UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED September 30, 2010o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ___________ to ____________





Commission File Number:0-21092





OCTuS, Inc.


(Exact name of registrant as specified in its charter)





Nevada
33-0013439(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)





2020 Research Drive, Suite 110, Davis, California 95618(Address of principal executive offices)





(530) 564-0200


(Issuer’s Telephone Number)





Indicate by check mark whether the registrant  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o





Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.





Large accelerated filer
o
Accelerated filer
oNon-accelerated filer
o
Smaller reporting company
x





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yes   x   No





As of November 19, 2010, the registrant had 45,729,072 shares of common stock outstanding.











TABLE OF CONTENTS




PART I. FINANCIAL INFORMATION
PageItem 1.     Financial StatementsConsolidated Balance Sheets as of  September 30, 2010 and December 31, 2009 (Unaudited)
3Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)
4Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)
5Notes to Consolidated Financial Statements (Unaudited)
6Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
13Item 3.    Quantitative and Qualitative Disclosures About Market Risk
17Item 4.    Controls and Procedures
17PART II. OTHER INFORMATIONItem 1.    Legal Proceedings
18Item 1A. Risk Factors
18Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
18Item 3.    Defaults upon Senior Securities
19Item 4.    Submission of Matters to a Vote of Security Holders
19Item 5.    Other Information
19Item 6.    Exhibits
21SIGNATURES
22





2





PART 1. FINANCIAL INFORMATION


Item 1.  Financial Statements


OCTuS, INC.


CONSOLIDATED BALANCE SHEETS


(Unaudited)




PREDECESSORSUCCESSOR COMPANY


COMPANYSeptember 30, 2010



December 31, 2009


December 31, 2009ASSETSCURRENT ASSETSCash

$
48,482


$
23,003


$  126,940Accounts receivable – trade


23,192



-


-Deferred financing costs, net


21,250



-


-Other current assets


4,686



1,686


-TOTAL CURRENT ASSETS


97,610



24,689


126,940Property, plant and equipment, net


6,729



-


-Goodwill


212,782



-


-TOTAL ASSETS

$
317,121


$
24,689


$   126,940LIABILITIES AND STOCKHOLDERS' DEFICITCURRENT LIABILITIESAccounts payable

$
238,460


$
102,236


$  88,776Accrued liabilities


174,507



26,750


-Accounts payable – related parties


4,993



4,993


-Accrued liabilities – related parties


78,574



63,986


-Stock payable


158,300



171,700


-Notes payable


84,313



5,000


35,899Notes payable – related parties


27,468



32,750


109,951Convertible notes payable – current portion


625,000



88,500


-TOTAL CURRENT LIABILITIES


1,391,615



495,915


234,626LONG TERM LIABILITIESNotes payable – long term


74,252



-


-Convertible notes, net of unamortized discount of $0 and $17,709, respectively


525,994



509,330


-TOTAL LIABILITIES


1,991,861



1,005,245


-Commitments and contingencies


-



-


-STOCKHOLDERS' DEFICITSeries A preferred stock, $0.001 par value, 300,000 sharesauthorized, no shares issued or outstanding


-



-


-Series B preferred stock, $0.001 par value, 910,000 sharesauthorized, no shares issued or outstanding


-



-


-Series C 6% cumulative preferred stock, $0.001 par value,250,000 shares authorized, no shares issued and outstanding


-



-


-Undesignated  preferred stock, $0.001 par value,540,000 shares authorized,  no shares issued or outstanding


-



-


-Common stock,  $0.001 par value, 100,000,000 shares authorized45,729,072 and 43,867,072 shares issued and outstanding, respectively.  (Predecessor entity: Common stock $0.10 par; 100,000 shares authorized; 10,000 shares issued and outstanding


45,729



43,867


1,000Additional paid-in capital


23,773,114



23,299,212


51,364Accumulated deficit


(25,493,583)



(24,323,635)


(160,050)TOTAL STOCKHOLDERS’ DEFICIT


(1,674,740
)


(980,556)


(107,686)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

$
317,121


$
24,689


$    126,940





The accompanying notes are an integral part of these unaudited consolidated financial statements.





3




OCTuS, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


(Unaudited)


SUCCESSOR COMPANY


PREDECESSOR COMPANYTHREE


NINEMONTHS


MONTHSTHREE MONTHS ENDED


NINE MONTHS ENDED


ENDED


ENDEDSEPTEMBER 30,


SEPTEMBER 30,


SEPTEMBER


SEPTEMBER2010


2009


2010


2009


30, 2009


30, 2009Revenues

$
38,258


$
-


$
47,094


$
-


$
62,849


$
58,236Cost of goods sold


(19,520
)


-



(35,977
)


-



(34,631
)


(136,880
)Gross margin


18,738



-



11,117



-



28,218



(78,644
)General and administrative expenses


(357,323
)


(268,505
)


(932,458
)


(716,971
)


(82,513
)


(237,965
)Loss from operations


(338,585
)


(268,505
)


(921,341
)


(716,971
)


(54,295
)


(316,609
)Interest expense


(111,386
)


(22,761
)


(248,632
)


(34,542
)


(1,033
)


(2,336
)Interest income


21



-



25



-



-Net loss

$
(449,950
)

$
(291,266
)

$
(1,169,948
)

$
(751,513
)

$
(55,328
)

$
(318,945
)Per share information - basic and dilutedNet loss per common share

$
(0.01
)

$
(0.01
)

$
(0.03
)

$
(0.02
)

$
(5.53
)

$
(31.89
)Weighted average shares outstanding


45,640,268



43,695,803



45,038,610



37,675,493



10,000



10,000





The accompanying notes are an integral part of these unaudited consolidated financial statements.




4





OCTuS, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


(Unaudited)





SUCCESSOR COMPANY


PREDECESSOR

COMPANY2010


2009


2009OPERATING ACTIVITIESNet loss

$
(1,169,948
)

$
(751,513
)

$
(318,945
)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation expense


206



-



-Share-based compensation


273,689



353,983



-Amortization of deferred financing cost


8,750



-



-Amortization of debt discount


187,664



3,056



-Changes in operating assets and liabilities:Decrease in accounts receivable


9,670



-



225,233Increase (decrease) in accounts payable and accrued liabilities


221,090



74,353



(33,788
)Increase in accounts payable and accrued liabilities – related parties


15,043



216,599



-Increase in stock payable


5,600



-



-Net cash used in operating activities


(448,236
)


(103,522
)


(127,500
)INVESTING ACTIVITIESPurchases of property, plant and equipment


(6,935
)


-



-Deposits paid


(3,000
)


(2,275
)


-Net cash used by investing activities


(9,935
)


(2,275
)


-FINANCING ACTIVITIESCash paid for deferred financing costs


(30,000
)


-



-Payment on line of credit acquired


(3,369
)


-



(7,197
)Proceeds from convertible notes payable


630,000



100,000



-Payments on notes payable


(13,319
)


-



-Payments on convertible notes payable


(100,000
)


-



-Proceeds from short term debt – related party


500



10,000



86,000Payments on short term debt – related party


(5,782
)


-



(5,132
)Proceeds from exercise of warrants


5,620



-



-Proceeds from notes payable


-



5,000



20,800Net cash provided by financing activities


483,650



115,000



94,471Net change in cash


25,479



9,203



(33,029
)CASH AT BEGINNING OF PERIOD


23,003



-



33,128CASH AT END OF PERIOD

$
48,482


$
9,203


$
99SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest

$
17,358


$
-


$
2,336Cash paid for income taxes

$
-


$
-


$
-NONCASH INVESTING AND FINANCING ACTIVITIESIssuance of stock for stock payable

$
19,000


$
-


$
-Conversion of note payable and accrued interest into convertible note payable

$
5,455


$
-


$
-Debt discount from warrants issued with convertible debt

$
169,955


$
100,000


$
-Conversion of accrued interest into convertible note payable - related party

$
-


$
38,686


$
-Net assets acquired in business combination for common stock

$
7,500


$
-


$
-





The accompanying notes are an integral part of these unaudited consolidated financial statements.





