U.S. SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K/A


(Amendment No. 1)








x Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for


the fiscal year ended December 31, 2009





o Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934





For 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)

(IRS Employer Identification No.)





2020 Research Park DriveSuite 110Davis, California

95616(Address of principal executive offices)

(Zip Code)





(530) 564-0200


(Registrant's Telephone Number, Including Area Code)





Securities registered pursuant to Section 12(b) of the Exchange Act: None





Securities registered pursuant to Section 12(g) of the Exchange Act:





Common Stock, $.0001 par value per share


(Title of Class)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o  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 Act. Yes  o  No  x





Indicate by check mark whether 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 if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. o





Indicate by check mark whether the registrant is a large accelerated filer, 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. (Check one)





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 Act) Yes o  No x





As of April 15, 2010, there were 44,867,072 shares of common stock outstanding.











OCTUS, INC.





FORM 10-K





FISCAL YEAR ENDED DECEMBER 31, 2009





Item

PagePART I1
Business
4PART II5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
117.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17[8.
Financial Statements and Supplementary Data
22]9A(T).
Controls and Procedures
34PART III10.
Directors, Executive Officers and Corporate Governance
3611.
Executive Compensation
3812.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
40[13.
Certain Relationships and Related Transactions, and Director Independence
41]PART IV15.
Exhibits, Financial Statement Schedules
42


Unless the context otherwise requires, the terms “we,” our,” “the Company” and “Octus” refer to Octus Inc. and its subsidiaries.


2
  EXPLANATORY NOTE
 
 This Amendment No. 1 on Form 10-K/A (the “Form 10-K/A”) is being filed to amend our Annual Report on Form 10-K for the year ended December 31, 2009, that we filed with the Securities and Exchange Commission (the “SEC” or the “Commission”) on April 15, 2010 (the “Form 10-K”).  This Form 10-K/A revises or amends the following items, in response to comments that we received from the SEC in connection with its review of the Form 10-K:
 
 ·
Part I, Item 1, Business, to expand the description of our business, including moving disclosures that were included in the original Form 10-K under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Our Plan of Operations for the Next Twelve Months.”
 
 ·
Part II, Item 5, to expand disclosures concerning recent sales of unregistered securities.
 
 ·
Part II, Item 7, (i) to revise disclosures in the “Overview” section concerning our business and agreements; (ii) to revise the liquidity and capital resources disclosure concerning our liquidity position, sources and uses of cash, and our plans to meet our ongoing expenses in the short-term and long-term; (iii) to supplement the disclosure in the liquidity and capital resources section concerning our material loan agreements; and plans to fund our operations for the next 12 months.
 
 ·
Part II, Item 8, Financial Statements and Supplementary Data, to revise disclosure in Note 9 for the specific financial conditions of the license agreement previously disclosed.
 
 ·
Part II, Item 9A(T), to revise the disclosures concerning controls and procedures.
 
 ·
Part III, Item 10, to discuss the specific experience, qualifications, attributes or skills that led to the conclusion that each of our directors should serve on our board.
 
 ·
Part III, Item 11, (i) to add disclosures concerning the shares received by Mr. Ecker and Mr. Soderquist, and (ii) to revise the Summary Compensation Table.
 
 ·
Part IV, Item 15, to add additional exhibits.
 
 ·
Section 302 Certifications, to conform certain wording.
 
 This amended Form 10-K/A does not attempt to modify or update any other disclosures set forth in the original Form 10-K, or to provide a general update or discussion of other developments at the Company after the date of the original filing.  All information contained in this Form 10-K/A and the original Form 10-K is subject to updating and supplementing as provided in the periodic reports that we have filed and will file after the original filing date with the Securities and Exchange Commission.  This Form 10-K/A does not include the items from the original
Form 10-K that are not being amended.  Accordingly, it should be read in conjunction with the original Form 10-K, and our other filings with the SEC subsequent to the filing of the Form 10-K.


FORWARD LOOKING STATEMENTS





Statements made in this Form 10-K that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions 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 statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate," or "continue," or the negative thereof.  The Company intends that such forward-looking statements be subject to the safe harbors for such statements.  The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only as of the date made.  Any forward-looking statements represent management's best judgment as to what may occur in the future.  However, forward-looking statements are subject to risks, uncertainties and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected.  These factors include adverse economic conditions, entry of new and stronger competitors, inadequate capital and unexpected costs.  The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated
events.





