87, 88, 106 and 132 (R)" SFAS No. 158 requires employers to recognize
the over funded or under funded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. SFAS No.
158 also requires an employer to measure the funded status of a plan as of the
date of its year-end statement of financial position, with limited exceptions.
The provisions of SFAS No. 158 are effective for employers with publicly traded
equity securities as of the end of the fiscal year ending after December 15,
2006. As such, the Company is required to adopt these provisions effective this
fiscal year end. The adoption of this statement has no material effect on the
Company's reported financial position or results of operations.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (
"GAAP"), and expands
disclosures about fair value measurements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after
November 15, 2007,
and interim periods within those fiscal years. As such,
the Company is required
to adopt these provisions at the beginning of the fiscal year ending
February
28, 2009.
The Company is currently evaluating the impact of SFAS No. 157 on its
consolidated financial statements.
In June
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statements No. 109" (FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes by prescribing a two-step method of first evaluating whether a tax
position has met a more likely than not recognition threshold and second,
measuring that tax position to determine the amount of benefit to be recognized
in the financial statements. FIN 48 provides guidance on the presentation of
such positions within a classified statement of financial position as well as on
de-recognition, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of this standard did not have a material effect
on the Company's results of operations or financial position.
3. Inventory
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
|
267,278 |
|
|
|
335,381 |
|
Finished
Goods
|
|
|
335,121 |
|
|
|
75,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
602,399 |
|
|
|
410,915 |
|
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
4. Property
and Equipment
|
|
|
|
|
|
|
|
Net
Book Value
|
|
|
|
Cost
$
|
|
|
Accumulated
Amortization
$
|
|
|
$
|
|
|
$
|
|
Building
and Land
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
5,666,824 |
|
Computers
|
|
|
36,637 |
|
|
|
35,482 |
|
|
|
1,155 |
|
|
|
12,762 |
|
Equipment
|
|
|
235,257 |
|
|
|
120,339 |
|
|
|
114,918 |
|
|
|
669,609 |
|
Furniture
and Fixtures
|
|
|
16,698 |
|
|
|
13,855 |
|
|
|
2,843 |
|
|
|
5,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288,592 |
|
|
|
169,676 |
|
|
|
118,916 |
|
|
|
6,354,740 |
|
5. Notes
Payable
|
a)
|
As
at December 31, 2007, the Company owed $246,521 (2006 - $50,000) in a
demand loan for financing of operations. Under the terms of the
loan, the amount is unsecured, non-interest bearing, and due on
demand.
|
|
b)
|
In
December 2007, the Company entered into a Demand Loan Agreement with a
third party for $350,000. Under the terms of the loan, the
amount was unsecured, non-interest bearing, and due on
demand.
|
|
c)
|
On
January 26, 2006, the Company secured a loan for its building in the
amount of $4,750,000 with a convertible Promissory Note. The Note was
convertible into 1,900,000 common shares of the Company at a conversion
rate of $2.50 per common share. The Note carried an annual
interest rate of 17% with interest-only payments and a term of one
year.
|
On
December 6, 2006, the Note was assigned to another third party, and interest was
renegotiated to 14% per annum.
On May
24, 2007, the Company and the third party renegotiated the terms of the
settlement and cancelled the convertibility feature of the Note and replaced it
with the issuance of 1,900,000 share purchase warrants. Each share
purchase warrants entitles the warrant holder to purchase one common share of
the Company at $2.50 per common share for a three-year period commencing from
the date of the renegotiated terms. In addition, the annual interest
rate of the Note was reduced from 14% to 12% per annum.
In
October 2007, corresponding with the completion of the sale leaseback of the
Company’s building, the Note was fully repaid.
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
|
d)
|
On
October 13, 2007, the Company issued 10,025,000 common share of the
Company at $0.95 per common share to settle consulting services,
professional fees, and management fees totalling $9,523,750, including
5,000,000 common shares to the Company’s Chief Executive Officer with a
fair value of $4,750,000.
|
|
e)
|
On
July 24, 2007, the Company issued 2,500,000 common shares of the Company
in a private placement agreement as part of the sale of the Company’s land
and building, for proceeds of $2,000,000. The remaining
$5,875,000 of the purchase and sale agreement has been allocated to the
sale of the land and building.
|
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
6.
|
Common
Shares (continued)
|
|
h)
|
On
April 4, 2007, the Company issued 156,000 common shares of the Company at
$4.25 per common share, or fair value of $663,000, for professional fees
and consulting services incurred.
|
|
i)
|
On
March 23, 2007, the Company issued 100,000 common shares of the Company at
$4.00 per common share, or fair value of $400,000, for professional fees
and consulting services incurred.