5





OCTuS, Inc.


Notes to Consolidated Financial Statements


(Unaudited)





Note 1 – Summary of Significant Accounting Policies





Financial Statement Presentation





The accompanying unaudited interim consolidated financial statements of  OCTuS, Inc. (“OCTuS”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with  Management's Discussion and Analysis and the audited financial statements and notes thereto contained in our 2009 Annual Report filed with the Securities and Exchange Commission on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited financial statements for 2009 as reported on Form 10-K have been omitted.





The company received an SEC Comment letter dated November 5, 2010, where the SEC questioned the Company as to the treatment of Quantum Energy Solutions, Inc., as its predecessor entity as Quantum’s historical operations were significantly larger than the historical operations of OCTuS.  For purposes of financial statements, designation of an acquired business as a predecessor is required if a registrant succeeds to the business of another entity and the registrant’s own operations prior to the succession appear insignificant relative to the operations assumed or acquired.  As such, OCTuS has included the historical financial statements of Quantum as its predecessor entity.





Principles of Consolidation





The financial statements include the business combination of Quantum Energy Solutions, Inc. as of June 30, 2010 and thereafter.   All significant intercompany transactions and balances, if any, have been eliminated in consolidation.





Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.





Revenue Recognition





Revenue is derived primarily from providing services under short-term negotiated fixed and variable fee arrangements. Revenue is recognized when it is earned, typically when our services have been rendered.  Upon execution of an agreement, if services have not been provided then the amount to be paid as a deposit under such agreement is recorded as deferred revenue on the balance sheet and is reclassified as revenue on the statement of operations after services have been provided and such revenue earned.  Any amount that has been earned, but not yet billed, is recorded as work in process or unbilled at the balance sheet date.





Loss Per Share





Basic loss per common share (“EPS”) calculations were determined by dividing net loss by the weighted average number of shares of common stock outstanding during the years.  Diluted loss per common share calculations were determined by dividing the net loss by the weighted average number of common shares and dilutive common share equivalents outstanding.  During the nine months ending September 30, 2010 and 2009 common stock equivalents were not included in the calculation, as their effect would be anti-dilutive.





Share-Based Compensation





OCTuS provides compensation costs for our stock option plans based on estimated fair values. OCTuS estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model and provides for expense recognition over the service period, if any, of the stock option.





Subsequent Events





OCTuS has evaluated all transactions through the financial statement issuance date for subsequent event disclosure consideration.





6





OCTuS, Inc.


Notes to Consolidated Financial Statements


(Unaudited)





Note 2 – Going Concern





The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of OCTuS as a going concern.  OCTuS has a working capital deficit of $1,294,005, a stockholders’ deficit of $1,674,740 and an accumulated deficit of $25,493,583 as of September 30, 2010.  In addition, OCTuS has generated net losses of $1,169,948 and $751,513 during the nine months ending September 30, 2010 and 2009, respectively, and currently has minimal revenue generated from operations.





We have licensed technologies and initiated energy savings projects and are actively seeking to continue development of technologies and business opportunities in the smart energy sector, which may include the additional licensing, acquisition or development of smart energy and energy efficiency products or technologies as part of the OCTuSSEP (Smart Energy Platform). We anticipate the need for additional debt or equity financing, and if OCTuS raises additional funds through equity financing transactions, the issuance of additional shares would dilute the ownership of existing shareholders.  However, OCTuS has no commitment from any party to provide additional capital, and there is no assurance that such funding will be available when needed, or if available, that its terms will be favorable or acceptable to OCTuS.





The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of OCTuS to continue as a going concern.





Note 3 – Business Combination





Purchase of Quantum Energy Solutions, Inc.





On June 10, 2010, OCTuS entered into an Asset Purchase Agreement and related agreements with Quantum Energy Solutions, Inc., a California corporation (“Quantum”).  Effective June 30, 2010, the acquisition of Quantum has been accounted for using purchase accounting since OCTuS acquired substantially all of the assets, debts, employees, intangible contracts and business of Quantum.





The purchase price included 150,000 shares of OCTuS common stock, valued at $7,500 on the date of the transaction closing which was June 10, 2010, at $0.05 per share, plus assumption of approximately $62,891 in accounts payable and accrued expenses; assumption of a line of credit facility with a balance of $45,253 and assumption of a 3-year promissory note to the seller for $130,000.





OCTuS entered into various employment and consulting arrangements with Quantum employees and a former owner where OCTuS issued 700,000 stock options to purchase common stock at exercise prices ranging from $0.06 to $0.11 per share.  OCTuS estimated the fair market value of these stock options to be $38,513 using a Black Scholes pricing model and will be amortized over the future requisite service period.  During the nine months ended September 30, 2010, $7,078 of share based compensation relating to these options was recognized.   The two year consulting arrangement with a former owner of Quantum included additional compensation of (i) a monthly cash payment of $5,000 and (ii) commissions on contracts originated by the consultant on Quantum projects of 10% of the gross margin payable in common stock; 30% of the gross margin payable in cash on projects invoiced in the first 90 days after consummation of the purchase; 20% of the gross margin payable in cash on projects invoiced in the second 90 days after purchase; and 10% of the gross margin payable in cash for projects invoiced thereafter through the end of the two year term.  All additional compensation described above occurs after the purchased accounts payable have been paid for.





On June 10, 2010, OCTuS assumed a three-year promissory note with the former principal owner of Quantum in the amount of $130,000.  The note has a simple interest rate of 6% per year.  No later than the 10th day of each month, OCTuS shall pay 36 equal monthly payments of $3,955 for principal and interest (assuming no further principal payments are made as further described) and make principal reduction payments as may occur of 10% of the gross margin of revenue received over the prior 30 days from projects initiated by former Quantum employees or principals.  OCTuS may prepay any or this entire note and accrued interest with no penalty any time before the maturity of the note.  In June 2010, the former principal of Quantum and OCTuS agreed to assign this note to a trust administered by the former principal owner of Quantum.   As of September 30, 2010, OCTuS has made principal and interest payments of $13,319 under the terms of this note.  In addition, OCTuS assumed the outstanding balance of $45,253 owed under a Line of Credit Facility with a variable interest rate currently at 7.25%.  The total line of credit capacity is $50,000, but OCTuS cannot borrow under the line of credit.  As of September 30, 2010, OCTuS has made principal and interest payments of $3,369 under the terms of this line of credit.




7





The acquisition price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values with the excess being recorded in goodwill.  The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:





Cash and cash equivalents

$
-Accounts receivable


32,862Goodwill


212,782Total assets acquired


245,644Accounts payable and accrued expenses


62,891Line of credit


45,253Long term debt


130,000Total liabilities assumed


238,144Net assets acquired

$
7,500





The allocation of the purchase price was based on preliminary estimates and is provisional.  Estimates and assumptions are subject to change upon the receipt of management’s review of the final amounts and final tax returns.  This final evaluation of net assets acquired is expected to be completed as soon as a final accounting is performed but no later than one year from the acquisition date.  Any future changes in the value of the net assets acquired will be offset by a corresponding change in goodwill.





The following unaudited pro-forma combined condensed financial statements are based on the unaudited historical financial statements of Quantum and OCTuS after giving effect to the acquisition of Quantum. This historical operation of OCTuS, Inc. includes three months of Quantum activity as the acquisition was effective on June 30, 2010.   The unaudited pro-forma condensed combined statements of operations for the nine months ended September 30, 2010 and 2009 and three months ended September 30, 2010 and 2009, is presented as if the acquisition had taken place on the first day of each period by combining the unaudited historical results of Quantum and OCTuS.