3


PART I


ITEM 1.  BUSINESS





Introduction





Octus was incorporated in October 1983 under the laws of the State of California.  On December 29, 2001, a majority of the shareholders voted to change our state of incorporation from California to Nevada.  In December 2003, this change was completed and we became a Nevada corporation.  Currently our Common Stock is eligible for quotation on the OTC Bulletin Board under the symbol OCTI.





The Company seeks to become a leading renewable energy efficiency company that brings innovative energy efficiency and renewable energy solutions to the commercial and public sector markets.  The Company intends to pursue and facilitate renewable energy efficiency projects involving energy efficiency systems and products that the Company may develop, acquire, license or distribute.  The Company believes the market demand for smart energy management – reducing the energy use and costs in commercial, industrial and municipal buildings -- is an attractive business opportunity.





We are actively seeking technologies and business opportunities in the smart energy sector, which may include the licensing, acquisition or development of smart energy and energy efficiency products or technologies as part of the OctusSEP (Smart Energy Platform).  We intend to recruit management, advisors and affiliates with sufficient experience needed to review and qualify such technologies and business opportunities for our involvement.  Although we are seeking 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.  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.
  In July 2009, we entered into consulting agreements with Tobin J.M. Richardson to act as Senior Advisor, Energy Markets, and with Siva Gunda to act 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.  The Company’s affiliations with the CLTC and WCEC focus on identifying and developing suitable products and services for OctusSEP and our energy-efficiency offerings.  The Company does not have a formal
relationship with the CLTC, and the Company is pays an annual $10,000 fee as an affiliate member of the WCEC.  As a WCEC affiliate, Octus is collaborating with the Center to commercially test and develop WickoolTM, a technology the Company licensed from the University of California.
  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.  The joint venture was focused on bringing OctusSEP and related offerings to market, including collaborative marketing to Quantum’s historical clients.  Under the joint venture arrangement, Octus and Quantum may each elect to engage the other on a non-exclusive basis as a partner in energy projects.  The company originating the business opportunity will receive 75% of the project’s net profit, with the partner receiving 25%.  When
Quantum elects to bill a project through Octus, Octus will receive 25% of the project’s net profit and will compensate Quantum with an equitable amount of Octus common stock.  The arrangement also provided that Octus and Quantum will evaluate each project and their relative contributions and compensation, and that if warranted, the companies may modify the above terms to reflect individual project contributions.  In addition, Octus and Quantum may source lighting (and other energy) products from each other, with an intent to private label (as an Octus or a Quantum-branded) the products.  The sourcing partner will receive a 15% commission – based on the manufactured price – for such products.
  4
 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 9, 2009, we announced the launch of SmartLightSupply.com, an electronic commerce marketplace featuring smart, energy-efficient lighting products for the commercial market.  However no business was conducted through the e-commerce site, and the Company has ceased operation of SmartLightSupply.com.
  Management believes that without an influx of significant new funds, we will not be able to sustain our operations beyond approximately 12 months.    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, 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 50% or more.  We seek to accomplish this through the development and deployment of the Octus Smart Energy Platform (OctusSEP), a portfolio of smart devices, sensors, and software-enabled energy management services, and the implementation of smart energy projects, including equipment upgrades, energy auditing and consulting, building automation, and lighting and HVAC retrofits.
  Our corporate strategy is to:
  (1)
Develop, license and acquire a portfolio of smart energy efficiency technologies (the “Octus Smart Energy Platform,” or, “OctusSEP”);
 (2)
Generate revenue through the sale of OctusSEP solutions via direct, channel and technology sub-licensing activities;
 (3)
Develop energy projects and deliver energy-efficiency services, including the retrofit of municipal and commercial buildings with energy-efficient lighting, HVAC and energy management systems;
 (4)
Develop and deliver software-enabled energy management services; and,
 (5)
Create and monetize energy information and intelligence to help building owners and managers better manage their energy use and costs.
  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 deploy solutions through OctusSEP to reduce the energy-related expenditures of our clients’ facilities and the impact of their energy use on the environment, including smart energy management systems, energy efficient lighting upgrades, energy efficiency mechanical and electrical retrofit and upgrade services, and renewable energy project development and implementation.
  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 intend to offer building owners and managers a full range of solutions to address the energy efficiency and energy 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.  We intend to sell smart energy products, develop energy projects, deliver software-enabled energy management services, and monetize energy intelligence through three business units:
  5