|
|
l)
|
On
January 24, 2007, the Company issued 200,000 common shares at $5.00 per
common share, or fair value of $1,000,000, for consulting services
incurred.
|
|
o)
|
In
November 2006, the Company issued 776,225 common shares of the Company in
various private placements for gross proceeds of
$1,550,819.
|
|
p)
|
In
November 2006, the Company issued 350,650 common shares of the Company at
approximately $2.00 per common share to settle services valued at
$752,020.
|
|
q)
|
On
November 16, 2006, the Company approved a 1-to-1,200 reverse common stock
split that decreased the number of issued and outstanding common shares
from 573,850,485 common shares to 479,500 common shares after accounting
for rounding up of partial common shares affected by the reverse stock
split. The common stock split has been applied
retroactively.
|
|
r)
|
On
November 2, 2006, the Company issued 17,718,187 post-reverse split common
shares to acquire 100% of the common shares of Ethos Environmental, Inc.
in a reverse takeover transaction, as disclosed in Note 3. The
common shares issued have been applied
retroactively.
|
|
s)
|
On
November 1, 2006, the Company issued 3,500,000 post-reverse split common
shares of the Company to the President of the Company with a fair value of
$2.00 per common share as settlement of services. The fair
value of the common shares were derived by management using historical
share issuance prices to third parties, and were a result of pre-merger
activity.
|
|
t)
|
On
November 1, 2006, the Company issued 100,000 post-reverse split common
shares at $0.25 per common share to settle legal fees valued at
$25,000.
|
|
u)
|
During
the six months ended June 30, 2008, the Company received capital
contributions totalling $957,616 which has been recorded as additional
paid-in capital.
|
7.
|
Share
Purchase Warrants
|
|
In
May 2007, the Company issued 1,900,000 share purchase warrants as part of
the amendment of the loan agreement, as noted in Note 5(b)
above. Each warrant allows the warrant holder to purchase one
additional common share of the Company at $2.50 per common share within
three years of the signed date. As at December 31, 2007, no
share purchase warrants have been
exercised.
|
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
7.
|
Share
Purchase Warrants (continued)
|
|
|
Number of Warrants
|
|
|
Exercise Price
|
|
|
|
|
– |
|
|
|
– |
|
Issued
|
|
|
1,900,000 |
|
|
$ |
2.50 |
|
|
|
|
1,900,000 |
|
|
$ |
2.50 |
|
Number of Warrants
|
|
|
Exercise Price
|
|
Expiry Date
|
|
1,900,000 |
|
|
$ |
2.50 |
|
|
|
|
|
|
|
|
|
|
|
1,900,000 |
|
|
|
|
|
|
8. Related
Party Transactions
9. Commitments
and Contingencies
|
a)
|
The
Company leases an office building under a lease agreement that expires in
July 2012. For the years ended December 31, 2006 and 2005, rent
expense totalled $52,657 and 66,844,
respectively.
|
|
In
October 2007, the Company completed a sale and leaseback agreement with
respect to its building. Commencing November 1, 2007, the
Company entered into a 15-year lease agreement, with monthly lease
payments of $63,000 in 2007. For the year ended December 31,
2007, the Company incurred lease expense of $126,000 (2006 -
$52,657).
|
|
During
the year ended December 31, 2007, the Company entered into various lease
agreements with respect to its manufacturing equipment, including sale
leaseback agreements of manufacturing equipment of approximately
$737,968. Under the lease terms, the monthly payment is based
on a factor of 0.04125 times the average outstanding loan balance for the
month. For the year ended December 31, 2007, the Company
incurred lease expense of $246,554 (2006 -
$4,996).
|
The Company’s future annual minimum
lease payments are as follows:
|
Amount
$
|
|
1,174,860
|
|
900,891
|
|
809,568
|
|
809,568
|
|
782,784
|
Thereafter
|
3,654,000
|
|
8,131,671
|
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
10. Concentrations
Inventory
Purchases
For the
year ended December 31, 2007, the Company uses eight vendors for its fuel
reformulating products which account for 97% of product purchases compared with
five vendors comprising 90% of product purchases for the year ended December 31,
2006.
Sales
Revenue
11. Income
Taxes
The
Company has adopted the provisions of SFAS 109, “Accounting for Income
Taxes”. Pursuant to SFAS 109, the Company is required to compute tax
asset benefits for net operating losses carried forward. The potential benefit
of net operating losses have not been recognized in the consolidated financial
statements because the Company cannot be assured that it is more likely than not
that it will utilize the net operating losses carried forward in future years.