The unaudited pro-forma results were as follows:




OCTuS, Inc.Unaudited Pro-forma Statements of Operations





For the Nine Months Ended September 30, 2010Historical

OCTuS, Inc.


Historical Quantum for the six-months ended June 30, 2010

Pro-forma Adjustments


Pro-forma

Condensed CombinedRevenues

$
47,094


$
96,300


$
-


$
143,394Cost of sales


35,977



70,810



-



106,787Gross margin


11,117



25,490



-



36.607Operating expenses


(932,458
)


(110,503
)


-



(1,042,961
)Interest expense


(248,607
)


(1,531
)


-



(250,138
)Net loss

$
(1,169,948
)

$
(86,544
)

$
-


$
(1,256,492
)Net loss per share - basic and diluted

$
(0.03
)









$
(0.03
)Weighted average shares outstanding -basic and diluted


45,038,610







150,000
(a)


45,188,610




8




For the Nine Months Ended September 30, 2009Historical OCTuS, Inc.


Historical Quantum

Pro-forma Adjustments


Pro-forma Condensed CombinedRevenues

$
-


$
58,236


$
-


$
58,236Cost of sales


-



136,880



-



136,880Gross margin


-



(78,644
)


-



(78,644
)Operating expenses


(716,971
)


(237,965
)


-



(954,936
)Interest expense


(34,542
)


(2,336
)


-



(36,878
)Net income (loss)

$
(751,513
)

$
(318,945
)

$
-


$
(1,070,458
)Net loss per share - basic and diluted

$
(0.02
)









$
(0.03
)Weighted average shares outstanding -basic and diluted


37,675,493







150,000
(a)


37,825,493





The unaudited pro-forma condensed combined statements of operations for the three months ending September 30, 2009, is presented as if the acquisition had taken place on January 1, 2009 by combining the unaudited historical results of Quantum and OCTuS.




For the Three Months Ended September 30, 2009Historical OCTuS, Inc.


Historical Quantum

Pro-forma Adjustments


Pro-forma Condensed CombinedRevenues

$
-


$
62,849


$
-


$
62,849Cost of sales


-



34,361



-



34,361Gross profit (loss)


-



28,488



-



28,488Operating expenses


(268,505
)


(82,513
)


-



(351,018
)Interest expense


(22,761
)


(1,033
)


-



(23,794
)Net loss

$
(291,266
)

$
(55,058
)

$
-


$
(346,324
)Net loss per share - basic and diluted

$
(0.01
)









$
(0.01
)Weighted average shares outstanding -basic and diluted


43,695,803







150,000
(a)


43,845,803





(a)
OCTuS issued 150,000 shares as consideration of the purchase of Quantum.  The pro-forma adjustment treats the shares as having been issued at the first day of each period.





Note 4 – Related Party Transactions





On February 24, 2009, OCTuS entered into employment agreements with Christian J. Soderquist and George M. Ecker pursuant to which Mr. Soderquist will serve as Chief Executive Officer of OCTuS and Mr. Ecker will serve as Chief Financial Officer of OCTuS. Mr. Soderquist and Mr. Ecker were also appointed directors of OCTuS. Concurrently, OCTuS executed restricted stock purchase agreements dated February 24, 2009, with each of Mr. Soderquist and Mr. Ecker.





Both employment agreements have a term of three years, through February 23, 2012, with the term extended automatically for successive one-year terms unless either party notifies the other in writing at least 90 days prior to the expiration of the then-effective term of such party’s intention not to renew the agreement.  Pursuant to the employment agreement, OCTuS will pay Mr. Soderquist and Mr. Ecker a base annual salary of $180,000 each, which will increase annually by the increase in the consumer price index from the prior year (the “Base Salary”).The officers have agreed to waive all accrued salaries during 2009 in the amount of $181,538 and have accepted annual base salaries of $120,000 each from January through June 2010 initiating the agreed salaries of $180,000 beginning July 1, 2010.  Each officer will be eligible for an annual bonus of up to 50% of his base annual salary as then in effect, as determined by OCTuS’ Compensation Committee or Board of Directors.  OCTuS issued to each person 15,000,000 shares of common stock.  These shares were valued at $270,000 and recorded as share-based compensation during the nine months ended September 30, 2009.





Under the terms of the restricted stock purchase agreements, a portion of the shares were subject to repurchase by OCTuS if four business milestones were not achieved before the first anniversary of the date of the purchase agreements.  For each of the business milestones that were not achieved before the first anniversary of the date of the purchase agreements, 25% of the shares were subject to repurchase by OCTuS at the original purchase price per share.  As determined by the Board of Directors on May 1, 2010 all four milestones have been achieved, and the repurchase rights of OCTuS lapsed.





There were 43,437,072 shares of common stock outstanding after the issuance of the shares in accordance with the purchase agreements.





Each employment agreement provides that if the employment of the officer is terminated by OCTuS without cause (as defined in the employment agreement) or by the officer for good reason (as defined in the employment agreement) or upon his death, the officer (or his estate) is entitled to receive in cash payment an amount equal to all previously accrued but unpaid compensation as of the date of such termination, and a lump sum payment equal to the amount of the Base Salary that the officer would have earned if the officer had remained employed with OCTuS during the remaining portion of the then-current term.





9





OCTuS, Inc.


Notes to Consolidated Financial Statements


(Unaudited)





Note 5 – Notes Payable





During April 2009, a third party loaned OCTuS $5,000 to provide short-term working capital.  This loan bears interest at 10% and is due upon demand.  In February 2010, the loan balance of $5,000 and related accrued interest of $455 was converted into a convertible note payable bearing interest at 10% and further described in Note 7.





On June 10, 2010, OCTuS assumed a three-year promissory note with the former principal owner of Quantum in the amount of $130,000.  The note has a simple interest rate of 6% per year.  No later than the 10th day of each month, OCTuS shall pay 36 equal monthly payments of $3,955 for principal and interest (assuming no further principal payments are made as further described) and make principal reduction payments as may occur of 10% of the gross margin of revenue received over the prior 30 days from projects initiated by former Quantum employees or principals.  OCTuS may prepay any or this entire note and accrued interest with no penalty any time before the maturity of the note.  In June 2010, the former principal of Quantum and OCTuS agreed to assign this note to a trust administered by the former principal owner of Quantum.   As of September 30, 2010, OCTuS has made principal and interest payments of $13,319 under the terms of this note.





Note 6 – Notes Payable - Related Parties





During April 2009, two of our officers and directors, Christian J. Soderquist and George M. Ecker, each loaned OCTuS $5,000 to provide short-term working capital.  These loans bear interest at 10% and are due upon demand.





During the year ended December 31, 2009 and in February 2010, Mr. Soderquist loaned OCTuS $27,750 and $500, respectively, for total proceeds of $28,250 to the Company.  These loans bear interest at 10% and are due upon demand.





During the nine-months ended September 30, 2010, payments of $5,782 have been paid by the company on these related party notes payable.





Note 7 – Convertible Notes Payable





Effective March 31, 2009, a convertible promissory note with a principal balance of $328,106 and accrued interest of $38,686 held by Grupo Dynastia SA was sold to another party who already held a promissory note in the amount of $113,747.  The terms of the new combined $480,539 note were modified such that the principal and interest will be paid over 60 months. The convertible promissory note can be converted into common stock at a rate of $0.10 per share and bears interest at an annual rate of 8% until converted or paid.  Total interest expense under borrowings from this party during the nine months ending September 30, 2010 was $9,612.  OCTuS paid $5,000 toward accrued interest on this note.  The current portion of this note is $125,000 at September 30, 2010.