 Our SmartEnergy Products business intends to offer a proprietary line of integrated, intelligent controls, sensors, network appliances, and energy management software to provide continuous management of lighting and HVAC equipment using wireless and power line communication technology.
  All products communicate using open standards.  Product offerings are communication protocol agnostic.  Revenue comes from product sales and technology sub-licensing.  As of December 31, 2009, proprietary Octus smart energy products were:
  ·
Wickool, a passive evaporative cooling solution that generates efficiencies through reuse of condensate created by commercial rooftop HVAC units.  Octus executed an exclusive worldwide license of the technology with the University of California on September 1, 2009.  Wickool was developed by the Western Cooling Efficiency Center at the University of California, Davis, and was commercially demonstrated by two major retailers.
 ·
Octus SmartCenter, an IP-based energy services appliance that wirelessly networks and optimizes the energy-efficiency of commercial lighting and HVAC systems.
 ·
Octus SmartPortal, Web-based energy management software that enables building owners and managers to monitor, control, and manage energy use within their facilities.
  Our SmartEnergy Services unit intends to develop, deliver and manage software-enabled services.  Services include reporting systems, building automation, resource management, and value-added services.  Value-added services include maintenance monitoring and service alert/dispatch services, cost accounting information, modeling and benchmarking, to name a few.  These are delivered through Octus SmartPortal, a hosted solution delivering capabilities through a Software as a Service (SaaS) model and subscriptions are on a per-service, per-user or per-facility basis.  Revenue comes from
subscriptions to one or more services or software modules.
  Our SmartEnergy Projects business provides energy engineering, consulting and financing services.  These services target development and implementation of energy-efficient lighting, HVAC, energy management and renewable energy projects for commercial, industrial and municipal building owners.  Our customers reduce energy use and costs, improve reliability, and maximize the operating efficiency of their buildings.
  Market Overview
  According to the U.S. Department of Energy (“DOE”), the United States consumes more energy than any other country in the world.  The United States is primarily dependent on traditional fossil fuels to supply energy for end users, which includes transportation, heating and electricity.  Recently, nearly all energy costs have risen due to a variety of factors, including the concern over a limited supply of fuel to meet increasing global demand.
  U.S. electricity prices have risen in recent years due to increasing energy prices, supply constraints, and the growing demand for electricity.  According to the DOE, electricity prices increased just 5.1% from 1996 to 2003 for commercial clients.  However, the average retail price of electricity to commercial clients rose 20.2% from 8.03 cents per kilowatt-hour in 2003 to a record of 9.65 cents per kilowatt-hour in 2007.  In addition, the Energy Information Administration (“EIA”) reported demand for electricity grew from 3,492 billion kilowatt hours in 1997 to 4,157 billion kilowatt hours in 2007, a 19% increase in 10
years.  These trends have created market opportunities for energy efficiency and smart energy management solutions due to immediate energy cost savings and positive environmental impact energy users realize after adopting and implementing solutions.
  Regulatory policy increasingly requires utilities to promote energy efficiency and obtain renewable energy resources as part of their resource planning.  Simultaneously, increasing costs and time required to construct traditional power plants are causing utilities to view investment in energy efficiency as an attractive alternative to investment in traditional generating capacity.
  We believe that smart energy efficiency, which we define as intelligently and systematically reducing the amount of energy used to operate facilities and produce goods and services, is the most immediate and economic means to reduce end user energy costs and promote environmental stewardship.  At a minimum, smart energy efficiency accomplishes four objectives:
  6
  ·
delivers immediate and recurring energy cost savings;
 ·
reduces greenhouse gas emissions to help alleviate climate change;
 ·
stimulates the economy through the creation of new jobs in the “green” segment; and
 ·
enhances the value and net operating income of buildings.
  The value of smart energy efficiency as a resource is affirmed by increasing emphasis placed on it in regulation, legislation and appropriations.  The American Council for an Energy Efficient Economy (“ACEEE”) estimates that $300 billion was invested in energy efficiency technologies and infrastructure in the U.S. in 2004, and that annual investment may grow to $700 billion by 2030 in conjunction with the goal of reducing energy use by 20%.  According to ACEEE, total additional investment from 2008 to 2030 could reach nearly $7 trillion.  We believe investments in smart energy efficiency solutions will have a significant impact on
electricity costs and demand, while improving the overall sustainability of the global energy market.
  A 2009 study by McKinsey & Company offers a detailed analysis of the magnitude of the efficiency potential in non-transportation uses of energy.  The study shows that the U.S. economy has the potential to reduce annual non-transportation energy consumption by roughly 23 percent by 2020, eliminating more than $1.2 trillion in waste – well beyond the $520 billion upfront investment (not including program costs) that would be required.  This reduction in energy use would also result in the abatement of 1.1 gigatons of greenhouse gas emissions annually – the equivalent of taking the entire U.S. fleet of passenger vehicles and light trucks off the
roads.
  According to Amory Lovins, Chairman & Chief Scientist of the Rocky Mountain Institute, there are abundant opportunities to save 70% to 90% of the energy and cost for lighting, fan, and pump systems; 50% for electric motors; and 60% in areas such as heating, cooling, office equipment, and appliances.