The Company has $15,038,000 of net operating losses to carryforward to offset
taxable income in future years which expire through fiscal 2027. For the years
ended December 31, 2007 and 2006, the valuation allowance established against
the deferred tax assets increased by $8,289,716 and $5,588,981,
respectively.
The
components of the net deferred tax asset at December 31, 2007 and 2006, the
statutory tax rate, the effective tax rate and the amount of the valuation
allowance are indicated below:
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Taxes
|
|
|
(24,582,613 |
) |
|
|
(16,474,909 |
) |
Statutory
rate
|
|
|
34 |
% |
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computed
expected tax recovery
|
|
|
(8,358,088 |
) |
|
|
(5,601,469 |
) |
Non-deductible
expenses
|
|
|
68,372 |
|
|
|
12,488 |
|
Change
in valuation allowance
|
|
|
8,289,716 |
|
|
|
5,588,981 |
|
|
|
|
|
|
|
|
|
|
Reported
income taxes
|
|
|
– |
|
|
|
– |
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Deferred
tax asset
|
|
|
|
|
|
|
-
Cumulative net operating losses
|
|
|
15,038,059 |
|
|
|
6,748,343 |
|
-
Less valuation allowance
|
|
|
(15,038,059 |
) |
|
|
(6,738,343 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
|
– |
|
|
|
– |
|
The
Company has incurred operating losses of $15,038,000 which, if unutilized, will
expire through to 2027. Future tax benefits, which may arise as a result of
these losses, have not been recognized in these consolidated financial
statements, and have been offset by a valuation allowance. The following table
lists the fiscal year in which the loss was incurred and the expiration date of
the operating:
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
|
|
|
Expiration
|
|
Net
|
|
Date
of
|
|
Loss
|
|
Operating
|
Period
Incurred
|
$
|
|
Losses
|
|
|
|
|
|
801,800
|
|
2011
|
|
357,500
|
|
2020
|
|
5,589,000
|
|
2026
|
|
8,289,700
|
|
2027
|
|
|
|
|
|
15,038,000
|
|
|
|
|
|
|
12. Restatement
The
Company has restated its consolidated financial statements as at and for the
years ended December 31, 2007 and 2006. The consolidated financial statements
have been restated to reflect the following transactions:
·
|
impairment
of goodwill and intangible assets upon the Company’s acquisition of Ethos
Environmental, Inc.;
|
·
|
recording
of fair value of issuance of common shares to management and directors of
the Company at the end-of-day trading price when the Company’s common
stock was publicly traded or based on the most recent third-party issuance
price when the Company’s common stock was not publicly
traded;
|
·
|
recording
of the issuance of common shares for cash proceeds and issuance of common
shares for services for the years ended December 31, 2007 and
2006;
|
·
|
recording
of the issuance in fiscal 2006 of common shares to the Company’s Chief
Financial Officer (CFO) that was previously booked during the year ended
December 31, 2007;
|
·
|
recording
of $901,080 of capital contributions for the year ended December 31,
2006;
|
·
|
reversal
of restricted cash that was previously recorded in the Company’s audited
financial statements, as the Company does not have ownership of the
funds;
|
·
|
property
and equipment that was purchased for personal use were written off and
charged to operations under general and administrative
expense;
|
·
|
impairment
of property & equipment that are no longer in the Company’s ownership
and use of operations and adjustments to amortization expense based on the
Company’s amortization policies;
and
|
·
|
reversal
of unsupported sales invoices and inventory purchases for the years ended
December 31, 2007 and 2006.
|
The
effect of the restatement is to decrease total assets and stockholders’ equity
by $7,050,194. Furthermore, the restatements decreased sales revenue
by $9,021,505, and increased net loss for the year ended December 31, 2007 by
$6,230,130 and accumulated deficit as at December 31, 2007 by
$16,363,959.