For the year ended December 31, 2009 and during the nine months ended September 30, 2010, OCTuS issued convertible secured promissory notes with a principal amount of $135,000 and $30,000, respectively, to investors.  The notes bear interest at a rate of 10% per annum and are due one year from the date of issuance.  Accrued interest is paid semi-annually, with the first payment due six months after the date the notes are issued.  At OCTuS’ option, OCTuS may make any interest payment either in cash or by delivery of a number of shares of common stock with a value equal to the amount of interest due and payable, calculated based on the average closing price of the common stock on the OTC Bulletin Board (or whatever exchange, market or quotation system the common stock is then traded), for the ten trading days ending three days before the date that such payment is due.  OCTuS granted to the holder of the notes a security interest of all assets of OCTuS, ranking before all preferred and common shareholders and subordinated to the existing senior convertible debt.  The notes may be converted to common stock at 70% of the price per share paid for securities in a financing of at least $1,000,000 or at any time after 90 days after issuance at the greater of $0.30 per share or 70% of the average closing price of the common stock for the ten trading days ending five days before the conversion date.  In conjunction with the issuance of the notes, OCTuS issued warrants to the note holders to purchase 540,000 and 120,000, respectively, shares of OCTuS common stock at an exercise price of $0.01 per share.  The term of the warrants is 18 months. The relative fair value of the warrants was $59,000 and $32,954, respectively.  The intrinsic value of the conversion feature totaled $63,817 and $13,112, respectively, resulting in a discount of $122,817 and $32,210, respectively, to the notes payable.





In May 2010, OCTuS issued a convertible secured promissory note with a principal value of $100,000 to an investor.  The note had a stated interest rate of 10% and is due May 2013.  Accrued interest was to be paid semi-annually with the first payment due six months after the date the note was issued.  The note contained a conversion option where the unpaid principal and interest due could be converted to common stock at 70% of the price per share paid for securities in a financing of at least $1,000,000 or at any time after 90 days after issuance at the greater of $0.30 per share or 70% of the average closing price of the common stock for the ten trading days ending five days before the conversion date.  In conjunction with the issuance of the note, OCTuS issued warrants to the same investor to purchase 400,000 shares of common stock at an exercise price of $0.01 per share.  The term of the warrants was eighteen months.  The relative fair value of the warrants was $38,544 resulting in an initial discount.  The conversion feature had no intrinsic value at the date of inception.  In June, OCTuS repaid the $100,000 note and cancelled the outstanding warrants resulting in the accelerated amortization of the discount of $38,544 into interest expense.





In June 2010, OCTuS issued a convertible secured promissory note with a principal value of $500,000 to an investor.  The note has a stated interest rate of 12% and is due in June, 2011.  No payments of principal or interest are due to be paid until the date of maturity.  At any time commencing ninety (90) days after the date of issuance of this note and before the maturity date or earlier conversion of this note, the holder, at holder’s option and upon five (5) days prior written notice to the Company, may convert in whole or in part the outstanding principal and accrued but unpaid interest of this note into a number of shares of common stock determined by the greater of $0.30 per share or at 70% of the average closing price of the common stock on, for the ten trading days ending five days before the conversion date.  OCTuS issued warrants in conjunction with this note to purchase 2,500,000 shares of common stock at an exercise price of $0.01 per share.  The term of the warrants is eighteen months.  The relative fair vale of the warrants was $98,201 resulting in an initial discount.  The conversion feature had no intrinsic value at the date of inception.  OCTuS recorded a deferred financing cost associated with a payment of $30,000 to an unrelated third party as a finder’s fee for this note.  The deferred financing cost is being amortized over the one-year maturity period of the convertible note resulting in $8,750 in interest expense for the nine-months ended September 30, 2010.





The respective discounts have been amortized over the period from the commitment date until the notes become convertible by the holder.  The details are as follows:





Face value of convertible notes payable

$
1,150,994Less: discount related to warrants


(215,843
)discount related to conversion feature


(76,929
)Add: amortization of debt discount


292,772Carrying value of notes at September 30, 2010

$
1,150,994





Note 8 – Equity





In June 2009, OCTuS entered into a twelve-month consulting agreement which calls for OCTuS to issue 10,000 shares of common stock each month the contract is in force.  OCTuS issued 50,000 shares under this agreement during the nine months ended September 30, 2010, valued at $9,300 and recorded as share-based compensation.





10





OCTuS, Inc.


Notes to Consolidated Financial Statements


(Unaudited)





In October 2009, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 20,000 shares of common stock each month the contract is in force.  During the nine months ended September 30, 2010 OCTuS accrued $5,600 of stock payable for the 20,000 shares due in January 2010 per the agreement.   In July 2010, OCTuS issued 60,000 shares to the former owner of Quantum with a fair market value of $19,000 to satisfy their stock payable.  As of September 30, 2010, OCTuS had a total stock payable of $158,300 for unissued common shares to various consultants.





On December 6, 2009, OCTuS entered into a “Reserve Equity Financing Agreement” with AGS Capital Group, LLC (the “Facility”).  The signed agreement authorized OCTuS to issue and sell up to $5,000,000 of the Company’s fully registered and tradable common stock.  These transactions will be made in compliance with the provisions of “Regulation D” of the Securities Act of 1933.   As of September 30, 2010, there have been no issuances under the Facility.





In January 2010, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 30,000 shares of common stock to an employee upon execution of the agreement as a signing bonus, 10,000 shares of common stock each month, and pay a $4,000 stipend each month the contract is in force.  OCTuS issued 90,000 shares under this agreement during the nine months ended September 30, 2010, valued at $13,350 and recorded as share-based compensation.





In January 2010, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 30,000 shares of common stock each month the contract is in force.  The consultant terminated the contract in March 2010. OCTuS issued 60,000 shares under this agreement during the nine months ended September 30, 2010, valued at $18,900 and recorded as share-based compensation.





In January 2010, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 30,000 shares of common stock to a consultant each month the contract is in force.  OCTuS issued 90,000 shares under this agreement during the nine months ended September 30, 2010, valued at $26,100, and recorded as share-based compensation.





In January 2010, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 30,000 shares of common stock each month the contract is in force.  OCTuS issued 90,000 shares under this agreement during the quarter ended March 31, 2010, valued at $23,400 and recorded as share-based compensation.  At the end of May 2010, OCTuS entered into a new six month consulting agreement with the same consultant which calls for OCTuS to issue 25,000 shares of common stock each month the contract is in force.  OCTuS issued 125,000 shares, valued at $8,100, and recorded as share-based compensation for the six months from May 2010 to September 30, 2010.





In February 2010, OCTuS entered into a three-month consulting agreement which call for OCTuS to issue 15,000 shares of common stock each month the contract is in force. OCTuS issued 30,000 shares under this agreement during the quarter ended March 31, 2010, valued at $6,900, and recorded as share-based compensation. In June, 2010, OCTuS entered into a new consulting agreement with this same consultant which calls for OCTuS to issue 10,000 shares of common stock each month the agreement is in force.  OCTuS issued a total of 55,000 shares under the new consulting agreements for the six months ended September 30, 2010 valued at $3,490, and recorded as share-based compensation.





In February 2010, OCTuS entered into a six-month consulting agreement which calls for OCTuS to issue 1,000,000 shares of common stock for services.  All services were not preformed as originally agreed and 500,000 shares were returned by the consultant and cancelled by OCTuS.  For the services that were performed, OCTuS agreed that the consultant could keep the remaining 500,000 shares which were valued at $150,000 and recorded as share-based compensation.





During the nine months ended September 30, 2010, OCTuS issued 562,000 common shares in connection with the exercise of warrants for $5,620.





In August 2009, OCTuS entered into various consulting arrangements where OCTuS issued 60,000 stock options to purchase common stock at exercise prices ranging from $0.33 to $0.39 per share.  OCTuS estimated the fair market value these stock options to be $19,538 using a Black Scholes pricing model.  This amount has been amortized over the requisite service period.  During the nine-months ended September 30, 2010, $4,884 of share based compensation relating to these options was recognized.