  Government Initiatives and Mandates to Stimulate Energy Efficiency for Facilities
  Improvements in energy technology and increases in government initiatives have created immediate economic reasons for building owners to upgrade to more efficient, cost saving technology.  In response to increasing environmental concerns over the years, coupled with record electricity demand and costs, regulatory authorities have created incentives for utilities and end-users to reduce electricity usage.  The federal government and many state governments have passed legislation that provides incentives to electricity users to reduce consumption by adopting energy efficiency solutions and forces utilities to decouple revenue from their electricity
sales.  These incentives lower the net costs of implementing smart energy efficiency solutions.  This helps building owners and managers rationalize and accelerate decisions to replace obsolete systems.  More recently, the ARRA and other related stimulus initiatives contain provisions that further support energy efficiency as a national priority.  Stephen Chu, U.S. Energy Secretary, recently opined, “If I were emperor of the world, I would put the pedal to the floor on energy efficiency and conservation for the next decade.”
  Legislation and mandates adopted to date which have stimulated building energy efficiency projects in both the commercial and industrial and public sector include:
  Federal Legislation:
  ·
The Energy Policy Act of 2005 (“EPAct05”) includes a significant tax-incentive to improve energy efficiency of commercial facilities.  The Commercial Building Tax Deduction is an incentive established to provide a tax-deduction of up to $1.80 per square foot for expenses incurred for the installation of energy efficient lighting, heating, ventilating, and air conditioning (“HVAC”), hot water systems and building envelope systems.
 ·
The EPAct05 and Executive Order 13423 (January 2007) set new federal energy goals.  The first goal is to cut energy use in federal facilities by 3% per year from 2003 levels during the period from 2007 through 2015.  Second, the federal government is to increase the use of renewable energy to not less than 3% of total electricity use in 2007-2009, not less than 5% in 2010-2012, and not less than 7.5% in 2013 and thereafter, with at least half of renewable purchases coming from new renewable sources.
 ·
The Energy Independence and Security Act of 2007 (“EISA”) included the permanent reauthorization of energy savings performance contracts (“ESPCs”).  ESPCs are contracting vehicles that allow federal agencies to complete energy projects for their facilities without up-front investment and without special Congressional appropriations to pay for the improvements.  In December 2008, the DOE awarded sixteen contracts to Energy Services Companies (ESCOs) for up to $80 billion in energy efficiency, renewable energy and water conservation projects at federal facilities.
  7
 More recently, the $787 billion American Recovery and Reinvestment Act of 2009 (“ARRA”) reflects increased government focus on energy efficiency initiatives, in addition to other continuing legislation and mandates.  The ARRA provides approximately $36.7 billion through a number of funding sources and for financial incentives to stimulate energy projects, including:
  ·
$16.8 billion through the Office of Energy Efficiency and Renewable Energy
 ·
$6.0 billion through the Office of Environmental Management
 ·
$4.5 billion through the Office of Electricity Delivery & Energy Reliability
 ·
$4.0 billion through the Loan Guarantee Program Office
 ·
$3.4 billion through the Office of Fossil Energy
 ·
$1.6 billion through the Office of Science
 ·
$400 million through the Advanced Research Projects Agency - Energy
  Additionally, many federal entities have made provisions for funding opportunities outside of the ARRA, including:
  ·
The U.S. Department of Energy currently manages the Loan Guarantee Program, authorized by the EPAct05, which guarantees loans on projects that either reduce emissions or advance energy efficiency technologies, encouraging early commercial use of such projects.
 ·
The General Services Administration, in conjunction with a $4.5 billion ARRA appropriation, has taken an initiative to convert its facilities to High-Performance Green Buildings.
 ·
Property Assessed Clean Energy Bonds (“PACE”) are bonds with terms of up to 20 years and issued by municipalities, with the proceeds lent to commercial and residential property owners in the community to finance energy efficiency and renewable energy projects.  These loans are secured by borrowers properties and are repaid over the term of the issuance via an annual assessment on properties’ tax bills.  The first PACE bonds were issued in 2009.  It is estimated that potential for PACE bonds could exceed $500 billion.  The Waxman-Markey Energy Bill includes a provision that would provide for DOE support of these bonds.
  State Legislation and Other Initiatives Supporting Energy Efficiency for Facilities
  Over the past few years, there have been increasing numbers of state initiatives encouraging or requiring utilities to establish Demand-Side Management (“DSM”) and energy efficiency programs.  DSM and energy efficiency programs typically provide incentives to utility customers to offset a portion of the upfront cost of energy efficiency projects.  Regulatory mandates, such as the Energy Efficiency Resource Standards (“EERS”), often result in significant economic incentives to utility customers and have served to increase the number of DSM and energy efficiency projects, especially in several Northeast and West Coast states.  Under
these programs utilities actively seek participants, arrange for project management and implementation services for energy efficiency projects initiated under their programs, and pay a portion of the costs.