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
|
|
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
5,951,275 |
|
|
|
(5,867,027 |
) |
|
|
84,248 |
|
Inventory
|
|
|
1,376,030 |
|
|
|
(773,631 |
) |
|
|
602,399 |
|
Total
Current Assets
|
|
|
7,401,481 |
|
|
|
(6,640,658 |
) |
|
|
760,823 |
|
Property
and Equipment
|
|
|
228,452 |
|
|
|
(109,536 |
) |
|
|
118,916 |
|
Other
Assets
|
|
|
699,419 |
|
|
|
(300,000 |
) |
|
|
399,419 |
|
Total
Assets
|
|
|
8,329,352 |
|
|
|
(7,050,194 |
) |
|
|
1,279,158 |
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
3,687 |
|
|
|
113 |
|
|
|
3,800 |
|
Additional
Paid-In Capital
|
|
|
35,615,040 |
|
|
|
9,164,592 |
|
|
|
44,779,632 |
|
Accumulated
Deficit
|
|
|
(28,219,087 |
) |
|
|
(16,214,899 |
) |
|
|
(44,433,986 |
) |
Total
Stockholders’ Equity
|
|
|
7,399,640 |
|
|
|
(7,050,194 |
) |
|
|
349,446 |
|
Total
Liabilities and Stockholders’ Equity
|
|
|
8,329,352 |
|
|
|
(7,050,194 |
) |
|
|
1,279,158 |
|
b) Statement
of Operations
|
|
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Sales
Revenue
|
|
|
10,376,646 |
|
|
|
(9,021,505 |
) |
|
|
1,355,141 |
|
Cost
of Sales
|
|
|
3,404,735 |
|
|
|
(2,659,599 |
) |
|
|
745,136 |
|
Gross
Profit
|
|
|
6,971,911 |
|
|
|
(6,361,906 |
) |
|
|
610,005 |
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad
Debt Expense
|
|
|
– |
|
|
|
427,530 |
|
|
|
427.530 |
|
General
and Administrative
|
|
|
18,214,796 |
|
|
|
(559,333 |
) |
|
|
17,655,463 |
|
Total
Operating Expenses
|
|
|
25,096,543 |
|
|
|
(131,803 |
) |
|
|
24,964,740 |
|
Net
Loss
|
|
|
(18,352,510 |
) |
|
|
(6,230,130 |
) |
|
|
(24,582,640 |
) |
Net
Loss Per Share – Basic and Diluted
|
|
|
(0.66 |
) |
|
|
(0,21 |
) |
|
|
(0.87 |
) |
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
12. Restatement
(continued)
c) Statement
of Cashflows
|
|
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss for the Year
|
|
|
(18,352,510 |
) |
|
|
(6,230,103 |
) |
|
|
(24,582,613 |
) |
Amortization
Expense
|
|
|
213,702 |
|
|
|
(12,609 |
) |
|
|
201,093 |
|
Bad
Debt Expense
|
|
|
– |
|
|
|
427,530 |
|
|
|
427,530 |
|
Common
Stock Issued for Services
|
|
|
15,359,710 |
|
|
|
(2,144,750 |
) |
|
|
13,214,960 |
|
Impairment
from Sale Leaseback of Building
|
|
|
– |
|
|
|
1,500,000 |
|
|
|
1,500,000 |
|
Changes
in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(5,623,951 |
) |
|
|
5,408,105 |
|
|
|
(215,846 |
) |
Inventory
|
|
|
(965,115 |
) |
|
|
773,631 |
|
|
|
(191,484 |
) |
Other
Assets
|
|
|
(674,519 |
) |
|
|
300,000 |
|
|
|
(374,519 |
) |
Accounts
Payable and Accrued Liabilities
|
|
|
(272,195 |
) |
|
|
192,779 |
|
|
|
(79,416 |
) |
Cashflows
Provided By (Used In) Operating Activities
|
|
|
(3,668,707 |
) |
|
|
214,583 |
|
|
|
(3,454,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of Property and Equipment
|
|
|
– |
|
|
|
(198,680 |
) |
|
|
(198,680 |
) |
Proceeds
from Sale of Property and Equipment
|
|
|
1,199,314 |
|
|
|
5,034,097 |
|
|
|
6,233,411 |
|
Cashflows
Provided By Investing Activities
|
|
|
1,199,314 |
|
|
|
4,835,417 |
|
|
|
6,034,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Issuance of Note Payable
|
|
|
1,055,334 |
|
|
|
(705,334 |
) |
|
|
350,000 |
|
Repayment
of Note Payable
|
|
|
(1,123,153 |
) |
|
|
(4,044,666 |
) |
|
|
(5,167,819 |
) |
Cashflows
Provided by (Used In) Financing Activities
|
|
|
2,178,702 |
|
|
|
(4,750,000 |
) |
|
|
(2,571,298 |
) |
Increase
(Decrease) in Cash
|
|
|
(290,691 |
) |
|
|
300,000 |
|
|
|
9,309 |
|
Cash
– Beginning of Period
|
|
|
364,867 |
|
|
|
(300,000 |
) |
|
|
64,867 |
|
d) Statement
of Stockholders’ Deficit
|
|
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Common
Stock
|
|
|
3,687 |
|
|
|
113 |
|
|
|
3,800 |
|
Additional
Paid-In Capital
|
|
|
35,615,040 |
|
|
|
9,164,592 |
|
|
|
44,779,632 |
|
Accumulated
Deficit
|
|
|
(28,219,087 |
) |
|
|
(16,214,899 |
) |
|
|
(44,433,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares of Common Stock
|
|
|
36,871,687 |
|
|
|
1,126,875 |
|
|
|
37,998,562 |
|
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
12. Restatement
(continued)
The
effect of the restatement is to decrease total assets by $4,702,099, decrease
total liabilities by $192,779, and decrease stockholders’ equity by
$4,509,320. Furthermore, the restatements decrease sales revenue by
$3,395,907, and increase net loss for the year ended December 31, 2006 and
accumulated deficit as at December 31, 2006 by $10,067,166.