In June 2010, OCTuS entered into various employment and consulting arrangements with Quantum employees and a former owner where OCTuS issued 700,000 stock options to purchase common stock at exercise prices ranging from $0.06 to $0.11 per share.  OCTuS estimated the fair market value of these stock options to be $38,513 using a Black Scholes pricing model and will be amortized over the future requisite service period.  During the nine months ended September 30, 2010, $7,077 of share based compensation relating to these options was recognized.





In July 2010, OCTuS entered into various employment and consulting arrangements with two individuals where OCTuS issued 300,000 stock options to purchase common stock at exercise prices ranging from $0.05 to $0.085 per share.  OCTuS estimated the fair market value of these stock options to be $16,885 using a Black Scholes pricing model and will be amortized over the future requisite service periods.  During the nine months ended September 30, 2010, $2,188 of share based compensation relating to these options was recognized.





Warrant and option activity during the nine months ended September 30, 2010 is as follows:





Warrants


Weighted Average Exercise Price


Weighted Average Remaining Contractual Term

(in Years)Outstanding at December 31, 2009


540,000


$
0.01



1.10Granted


3,102,000



0.01



1.45Exercised


(562,000
)


0.01



-Forfeited or cancelled


(500,000
)


0.01



-Outstanding and exercisable at September 30, 2010


2,580,000


$
0.01



1.19





As of September 30, 2010, all warrants outstanding had an intrinsic value of $74,820.





11





OCTuS, Inc.


Notes to Consolidated Financial Statements


(Unaudited)





Options


Weighted Average

Exercise Price


Weighted Average

Remaining Contractual Term

(in Years)Outstanding at December 31, 2009


60,000


$
0.36



2.60Granted


1,000,000



0.08



1.90Exercised


-



-



-Forfeited


-



-



-Outstanding and exercisable at September 30, 2010


1,060,000


$
0.09



2.01





For the nine months ended September 30, 2010, OCTuS amortized $14,149 of share-based compensation relating to the options.  As of September 30, 2010, all options outstanding had intrinsic value of $0 and unamortized share-based compensation of $46,132.





OCTuS estimates the fair value of each warrant and option at the grant date by using the Black-Scholes option-pricing model with the following range of assumptions used for grants during the nine months ended September 30, 2010 as follows:





September 30, 2010Dividend yield


0.00%Expected volatility


158% - 318%Risk free interest rate


0..29% - 0.82%Expected lives in years


1.0-3.0





Note 9 – License Agreements





On August 28, 2009, OCTuS entered into an exclusive license agreement with The Regents of the University of California (the “University”) pursuant to which OCTuS acquired exclusive rights under a provisional U.S. patent application and related intellectual property relating to an evaporative cooling technology known as “Wickool.”  The application relates to the passive evaporative cooling of rooftop HVAC units, whereby Wickool repurposes the condensate generated by HVAC equipment to cool incoming air and thereby increase energy efficiency and reduce peak-demand electricity use.  The Wickool system can be used to retrofit presently installed HVAC units in addition to integration in new building construction design and is best suited for large scale, commercial installations. Wickool was developed by the University of California, Davis Western Cooling Efficiency Center, and is being commercially tested by major retailers. The license covers the United States and, to the extent available, foreign rights, exclusively covers all fields of use and includes the right to sublicense, subject to standard University terms applying to sublicenses.





Under the agreement, OCTuS will pay the University a nominal annual minimum cash payment each year until the year following the year of the first sale of a licensed product.  Upon commencement of commercial sales, OCTuS will pay the University the greater of a minimal annual fee or royalties based on net sales of licensed products, licensed services, and other revenue resulting directly from use of the licensed products.  The agreement also provides that OCTuS will pay the University a percentage of any consideration received by OCTuS for the grant of rights under a sublicense from OCTuS.  OCTuS is responsible for reimbursing the University for prior patent costs incurred, which are not material, and subsequent legal fees and patent costs incurred in connection with prosecuting the application and maintaining any patents that may issue from the application.  The agreement includes a number of customary milestone conditions related to OCTuS’ progress in funding support of the product, commencement of manufacturing, and commencement and progress of commercial sales. The agreement also includes several other customary provisions, including representations and warranties of the parties, provisions addressing indemnification of the University by OCTuS, use of names and other intellectual property, litigation and disputes, and insurance requirements, and other customary provisions.





In February, 2010, we entered into a seven-year, non-exclusive license agreement with EcoNexus, LLC, whereby we were granted certain rights to EcoNexus’s Environmental Impact Manager technology. If and when OCTuS develops a commercial product based on the EcoNexus technology, OCTuS will grant 100,000 shares of common stock to EcoNexus. In addition, OCTuS will pay EcoNexus a royalty of 1.75% of net sales of the licensed and develop product over the term of the agreement. As of September 30, 2010, OCTuS has not completed development of the commercial product based on the EcoNexus technology, and thus no consideration has been granted, to date, to EcoNexus.





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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations





This following information specifies certain forward-looking statements of management of the company. Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact.  Forward-looking statements may be identified by the use of forward-looking terminology, such as “may”, “shall”, “could”, “expect”, “estimate”, “anticipate”, “predict”, “probable”, “possible”, “should”, “continue”, or similar terms, variations of those terms or the negative of those terms.  The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.





The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. We cannot guarantee that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and except as required by law we assume no obligation to update any such forward-looking statements.





Critical Accounting Policy and Estimates





Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included in our Annual Report for the year ended December 31, 2009 filed on Form 10-K.





Revenue Recognition





Revenue is derived primarily from providing services under short-term negotiated fixed and variable fee arrangements. Revenue is recognized when it is earned, typically when our services have been rendered.  Upon execution of an agreement, if services have not been provided then the amount to be paid as a deposit under such agreement is recorded as deferred revenue on the balance sheet and is reclassified as revenue on the statement of operations after services have been provided and such revenue earned.  Any amount that has been earned, but not yet billed, is recorded as Work in process or unbilled at the balance sheet date.





Overview





OCTuS is a smart energy management company developing, marketing and selling energy-efficient lighting, cooling and energy management solutions that enable public sector and private organizations to reduce their energy expenses. OCTuS has developed OctusSEP (Smart Energy Platform), a turnkey energy savings platform for the energy management of commercial, industrial and institutional buildings.





On July 9, 2009, we announced the addition of two energy industry executives to our management team: Tobin J.M. Richardson as Senior Advisor, Energy Markets, and Siva Gunda as Senior Engineer, Smart Energy Solutions. Richardson is Director of the ZigBee Smart Energy Initiative, where he drives adoption of energy efficiency technology in key smart energy markets, and Gunda is the Southern California Edison International Energy Efficiency Fellow with the UC Davis Energy Efficiency Center.





On August 20, 2009, we announced our affiliation with the California Lighting Technology Center (CLTC) and the Western Cooling Efficiency Center (WCEC) to further development and deployment the OCTuS Smart Energy Platform. CLTC and WCEC are part of the University of California, Davis Energy Efficiency Center, and are supported by leading companies, utilities and federal and state energy organizations.





On September 1, 2009, we announced an exclusive worldwide license with the University of California for Wickool, a passive evaporative cooling technology for commercial rooftop HVAC units. Wickool has been commercially tested by the WCEC at Target Corp. and Wal-Mart stores as a retrofit to rooftop HVAC units.





On October 4, 2009, we announced a joint venture with Quantum Energy Solutions to catalyze commercialization of the OCTuS Smart Energy Platform and to collaboratively pursue smart energy projects. Quantum has managed more than $100 million in energy projects for several hundred clients, including Safeway, Bank of America, Sears, Hewlett-Packard and Chevron.





On October 27, 2009, we announced the addition to two energy industry executives to our Advisory Group: Mark Henwood, CEO of Henwood Associates, and Dr. Mark Modera, director of the UC Davis Western Cooling Efficiency Center.