  Current EERS typically require utilities to achieve savings equivalent to between one and 1.5 percent of their annual sales through energy efficiency.  In response to EERS, many states have begun planning or have already implemented DSM and Energy Efficiency projects, including New York, where utilities have filed more than $6 billion in new DSM and Energy Efficiency programs and Pennsylvania with utilities allocating more than $275 million per year to new DSM and Energy Efficiency projects.  Currently 26 states, representing 71% of the U.S population, have adopted, or are in the process of adopting, EERS programs.  The Save American Energy Act
currently being considered by Congress would establish a national EERS program requiring utilities to achieve 15% energy savings through utility efficiency programs, building energy codes, appliance standards and related efficiency measures.  In addition to these programs, five states--Maryland, Nevada, New York, Montana and Oregon--currently offer incentives for commercial facilities that meet green building standards.
  8
 Initiatives of Non-Governmental Organizations
  Public awareness of cost savings and environmental benefits accruing from facility energy efficiency initiatives are also being stimulated by organizations other than the federal government.  These include a number of non-government organizations (“NGOs”) that are helping to increase public awareness of the environmental and operational value of prioritizing building energy efficiency initiatives.  These initiatives include efforts to focus on specific major projects.  They have helped focus commercial and public sector entities on the need to take action and for results to be seen by their stakeholders.  Notable examples
include:
  ·
Clinton Climate Initiative (“CCI”)—Working with governments and businesses around the world, the CCI focuses on three strategic program areas consisting of increasing energy efficiency in cities, catalyzing the large-scale supply of clean energy and working to stop deforestation.
 ·
Energy Efficiency Partnership of Greater Washington—This is a collective partnership of energy efficiency companies, banks, local governments and facility owners to reach a goal of reducing energy use by twenty to fifty percent in existing facilities in the Greater Washington, D.C. region.
  As much of ARRA funding has yet to be allocated to specific projects and programs, it is premature to identify resulting benefits.  However, we believe that we are well positioned to capitalize on the range of mandates and initiatives intended to stimulate building energy efficiency.  We are focusing sales and marketing efforts to industries and markets likely to be primary beneficiaries of significant government funding.
  Growing Interest in Adoption of Environmentally Conscientious Energy Efficiency Strategies
  Electricity supply shortages and rising energy prices have led consumers, companies and public entities to implement “sustainable” policies to reduce energy use and greenhouse gas emissions.  As standards of corporate accountability evolve, stockholders and other stakeholders are pushing organizations to recognize and act to reduce their carbon footprint.  Achieving greater energy efficiency is a cost-effective way to reduce energy consumption and promote environmental stewardship.  According to Institute of Business and Economic Research (“IBER”), energy represents 30% of operating expenses in a typical office building, which makes
it the single largest building operating expense.  DOE estimates that residential and commercial buildings are responsible for 39% of total U.S energy consumption and that buildings account for 38% of total U.S. CO2 emissions, America’s largest single source.
  There is an increasing demand for environmentally friendly and sustainable building construction and methods for addressing energy efficient upgrades of facilities.  The term “green building” has been adopted to refer to buildings that use lower amounts of electricity and reduce their emissions through use of energy efficient equipment and materials.  According to McGraw-Hill Construction, an estimated 10%-12% of current new commercial construction starts are green, representing a $24-$29 billion market, and total commercial construction market is on track to grow to $56-$70 billion annually by 2013.  In the U.S., the Energy Star
project, which is jointly sponsored by the Environmental Protection Agency (“EPA”) and DOE, and the U.S. Green Building Council’s Leadership in Energy and Environmental Design (“LEED”) program are the two major rating systems to encourage development of energy-efficient and sustainable facilities.  According to IBER only 1,360 of the approximately 332,000 U.S. commercial facilities listed in the Co-Star Group, Inc. database of commercial properties for sale or lease are certified by either LEED or Energy Star as “green” office buildings.  We believe that economic and environmental factors will drive growth in new construction and retrofit projects that result in green building certifications.
  Commercial and Industrial Market
  We believe there is currently a significant market opportunity for the sale of smart energy efficiency solutions based on the amount of U.S. electricity expenditures, potential energy savings with currently available solutions, and amount of commercial and industrial floor space able to be retrofitted.  The EIA estimated that in 2003 the U.S. commercial sector spent approximately $46 billion on electricity for lighting, heating, ventilating and air conditioning.  This represented approximately 67% of the $69 billion total electricity spending by that sector for facilities.  Also according to the EIA, more than 63 billion square feet of
commercial building floor space in the U.S. was built before 2004.  We believe there are about 4 million “small commercial / small site” buildings of less than 100,000 square feet in the U.S. today.  Few of these small site buildings have any form of centralized energy management or control systems in place.  With constant changes in lighting products and energy management technologies, this represents a significant amount of floor space able to be retrofitted to improve energy efficiency and meet sustainability goals.
  9