|
|
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Cash
|
|
|
300,000 |
|
|
|
(300,000 |
) |
|
|
– |
|
Accounts
Receivable
|
|
|
327,324 |
|
|
|
(31,392 |
) |
|
|
295,932 |
|
Total
Current Assets
|
|
|
1,123,006 |
|
|
|
(331,392 |
) |
|
|
791,614 |
|
Property
and Equipment
|
|
|
10,725,447 |
|
|
|
(4,370,707 |
) |
|
|
6,354,740 |
|
Total
Assets
|
|
|
11,853,453 |
|
|
|
(4,702,099 |
) |
|
|
7,151,354 |
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
503,898 |
|
|
|
(192,779 |
) |
|
|
311,119 |
|
Total
Liabilities
|
|
|
5,823,205 |
|
|
|
(192,779 |
) |
|
|
5,630,426 |
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
2,311 |
|
|
|
123 |
|
|
|
2,434 |
|
Additional
Paid-In Capital
|
|
|
15,961,204 |
|
|
|
5,408,663 |
|
|
|
21,369,867 |
|
Accumulated
Deficit
|
|
|
(9,933,267 |
) |
|
|
(9,918,106 |
) |
|
|
(19,851,373 |
) |
Total
Stockholders’ Equity
|
|
|
6,030,248 |
|
|
|
(4,509,320 |
) |
|
|
1,520,928 |
|
Total
Liabilities and Stockholders’ Equity
|
|
|
11,853,453 |
|
|
|
(4,702,099 |
) |
|
|
7,151,354 |
|
b) Statement
of Operations
|
|
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Sales
Revenue
|
|
|
4,768,013 |
|
|
|
(3,246,847 |
) |
|
|
1,521,166 |
|
Cost
of Sales
|
|
|
1,340,135 |
|
|
|
(883,664 |
) |
|
|
456,471 |
|
Gross
Profit
|
|
|
3,427,878 |
|
|
|
(2,363,243 |
) |
|
|
1,064,635 |
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
– |
|
|
|
18,865 |
|
|
|
18,865 |
|
General
and Administrative
|
|
|
5,346,409 |
|
|
|
7,579,330 |
|
|
|
12,925,739 |
|
Impairment
of Property and Equipment
|
|
|
– |
|
|
|
36,728 |
|
|
|
36,728 |
|
Selling
Expense
|
|
|
4,689,910 |
|
|
|
(80,000 |
) |
|
|
4,609,910 |
|
Total
Operating Expenses
|
|
|
10,036,319 |
|
|
|
7,554,923 |
|
|
|
17,591,242 |
|
Net
Loss
|
|
|
(6,556,803 |
) |
|
|
(9,918,106 |
) |
|
|
(16,474,909 |
) |
Net
Loss Per Share – Basic and Diluted
|
|
|
(0.05 |
) |
|
|
(0.73 |
) |
|
|
(0.78 |
) |
Ethos
Environmental, Inc.