On November 2, 2009, we announced the launch of SmartLightSupply.com, an electronic commerce marketplace featuring smart, energy-efficient lighting products for the commercial market.





13




On December 7, 2009, we announced a definitive agreement with AGS Capital Group, a New York-based value fund, to provide investment capital of up to $5 million through a reserve equity financing facility.





On January 29, 2010, we announced the addition of two technology industry executives to our management team: Dave Glende as Senior Manager, Smart Energy Services, and John Walter as Senior Manager, Smart Energy Products.





On April 19, 2010, we announced the addition of commercial real estate and product marketing executives to our management team: George Condon as Development Manager, Smart Energy Projects, and Katie Bolich as Marketing Manager, OCTuSSEP.





On April 21, 2010, we announced a contract to test and demonstrate energy-efficient LED parking garage fixtures for one of the largest hotel-casinos in Northern California.





On June 16, 2010, we announced a consummation of an asset purchase agreement and related agreements with Quantum Energy Solutions, Inc., a California corporation (“Quantum”).  Effective June 30, 2010, the acquisition of Quantum has been accounted for using purchase accounting since OCTuS acquired substantially all of the assets, debts, employees, intangible contracts and business of Quantum.





The purchase price included 150,000 shares of OCTuS common stock, valued at $7,500 on the date of the transaction closing which was June 10, 2010, at $0.05, plus assumption of approximately $62,891 in accounts payable and accrued expenses; assumption of a line of credit facility with a balance of $45,253 and assumption of a 3-year promissory note to the seller for $130,000.




On June 29, 2010, OCTuS announced one of the world’s leading retailers has purchased nine Wickool® units for installation atop one of its Northern California retail stores.




On July 14, 2010, OCTuS announced it completed an energy-efficient lighting project for the Contra Costa Community College District, one of the largest multi-college community college districts in California. OCTuS secured the project through a competitive bid process. The retrofit is projected to generate a simple payback of 1.94 years with a 51% return on investment, which is the product of an estimated 70% reduction in electricity use of the District's exterior lighting system.




On July 15, 2010, OCTuS announced it was selected, throughout a competitive bid process, as an approved energy efficiency contractor for Roseville Electric’s Small Business Lighting Program. OCTuS’ selection is part of Roseville Electric’s $1,073,700 in American Recovery and Reinvestment Act of 2009 (ARRA) funds for energy efficiency programs granted to the City of Roseville.




On July 22, 2010, OCTuS announced it was awarded a contract to develop an energy-efficient lighting retrofit project for the City of Davis, California, focused on the City’s downtown parking facilities and its Central Park Pavilion. OCTuS will manage the project development process, including energy and technology analysis, contractor selection, and project management.




On July 27, 2010, OCTuS announced Quantum Energy Solutions has been awarded a contract for an energy-efficient lighting retrofit project for the Hampton Inn & Suites property in Lodi, California.




On August 12, 2010, OCTuS announced it has partnered with Five Star Bank to provide energy efficiency project financing for commercial and industrial building owners. The OCTuS/Five Star Bank Smart Energy Financing Program (“Building Energy Savings”) enables property owners to significantly reduce their energy expenses with little to no upfront costs.




On October 5, 2010, Octus announced it has won and is implementing multiple energy-efficient lighting retrofit projects leveraging Roseville Electric's Small Business Lighting Program.




We anticipate the need for additional debt or equity financing, and if the Company raises additional funds through equity financing transactions, the issuance of additional shares would dilute the ownership of existing shareholders.





14





Results of Operations for the Three Months Ended September 30, 2010 Compared to the Three Months Ended September 30, 2009





We realized revenue of $38,258 during the three months ended September 30, 2010 from execution of energy projects and we did not realize revenue during the three months ended September 30, 2009.





During the three months ended September 30, 2010, our operating expenses were $376,843, as compared to $268,505 for the three months ended September 30, 2009. The increase of $108,338 was primarily due to an increase in professional, consulting and payroll related expenses of $88,818 and an increase in cost of goods sold of $19,520 during the three months ended September 30, 2010 from $0 in the same period during 2009.





Interest expense for the three months ended September 30, 2010 was $111,386 compared to $22,761 incurred for the three months ended September 30, 2009. The increase of $88,625 was due to a higher debt balance during the 2010 period which created discounts which were amortized into interest expense.





During the three months ended September 30, 2010, we reported a net loss of $449,950, or loss per share of $0.01, compared to a net loss of $291,266, or loss per share of $0.01, for the three months ended September 30, 2009. We expect to incur losses at least until such time as we begin generating significant revenue from operations.





Results of Operations for the Nine Months Ended September 30, 2010 Compared to the Nine Months Ended September 30, 2009





We realized revenue of $47,094 during the nine months ended September 30, 2010 from product sales and execution of energy projects.  We did not realize any revenues during the nine months ended September 30, 2009.





During the nine months ended September 30, 2010, our expenses were $968,435, as compared to $716,971 for the nine months ended September 30, 2009. The increase of $251,464 was primarily due to an increase in direct project expenses classified as cost of sales of $35,977 during 2010 as compared to $0 during 2009; an increase in salary, consulting expense and professional costs of $194,279; an increase in other general and administrative expenses consisting primarily of rent and office supplies of $95,597 and an increase in travel related expense of $23,460.  Share-based compensation decreased by $80,294 for the nine months ended September 30, 2010 as compared to the nine months ended September 30, 2009.





Interest expense for the nine months ended September 30, 2010 was $248,632 compared to $34,542 incurred for the nine months ended September 30, 2009. The increase of $214,090 was due primarily to $196,414 of debt discount and deferred financing cost amortization.





During the nine months ended September 30, 2010, we reported a net loss of $1,169,948, or loss per share of $0.03, compared to a net loss of $751,513, or loss per share of $0.02, for the nine months ended September 30, 2009. We expect to incur losses at least until such time as we begin generating significant revenue from operations.





Liquidity and Capital Resources





For the nine months ended September 30, 2010, we incurred a net loss of $1,169,948 that included $273,689 of noncash share-based compensation expense as well as $196,414 of amortization of noncash debt discount and deferred financing cost. At September 30, 2010, we had a working capital deficit of $1 294,005.   At September 30, 2010, our total assets were $317,121 including goodwill of $212,782 related to the acquisition of Quantum Energy Solutions, Inc.  Our current liabilities at September 30, 2010, included $412,967 in accounts payable and accrued liabilities, $83,567 in accounts payable and accrued liabilities due to related parties; $625,000 in current portion of convertible notes, $84,313 of short term debt, and $27,468 of short-term debt to related parties and $158,300 of common stock payable. We also had $600,246 in the long-term portion of convertible debt and notes payable.





During the nine months ended September 30, 2010, we used $448,236 in operating activities.  At September 30, 2010, we had $48,482 cash on hand.  During the nine months ended September 30, 2010, we issued in aggregate convertible secured promissory notes with a principal amount of $630,000 and paid back $100,000 and paid $30,000 for financing costs to a third party.  Other cash flow provided from financing activities were $5,620 from exercises of warrants.  We cannot give assurance that we will enter into any new investment, or that the terms of any such agreements will be on terms favorable to us. There is no assurance that our officers and directors or others will continue to fund us. Should we be unable to generate sufficient revenues or raise additional capital, we could be forced to cease business activities altogether, and the holders of security interests would likely be entitled to receive all or substantially all of our assets.  As such, the accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of OCTuS as a going concern.





15





Our Plan of Operations for the Next Twelve Months





Over the past year, we have actively pursued technologies and business opportunities in the smart energy sector, and we continue to pursue such technologies and opportunities. We have recruited management, advisors and affiliates who we believe have sufficient experience to review and qualify such technologies and business opportunities. Although we continue to seek such opportunities, we may not consummate any such transactions beyond what have been consummated to date, and it is possible such transactions would not generate sufficient revenue to sustain our operations.