Intellectual Property





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.  In the agreement, OCTuS agreed to diligently proceed with the development, manufacture and sale of licensed products, licensed services and licensed methods and to diligently market them in quantities sufficient to meet the market demand.
 
 Pursuant to these milestone conditions, OCTuS committed to achieving the following objectives and milestones in its activities under the agreement:
 
 (a)
Funding of OCTuS:  $250,000 by December 31, 2010;
 
 (b)
Manufacturing of a licensed product begins (including by a third-party on behalf of OCTuS) by May 31, 2010;
 
 (c)
First sales of a licensed product or licensed services by August 31, 2010; and
 
 (d)
1,000 units of licensed products sold by August 31, 2011.
 
 If OCTuS is unable to meet any of these diligence obligations, then the University will notify OCTuS of failure to perform, and OCTuS will have the right to extend the target date of any such diligence obligation for a period of six months upon the payment of $5,000 within 30 days of the date to be extended for each such extension option exercised by OCTuS.  OCTuS may further extend the target date of any diligence obligation for an additional six months upon payment of an additional $5,000.  Additional extensions may be granted only by mutual written consent of OCTuS and the
University.  Should OCTuS elect not to extend the dates or fail to meet a milestone by the extended target date, then the University will have the right either to terminate the agreement or to reduce OCTuS’ exclusive license to a non-exclusive license, by means of a notice delivered to OCTuS, with OCTuS having 60 days to cure the deficiency or to request arbitration.
 
 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.
 
 Government Regulation





As our current operations and activities are minimal, applicable government regulations do not have a material impact on our activities.  However, if we successfully execute on our business plan, we anticipate that federal, state and local environmental, energy, tax incentive, health, labor relations, sanitation, building, zoning, fire and safety regulations could have an effect on our business and on the businesses of the customers to which we intend to sell products, services and solutions.





10





Our Research and Development





We are not currently conducting any research and development activities although we may conduct such activities in the foreseeable future.





Employees





As of December 31, 2009, we had four employees.  We added four employees to our workforce during the year ended December 31, 2009.  None of our employees is currently represented by labor unions or covered by a collective bargaining agreement.  We believe that relations with our employees are good.





PART II





ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Market for Common Stock





Our common stock is eligible for quotation on the Over-the-Counter Bulletin Board under the symbol "OCTI.OB".





11


Set forth below are the ranges of high and low bid prices for each quarter for the Common Stock as reported by the OCTI.OB for the years ended December 31, 2009 and 2008.