Notes to
the Consolidated Financial Statements
(expressed
in U.S. dollars)
12. Restatement
(continued)
c) Statement
of Cashflows
|
|
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss for the Year
|
|
|
(6,556,803 |
) |
|
|
(9,918,106 |
) |
|
|
(16,474,909 |
) |
Amortization
Expense
|
|
|
358,786 |
|
|
|
(66,690 |
) |
|
|
292,096 |
|
Common
Stock Issued for Services
|
|
|
7,580,990 |
|
|
|
7,346,020 |
|
|
|
14,927,010 |
|
Impairment
of Property and Equipment
|
|
|
– |
|
|
|
36,728 |
|
|
|
36,728 |
|
Changes
in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(37,267 |
) |
|
|
31,392 |
|
|
|
(5,875 |
) |
Accounts
Payable and Accrued Liabilities
|
|
|
(235,729 |
) |
|
|
(192,779 |
) |
|
|
(428,508 |
) |
Cashflows
Provided By (Used In) Operating Activities
|
|
|
1,025,835 |
|
|
|
(2,763,435 |
) |
|
|
(1,737,600 |
) |
Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Capital Contribution
|
|
|
45,000 |
|
|
|
912,616 |
|
|
|
957,616 |
|
Proceeds
from Issuance of Common Shares
|
|
|
– |
|
|
|
1,550,819 |
|
|
|
1,550,819 |
|
Cashflows
Provided by Financing Activities
|
|
|
5,199,819 |
|
|
|
2,463,435 |
|
|
|
7,663,254 |
|
Increase
(Decrease) in Cash
|
|
|
(133,631 |
) |
|
|
(300,000 |
) |
|
|
(433,631 |
) |
Cash
– End of Period
|
|
|
364,867 |
|
|
|
(300,000 |
) |
|
|
64,867 |
|
d) Statement
of Stockholders’ Deficit
|
|
|
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
Restated
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Common
Stock
|
|
|
2,311 |
|
|
|
123 |
|
|
|
2,434 |
|
Additional
Paid-In Capital
|
|
|
15,961,204 |
|
|
|
5,408,663 |
|
|
|
21,369,867 |
|
Accumulated
Deficit
|
|
|
(9,933,267 |
) |
|
|
(9,918,106 |
) |
|
|
(19,851,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares of Common Stock
|
|
|
23,107,687 |
|
|
|
1,226,875 |
|
|
|
24,334,562 |
|
13. Subsequent
Events
a)
|
On
March 31, 2008, the Company issued a Promissory Note (the “Note”) in
exchange for cash proceeds of $300,000. In accordance with the
terms of the Note, the amount is unsecured, due interest at 12% per annum
payable monthly in arrears, and due on March 28,
2009.
|
b)
|
On
March 26, 2008, the Company issued a Promissory Note (the “Note”) in
exchange for cash proceeds of $1,000,000. In accordance with
the terms of the Note, the amount is secured with 2,000,0000 common shares
owned by the Company’s Chief Executive Officer, due interest of 12% per
annum, and is due on July 30, 2008.
|
e)
|
Subsequent
to December 31, 2007, the Company issued 106,550 common shares to settle
consulting services and professional fees, and issued 742,798 common
shares pursuant to a provision in the Registration Rights Agreement with
GreenBridge Capital Partners IV,
LLC.
|
Item
8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Other
than as may have been previously disclosed in our filings with the SEC, we have
had no changes in and disagreements with our independent public accountants on
accounting and financial disclosure.
Item
8A(T). Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15 under the Exchange Act, our management, including Corey
P. Schlossmann, our Chief Executive Officer, and Thomas W. Maher, our Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures for the period ended December 31, 2007
and December 31, 2006. This evaluation was performed as of November
18, 2008.
Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures.
Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based on that evaluation, Mssrs. Schlossmann and Maher concluded that because of
the material weaknesses in internal control over financial reporting described
below, our disclosure controls and procedures were not effective as of December
31, 2007.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act. Our management is also required to
assess and report on the effectiveness of our internal control over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002
(“Section 404”). Management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2007 and
December 31, 2006. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control - Integrated Framework. During our
assessment of the effectiveness of internal control over financial reporting as
of December 31, 2007 and December 31, 2006, management identified material
weaknesses related to (i) the U.S. GAAP expertise of our internal accounting
staff and (ii) our internal audit functions, and material weaknesses related to
(i) the absence of an Audit Committee as of December 31, 2007 and December 31,
2006 and (ii) a lack of segregation of duties within accounting
functions.
The
Company completed a merger in November 2006, following which new management was
appointed. Since that time, our internal accounting department has
been inadequate to effectively respond to requirements under Section 404, which
resulted in material weaknesses of our internal control over financial reporting
for the years ended December 31, 2007 and 2006.
On
September 5, 2008, the Company accepted the resignations of Enrique de Vilmorin,
Luis Willars, and Jose Manuel Escobedo from all positions with the
Company. These resignations were precipitated by certain shareholders
of the Company advising Mr. de Vilmorin that they would be formally requesting a
shareholder vote to replace management, including the Company’s
directors. Prior to receiving such a demand, Mr. de Vilmorin, Mr.
Willars and Mr. Escobedo resigned from their positions with the
Company.
Immediately
following their resignations, the Company launched an internal investigation,
led by the Audit Committee which was formed on September 25, 2008, to ascertain
the extent of the financial statement items requiring restatement and other
issues requiring disclosure to the Securities & Exchange Commission and to
the investment community. On or about October 16, 2008, we concluded that
sufficient support had been obtained that certain revenue transactions dating
back to the year ended December 31, 2006 were unsupportable, and that certain
personal expenditures were incurred on the Company’s accounts. Upon
evidence of these transactions which were materially misstated for all periods
dating back to December 31, 2006, the Company filed a Form 8-K on October 21,
2008 citing non-reliance on its issued financial statements since that
time.