During the nine months ended September 30, 2010, OCTuS raised net proceeds of $600,000 in new capital.  Although we have actively been pursuing new investment, we cannot give assurance that we will enter into any new investment, or that the terms of any such agreements will be on terms favorable to us. There is no assurance that anyone will continue to fund us. Should we be unable to obtain additional funds or finance growth through ongoing operations, we could be forced to cease business activities altogether, and the holders of security interests would likely be entitled to receive all or substantially all of our assets.





We are implementing a business plan focused to provide innovative solutions that significantly improve energy management and reduce energy costs. Our purpose is to enable building owners and managers to reduce energy consumption by 30% or more. We seek to accomplish this through the development of turnkey energy-efficiency and water-efficiency projects including equipment upgrades, energy auditing and consulting, building automation, and lighting HVAC and water system retrofits.





Our corporate strategy is to:




(1)
Develop energy-saving projects and deliver energy-efficiency services, including the retrofit of municipal and commercial buildings with energy-efficient lighting, HVAC and energy management systems;




(2)
Develop water-saving projects and deliver water-efficiency services, including the retrofit of municipal, commercial and multi-tenant buildings with water-saving products and systems;




(3)
Develop , administer, market and implement turnkey energy-efficiency and water-efficiency programs for energy utilities, water agencies, and commercial real estate managers, developers and investors; and,





(4)
Market, sell and implement proprietary and non-proprietary energy-efficiency and water-efficiency products, including WickoolTM and Dualcool evaporative cooling systems; and





(5)
Facilitate the financing and implementation of energy-saving and water-saving projects through financial partners including the Octus/Five Star Bank Building Energy Savings program.





We focus on two specific markets: the commercial and industrial market, including utilities, and the M.U.S.H. (municipality, university, school and hospital) market.





We believe the following factors drive demand for smart energy efficiency services by facility owners in the U.S. commercial, industrial and M.U.S.H. markets:





·
The potential for immediate return on investment and demonstrable long-term cost savings resulting from the installation of smart energy efficiency solutions;





·
Concerns regarding the substantial and volatile cost of energy, the adverse implication of global climate change and the desire for energy independence;





·
Increasing pressure on corporations and public sector organizations to establish and attain sustainability goals;





·
Increasing regulatory pressure on utilities to include energy efficiency and renewable energy in their resource plans;





·
The availability of rebates and tax incentives at the federal, state, and regional levels for organizations that reduce their energy consumption;





·
Existing and prospective government mandates to improve the efficiency of M.U.S.H. facilities;





·
The allocation of funds under the American Recovery and Reinvestment Act of 2009 ("ARRA") to promote energy efficiency and alternative energy projects in federal, state and local municipal facilities; and





·
The migration toward a low-carbon economy which will potentially place a price or tax on the carbon emissions of our clients.





Through OctusSEP we offer building owners and managers a full range of solutions to address the resource efficiency and management needs of their facilities. These solutions are based on our ability to identify and deliver significant return on our clients' investments, improve the quality of their facilities, maximize their operational savings and reduce their maintenance costs.





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OurSmart Energy Projects business provides energy engineering, consulting and financing services. These services target development and implementation of energy-efficient lighting, HVAC, water conservation, and energy management projects for commercial, industrial and municipal building owners. Our customers reduce energy use and costs, improve reliability, increase the value of their real estate assets and maximize the operating efficiency of their buildings.  In June 2010, we acquired certain assets of Quantum Energy Solutions, Inc., a pioneer in the development of smart energy projects.




Off Balance Sheet Arrangements





There are no 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 investors.





Item 3. Quantitative and Qualitative Disclosures about Market Risk





Not applicable.





Item 4. Controls and Procedures





Evaluation of disclosure controls and procedures





Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report.  Disclosure controls and procedures are defined as those controls and other procedures of an issuer that are designed to ensure that the information required to be disclosed by the issuer in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure.  Based on their evaluation, our principal executive officer and principal accounting officer concluded that as of September 30, 2010, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC and is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.  Our conclusion was based on (1) our lack of systematic accounting and disclosure procedures, notwithstanding that the Company’s financial statements and notes thereto are prepared and reviewed by management and that the Company’s chief financial officer reviewed each transaction during the periods covered by the report that had an effect on the Company’s financial statements included in the Form 10-Q, (2) the absence of personnel, other than the chief financial officer, with requisite expertise in the functional areas of finance and accounting, and (3) the absence of a functioning audit committee or outside directors on the Company’s board of directors.




Throughout the period covered by the report, the Company had minimal amounts of cash and limited active business activities.  To address the weaknesses identified above, management reviewed and performed an analysis of every transaction for the period covered by the report that had an impact on the Company’s financial statements included in the Form 10-Q.  Accordingly, notwithstanding the existence of the material weaknesses described in this Item, management believes that the financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presents in accordance with U.S. generally accepted accounting principles.  The Company also intends to address the weaknesses identified above by adding more formalized accounting, control and disclosure procedures, by hiring additional personnel resources when the Company’s operations and financial position permit it to do so, by continuing to have the chief financial officer review all significant transactions affecting the Company’s financial statements, and by considering the appointment of outside directors and audit committee members in the future where appropriate.





Changes in internal controls





There were no changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.





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PART II — OTHER INFORMATION





Item 1. Legal Proceedings





None.





Item 1A. Risk Factors





Our business is subject to various risks, including those described in Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2009, and strongly encourage you to review the Form 10-K and other reports that we filed with the SEC after the filing of the Form 10-K.  Except as described below in Part II, Item 5, “Other Information,” which disclosure is incorporated herein by this reference, there have been no material changes from the risk factors disclosed in that section of our Form 10-K.





Item 2. Unregistered Sales of Equity Securities and Use of Proceeds





In June 2009, OCTuS entered into a twelve-month consulting agreement which calls for OCTuS to issue 10,000 shares of common stock each month the contract is in force.  OCTuS issued 50,000 shares under this agreement during the nine months ended September 30, 2010, valued at $9,300 and recorded as share-based compensation.





In October 2009, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 20,000 shares of common stock each month the contract is in force.  During the nine months ended September 30, 2010 OCTuS accrued $5,600 of stock payable for the 20,000 shares due in January 2010 per the agreement.  As of September 30, 2010, OCTuS had a total stock payable of $158,300 for unissued common shares to various consultants. In July 2010, OCTuS issued 60,000 shares to the former owner of Quantum with a fair market value of $19,000.  This amount had been included in the previously accrued amount of $177,300 of stock payable.  .





In January 2010, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 30,000 shares of common stock to an employee upon execution of the agreement as a signing bonus, 10,000 shares of common stock each month, and pay a $4,000 stipend each month the contract is in force.  OCTuS issued 90,000 shares under this agreement during the nine months ended September 30, 2010, valued at $13,350 and recorded as share-based compensation.





In January 2010, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 30,000 shares of common stock each month the contract is in force.  The consultant terminated the contract in March 2010. OCTuS issued 60,000 shares under this agreement during the six months ended September 30, 2010, valued at $18,900 and recorded as share-based compensation.





In January 2010, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 30,000 shares of common stock to a consultant each month the contract is in force.  OCTuS issued 90,000 shares under this agreement during the nine months ended September 30, 2010, valued at $26,100 and recorded as share-based compensation.





In January 2010, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 30,000 shares of common stock each month the contract is in force.  OCTuS issued 90,000 shares under this agreement during the quarter ended March 31, 2010, valued at $23,400 and recorded as share-based compensation.  At the end of May 2010, OCTuS entered into a new six month consulting agreement with the same consultant which calls for OCTuS to issue 25,000 shares of common stock each month the contract is in force.  OCTuS issued 125,000 shares valued at $8,070, recorded as share-based compensation for the six months ended September 30, 2010.