COMMON STOCKQUARTER ENDED

HIGH


LOWMarch 31, 2008


0.08



0.08June 30, 2008


0.04



0.04September 30, 2008


0.07



0.07December 31, 2008


0.01



0.01March 31, 2009


0.01



0.10June 30, 2009


0.05



0.25September 30, 2009


0.10



0.39December 31, 2009


0.18



0.35





The source of these high and low prices was the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions. The high and low prices listed have been rounded up to the next highest two decimal places.





It is anticipated that the market price of our common stock will be subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market for the products we distribute, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance. On April 9, 2010, the closing price of our common stock as reported by the OTC Bulletin Board was $0.21 per share.  Trading on our Common Stock is extremely limited and
sporadic.  Therefore, prices are not an accurate indication of the market value of our Common Stock.





Reports to Security Holders





We are a reporting company with the Securities and Exchange Commission, or SEC.  The public may read and copy any materials filed with the Securities and Exchange Commission at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C.  20549.  The public may also obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330.  The Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the Securities and Exchange Commission.  The address of that site is http://www.sec.gov.


Dividends





We have never declared or paid cash dividends on our Common Stock and have no current intention to declare or pay any dividends on our Common Stock in the foreseeable future.  We intend to retain earnings, if any, for the development of our business.





Description of Capital Stock





Our authorized capital stock consists of the following:


·
Common stock, $0.001 par value, 100,000,000 shares authorized; approximately 43,867,072 shares issued and outstanding;


·
Series A preferred stock, $0.001 par value, 300,000 shares authorized, no shares issued or outstanding;


·
Series B preferred stock, $0.001 par value, 910,000 shares authorized, no shares issued or outstanding;


·
Series C 6.0% cumulative preferred stock, $0.001 par value, 250,000 shares authorized, no shares issued and outstanding; and


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





12


Holders of shares of our common stock are entitled to receive dividends when and as declared by our Board of Directors from funds legally available. All the shares of our common stock have equal voting rights and are non-assessable. Each shareholder of our common stock is entitled to share ratably in any assets available for distribution to holders our equity securities upon our liquidation. Holders of our common stock do not have preemption rights.





As of April 12, 2010, there were approximately 311 holders of our Common Stock.





Recent Sales of Unregistered Securities





On February 24, 2009, we entered into share purchase agreements with our two officers and directors whereby they each received 15,000,000 common shares in consideration of their willingness to serve as directors and officers of the Company, services rendered to the Company in connection with the formation and development of our business plan and the contribution of proprietary ideas concerning the Company’s intended business plans and strategies.  The shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended, based in part on the status of the persons receiving the
shares as officers and directors of OCTuS and their familiarity with the business and intended business of OCTuS.  Each such person represented that the shares were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act.
 
 On May 5, 2009, OCTuS entered into an employment agreement with John Argo pursuant to which Mr. Argo will serve as Director, Energy Projects & Finance of OCTuS.  The employment agreement has a term of three years, through April 30, 2012, with a base annual salary of $120,000.  Concurrently, OCTuS issued 250,000 shares of common stock, valued at $12,500 to Mr. Argo, recorded as share-based compensation, in consideration for his willingness to join the Company as an employee and services consisting of pre-employment business planning and discussions.  The shares were issued in
reliance on Section 4(2) of the Securities Act, based in part on his status as employee of OCTuS and his familiarity with the business of OCTuS.  The employee represented, among other things, that the shares were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, and that the recipient understood the speculative
nature of the acquisition of the shares.
 
 In June 2009, OCTuS entered into a twelve-month consulting agreement with Siva Gunda to assist in the development of the Octus Smart Energy Platform, including identification of key partners, systems, and components.  The agreement provides for OCTuS to issue 10,000 shares of common stock each month the contract is in effect.  OCTuS issued 70,000 shares under this agreement during the year ended December 31, 2009, valued at $20,900 and recorded as share-based compensation.  The shares were issued in reliance on Section 4(2) of the Securities Act.  The recipient
represented that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, and that the recipient understood the speculative nature of the acquisition of the shares.  The recipient of the shares represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, and that the recipient was familiar with the business of OCTuS, had an opportunity to ask questions
of the officers of OCTuS concerning its business, and understood the investment risks involved in acquiring the shares.