Among the
materially misstated transactions noted were the following:
·
|
Sales
invoices and transactions to companies that did not exist dating back to
the fiscal year ended December 31,
2006;
|
·
|
Purchases
of inventory that were not supportable dating back to the fiscal year
ended December 31, 2006; and
|
·
|
Personal
expenditures incurred by Mr. de Vilmorin dating back to the fiscal year
ended December 31, 2006, including cash payments and purchases of personal
assets that were recorded as Company
assets.
|
The
Company, through co-operation of its management and Board of Directors, has
substantively reviewed all significant transactions and will be restating, to
the extent not already done, all reported financial statements from December 31,
2006 to June 30, 2008 to reflect the Company’s true financial position for each
of the reporting periods then ended.
The
following material weaknesses over internal controls over financial reporting
existed as at December 31, 2007 and 2006:
Lack of Control
Environment that sufficiently promotes effective internal control over financial
reporting throughout the management structure.
Our
control environment did not sufficiently promote effective internal control over
financial reporting throughout our management structure, and this material
weakness was a contributing factor in the development of other material
weaknesses described below. Principal contributing factors included the lack of
permanent employees in key financial reporting positions, resistance to change
of long-held practices developed in an entrepreneurial and trust culture, the
lack of a formal program for training members of our finance and accounting
group and a lack of a full evaluation of our financial system applications due
to incomplete documentation and testing of key controls. Our control environment
also contributed to our inability to fully evaluate our general computer
controls and financial system application controls, as described more fully
below.
Insufficient
Segregation of Duties.
We did
not segregate duties in several important functions, including: permitting one
person the ability to receive inventory, perform cycle counts and process
adjustments, and another individual to initiate and authorize the scrapping of
obsolete and excess inventory; permitting changes to inventory quantity
information within the financial application system without appropriate review;
providing users access within our financial application system to areas outside
of their responsibilities; and permitting the creation, modification and
updating of customer or vendor data without a secondary level of review or
approval.
Insufficient
personnel in our finance/accounting functions and Lack of Controls over the
Invoice Posting Process.
We had a
lack of resources and inadequate training within our finance and accounting
departments. Training for our accounting staff with respect to
generally accepted accounting principles (“GAAP”) had been ad hoc rather than
systematic. As a result of these factors, certain transactions were not recorded
initially in accordance with GAAP, such as a limited number of third-party
vendor contracts, leases and licenses; the capitalization of sales and use taxes
on fixed assets and the internal labor component of a financial application
system implementation; and appropriate period-end cut-off for “FOB Origin”
inventory received shortly after the end of the period.
Insufficient
policies and procedures over various financial statement
areas.
We had
insufficient processes and personnel to provide adequate oversight of
financially significant transactions and determinations by our finance and
accounting personnel in our offices outside of headquarters. These deficiencies
represented a design deficiency in internal controls which resulted in more than
a remote likelihood that a material error would not have been prevented or
detected, and constituted a material weakness.
Lack of control
process for recording and approving journal entries.
We did
not have appropriate controls around the process for recording and approving
journal entries. We also noted instances where material journal entries were
recorded before subsequently provided supporting documentation was prepared or
reviewed by the accounting department. Instances also occurred in which journal
entries were not adequately documented and reviewed. These deficiencies
represented an operating effectiveness deficiency in internal controls which
resulted in more than a remote likelihood that a material error would not have
been prevented or detected, and constituted a material
weakness.
Lack of controls
over the sales transaction process.
We did
not have a consistent process in place to document the significant terms of all
important product sales contracts and our accounting for these contracts. We
enter into a small number of high dollar amount contracts for our product sales.
These contracts often contain complex terms that impact our recognition and
determination of revenue (including customer rights of return, multiple elements
and contingencies that can have a material impact on the recognition or deferral
of revenue) and balance sheet classification of deferred revenue. These
deficiencies represented a design deficiency in internal controls which resulted
in more than a remote likelihood that a material error would not have been
prevented or detected, and constituted a material weakness.
Lack of
Independent Directors for our audit committee & lack of an audit committee
financial expert.
We did
not have an audit committee with a designated financial expert. An
audit committee is engaged primarily in an oversight function and ultimately is
responsible for the company's financial reporting processes and the quality of
its financial reporting. As a basis for carrying out its
responsibilities, an audit committee must have a working knowledge of a
company's goals and strategies as well as the issues it faces in achieving its
objectives. We had numerous material weaknesses which would have likely made the
role of an audit committee ineffective. These deficiencies represented a design
deficiency in internal controls, and constituted a material weakness at December
31, 2006, and again at December 31, 2007.