In February 2010, OCTuS entered into a three-month consulting agreement which call for OCTuS to issue 15,000 shares of common stock each month the contract is in force.  OCTuS issued 30,000 shares under this agreement during the quarter ended March 31, 2010, valued at $6,900 and recorded as share-based compensation. In June, 2010, OCTuS entered into a new consulting agreement with this same consultant which calls for OCTuS to issue 10,000 shares of common stock each month the agreement is in force.  OCTuS a total of 55,000 shares under the old and new consulting agreements for the six months ended September 30, 2010 valued at $3,490 and recorded as share-based compensation.





In February 2010, OCTuS entered into a six-month consulting agreement which calls for OCTuS to issue 1,000,000 shares of common stock for services.  All services were not preformed as originally agreed and 500,000 shares were returned by the consultant and cancelled by OCTuS.  For the services that were performed, OCTuS agreed that the consultant could keep the remaining 500,000 shares which were valued at $150,000 and recorded as share-based compensation.





During the nine months ended September 30, 2010, OCTuS issued 562,000 common shares in connection with the exercise of warrants for $5,620.




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In June 2010, OCTuS issued 150,000 shares in connection with the acquisition of Quantum Energy Solutions, Inc.





All of the above issuances were made without any public solicitation, to a limited number of employees, consultants and shareholders and were acquired for investment purposes only.  The securities were issued in reliance on the private placement exemption provided by Section 4(2) of the Securities Act of 1933.





Item 3.  Defaults Upon Senior Securities





None.





Item 4.  Submission of Matters to Vote of Security Holders





None.





Item 5.  Other Information





Certain Matters Relating to the Company’s 2003 Reincorporation Transaction





In connection with a review of previous corporate transactions, the Company recently became aware of administrative errors related to the Company's change of domicile from California to Nevada at the end of 2003.  At the time of all of the events described below, the Company was a shell company with no cash (or nominal cash), no business and a small amount of liabilities consisting primarily of accrued obligations and notes to a related party.  Further, the majority shareholder, and the person who was the president of OCTuS California at the time of the events described below, have affirmed in writing to the Company that their vote, support and intention was to enact the events.





As reflected in previous filings by the Company with the Securities and Exchange Commission (the “Commission”), in December 2001, OCTuS, which was then incorporated in California (sometimes referred to as “OCTuS California”), distributed a proxy statement to its shareholders in connection with its annual meeting of stockholders to be held on December 29, 2001 (the “2001 Meeting”), soliciting approval for a proposal to change the state of incorporation of OCTuS from California to Nevada.  The proxy statement indicated that the change of domicile would be accomplished by merging OCTuS California into a newly formed subsidiary, OCTuS Nevada.  At the time, one shareholder, Grupo Dynastia, S.A., a foreign corporation, held approximately 56% of the outstanding voting stock as of the record date of the meeting.  Grupo Dynastia has represented to management of the Company in writing that it supported the reincorporation and change of domicile.  In addition, Grupo Dynastia and the person who at the time was the president of OCTuS California have represented to management of the Company in writing that Grupo Dynastia delivered to OCTuS California in advance of the 2001 Meeting a signed form of proxy appointing the president of OCTuS as proxy for the shareholder to vote the shareholder’s shares in favor of the reincorporation and the other proposals at the 2001 Meeting.  However, the Company does not have in its records evidence that an executed proxy was received by OCTuS California from Grupo Dynastia or taken into account at the meeting.





In December 2003, the Company decided to effect the reincorporation transaction that it believed had been approved at the 2001 shareholder meeting.  A new corporation was incorporated in Nevada named OCTuS, Inc. (“OCTuS Nevada”).  All assets and liabilities of OCTuS California, which consisted of the nominal cash and minimal liabilities described below, were transferred to OCTuS Nevada on or before December 31, 2003 as part of the change of corporate domicile.  However, for reasons of administrative inadvertence, articles of merger were not filed in either Nevada or California.





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In January 2004, dissolution and winding up certificates were filed with the California Secretary of State for OCTuS California, reciting that OCTuS California had elected to wind up and dissolve; that the election was made by the vote of at least 5.8 million shares, representing in excess of approximately 90% of the outstanding shares of the Company; that the affairs of OCTuS California had been completely wound up; that the known debts and liabilities of the company had been paid or provided for; and that all known assets of the company had been distributed to the OCTuS California shareholders.





The person who was the president of OCTuS California at the time at the time of the events described above has affirmed in writing that these filings were intended to be part of the process of implementing the reincorporation merger transaction.  At the time, Grupo Dynastia owned common stock and preferred stock of OCTuS California representing in excess of 97.6% of the voting power of the outstanding shares of OCTuS California.  Grupo Dynastia has represented to management of the Company in writing that it supported and approved of the reincorporation transaction in December 2003, regardless whether it was affected by means of a merger, transfer of assets and lisbilities or other mechanism.





On March 23, 2004, the Company filed its Annual Report on Form 10-K with the SEC with respect to the year ended December 31, 2003 (the “2003 Form 10-K”), indicating that it was a Nevada corporation and including the following disclosure:  “On December 29, 2001, a majority of the shareholders voted to change the Company's state of incorporation from California to Nevada.  In December 2003, this change was completed and the Company became a Nevada corporation.”  According to the 2003 Form 10-K, at December 31, 2003, OCTuS was not engaged in any business activities, its total assets consisted of $22 of cash, and its liabilities consisted of accounts payable and accrued expenses of $1,238, accounts payable and accrued expenses to related parties of $16,138, and notes payable to a related party, Grupo Dynastia, of $144,271.  According to the 2003 Form 10-K, the aggregate market value of shares held by non-affiliates of the Company as of March 18, 2004, was $31,676, and the actual value of those shares may have been even less in light of, among other factors, the Company’s liabilities and lack of any business and cash assets.





Implementing what management of the Company believed was the merger transaction; OCTuS Nevada subsequently issued one share of OCTuS Nevada for each share of OCTuS California held by each person who was a former shareholder of OCTuS California.  If not part of the merger transaction, the the Company believes the issuance of shares was part of the distribution by OCTuS California of its remaining assets, consisting of the shares issued by OCTuS Nevada, to its shareholders as part of the process of winding up OCTuS California.  Accordingly, there was no change in ownership of shares of the Company as the result of the redomicile.  In addition, no shareholder has communicated with the Company or its officers in any way concerning claims or complaints relating to the above matters.





The Company has submitted for filing with the Nevada Secretary of State, articles of merger reflecting the merger transaction that the Company believed occurred at the end of 2003.  However, the Company cannot provide any assurances concerning the legal effect, if any, of belatedly filing such articles of merger at such time in the circumstances described above.





The foregoing matters may give rise to liabilities, claims or regulatory actions under federal or state laws, including without limitation relating to whether sufficient shareholder approval was obtained for the reincorporation transaction, whether the issuance of shares of OCTuS Nevada in the reincorporation transaction complied with federal and state securities laws, whether the foregoing matters affect OCTuS Nevada's status as a successor issuer under federal securities laws, and other related matters.  The Company can give no assurance as to whether any such liabilities, claims or regulatory actions, including actions by the Commission or state regulatory authorities, may arise in the future or the outcome of any such liabilities, claims or regulatory actions on the Company's business and previously reported or current financial statements.  An adverse outcome in any such claim or proceeding could have a material adverse effect on the Company's business, financial position and results of operations.





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Item 6.  Exhibits





Exhibit No.
Description31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.32.1
Section 1350 Certification of Chief Executive Officer32.2
Section 1350 Certification of Chief Financial Officer





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SIGNATURES





In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





OCTuS, Inc.,

a Nevada corporationNovember 22, 2010
By:
/s/ Christian SoderquistChristian Soderquist

Chief Executive Officer and a Director





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