Lack of Training
in Public Company Reporting Obligations.
Our Chief
Executive Officer and Chief Financial Officer for the years ended December 31,
2007 and 2006 appear to have had limited knowledge of the reporting
obligations associated with being a reporting company. This
represented a design deficiency in internal controls which resulted in more than
a remote likelihood that a material error would not have been prevented or
detected, and constituted a material weakness.
Insufficient
documentation for accounting or business transactions and Lack of Policies and
procedures over records retention.
In
November 2006, new officers and directors were appointed and the process of
obtaining and producing certain corporate documentation proved to be a difficult
and lengthy task. These deficiencies represented a design deficiency
in internal controls which resulted in more than a remote likelihood that a
material error would not have been prevented or detected, and constituted a
material weakness.
Insufficient
Corporate Governance Policies.
Following
the transaction in which Ethos Environmental, Inc. became a public company, our
officers and directors failed to implement appropriate corporate governance
policies. This represented a design deficiency in internal controls which
resulted in more than a remote likelihood that a material error would not have
been prevented or detected, and constituted a material
weakness.
Auditor
Attestation
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit us to provide only management’s report in this
annual report.
Changes in Internal Controls.
As at
November 19, 2008, the filing date of our amended Form 10-K for the year ended
December 31, 2007, we have not implemented any new internal controls or
significantly changed our existing internal controls. However, as a response to
the material misstatements of our financial statements from December 31, 2006 to
June 30, 2008 as a result of material weaknesses in our internal controls over
financial reporting, we created an Audit Committee on September 25, 2008 to
oversee our internal controls and financial reporting process and have hired a
financial statement consulting firm to review our policies and implement
required internal controls over financial reporting for all significant
financial statement processes.
For the
year ended December 31, 2007, and as at November 18, 2008 (the filing of our
amended Form 10-K for the year ended December 31, 2007), our management has
concluded that because of the material misstatements of our financial statements
from December 31, 2006 to June 30, 2008, and the material weaknesses in internal
controls over financial reporting identified in various significant financial
statement processes, our internal controls over financial reporting were not
effective as of December 31, 2007 and December 31,
2006.
Item
8B. Other Information
None.
PART III
EXHIBIT
NUMBER
|
DESCRIPTION
|
LOCATION
|
3.1
- 3.2
|
Articles
of Incorporation and Bylaws
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification (CEO)
|
Filed
herewith
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification (CFO)
|
Filed
herewith
|
32.1
|
Section
1350 Certification (CEO)
|
Filed
herewith
|
32.2
|
Section
1350 Certification (CFO)
|
Filed
herewith
|
Item
14. Principal Accounting Fees and Services
During
the year ended December 31, 2007, we engaged Peterson Sullivan PLLC, J.H. Cohn
LLP and Moore & Associates, Chartered as our independent
auditors. For the year ended December 31, 2007, we incurred fees to these
firms as discussed below.
·
|
Audit Fees: Peterson Sullivan PLLC
fees for audit and quarterly review services totaled $29,273 and
$117,457 for 2007 and 2006, respectively, including fees associated with
consents and the review of this
report.
|
·
|
Tax Fees: We paid PETERSON
SULLIVAN PLLC, $1,728 for tax related services associated with our 2006
corporate tax return extensions.
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·
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All Other Fees:
J. H. Cohn LLP fees totaled $43,411 for 2007, although they were
not associated with any audit or review, and NIL for 2006. In
addition, the Company contracted for the services of Blum and Clark, CPAs,
for assistance in preparing the Registrant’s financial
statements. The fees associated with Blum and Clark in 2007
were $68,076 and NIL in 2006. Moore & Associates,
Chartered, fees totaled $57,500 for 2007 and $12,500 for
2006.
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SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 19th day of
November, 2008.
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Ethos
Environmental, Inc.
a
Nevada Corporation
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By:
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/s/
Corey P. Schlossmann
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Corey
P. Schlossmann
Chief
Executive Officer
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Pursuant to the requirements of the
Securities Exchange Act of 1934, the following persons on behalf of the
Registrant and in the capacities and on the dates indicated have signed this
report below.
Signature
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Position
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Date
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/s/
Corey P. Schlossmann
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Chief
Executive Officer and Director
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Corey
P. Schlossmann
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/s/
Howard Landa
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Director
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Howard
Landa
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/s/
Bruce Tackman
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Director
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Bruce
Tackman
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Principal
Accounting Officer
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Thomas
W. Maher
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Chief
Financial Officer
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