In July 2009, OCTuS entered into a consulting agreement with an initial term of three months with Mananya Chansanchai as Energy Solutions Program Manager, providing for OCTuS to issue 20,000 shares of common stock upon execution of the agreement and 10,000 shares of common stock each month during the term of the agreement, and pay $2,000 each month the agreement is in effect.  OCTuS issued 80,000 shares under this agreement during the year ended December 31, 2009, valued at $22,200 and recorded as share-based compensation.  The shares were issued in reliance on Section 4(2) of the
Securities Act.  The recipient of the shares represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act and that the recipient was familiar with the business of OCTuS concerning its business, had an opportunity to ask questions of the officers of OCTuS, and understood the investment risks involved in acquiring the shares.  The recipient represented that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with
respect to the acquisition of the shares and the business of the Company, and that the recipient understood the speculative nature of the acquisition of the shares.
 
 13
 In July 2009, OCTuS entered into a three-month consulting agreement with Tobin Richardson as Senior Advisor, Energy Markets providing for OCTuS to issue 10,000 shares of common stock each month the contract is in effect.  OCTuS issued 30,000 shares under this agreement during the year ended December 31, 2009, valued at $9,300 and recorded as share-based compensation.  The shares were issued in reliance on Section 4(2) of the Securities Act.  The recipient of the shares represented that the securities were being acquired for investment purposes, for the recipient’s own
account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, and that the recipient was familiar with the business of OCTuS, had an opportunity to ask questions of the officers of OCTuS, and understood the investment risks involved in acquiring the shares.  The recipient represented that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, and that the recipient understood the speculative nature of the acquisition of the shares.
 
 In August 2009, OCTuS entered into a twelve-month consulting agreement with Eduardo Mendoza to provide technology support services for Mr. Argo, providing for OCTuS to pay $3,000 and issue 10,000 shares of common stock each month the contract is in effect.  OCTuS issued 30,000 shares under this agreement during the year ended December 31, 2009, valued at $9,300 and recorded as share-based compensation.  This contract was terminated October 31, 2009 by mutual agreement.  The shares were issued in reliance on Section 4(2) of the Securities Act.  The recipient of
the shares represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, that the recipient understood the speculative nature of the acquisition of the shares, and that the recipient was familiar with the business of OCTuS, had an opportunity to ask questions of the officers of OCTuS, and understood
the investment risks involved in acquiring the shares.
 
 On August 12, 2009, OCTuS entered into a consulting agreement with each of Daniel Tomasello and Mark Miyamoto to assist with sales activities, and granted each of the consultants an option to purchase 30,000 shares of OCTuS’ common stock at $0.39 per share.  The options vest ratably over six months and expire on August 17, 2012.  The options each had a value of $11,091 on the date of grant.  The consulting agreement with Mr. Tomasello was terminated effective November 23, 2009.  The shares were issued in reliance on Section 4(2) of the Securities
Act.  The recipient of the shares represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, that the recipient understood the speculative nature of the acquisition of the shares, and that the recipient was familiar with the business of OCTuS, had an opportunity to ask questions of the
officers of OCTuS, and understood the investment risks involved in acquiring the shares.
 
 In September 2009, OCTuS entered into a software development contract with an individual that required OCTuS to issue 91,000 shares of common stock upon execution of the agreement as part of the developer’s compensation.  The shares were valued at $30,000 and recorded as share-based compensation.  OCTuS sent a notice of termination of this agreement to the contractor on January 13, 2010 and considers the contract terminated.  The shares were issued in reliance on Section 4(2) of the Securities Act.  The recipient of the shares represented that the securities
were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, that the recipient understood the speculative nature of the acquisition of the shares, and that the recipient was familiar with the business of OCTuS, had an opportunity to ask questions of the officers of OCTuS, and understood the investment risks involved in acquiring
the shares.
 
 In October 2009, OCTuS entered into a one year consulting agreement with Corporate Profile Inc. to provide investor relations services.  The agreement provided for the issuance of 350,000 shares of common stock.  The agreement was terminated by OCTuS on January 8, 2010, with no shares issued.  The agreement was entered into in reliance on Section 4(2) of the Securities Act.  The recipient represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or
distribution of any part thereof in violation of the Securities Act, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, that the recipient understood the speculative nature of the acquisition of the shares, and that the recipient was familiar with the business of OCTuS, had an opportunity to ask questions of the officers of OCTuS, and understood the investment risks involved in acquiring the shares.
 
 14
 In June, November and December2009, OCTuS issued convertible secured promissory notes (the “Notes”) with a collective  principal amount of $135,000 to two investors.  The Notes bear interest at a rate of 10% per annum and is 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 Note is 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 note a security interest of all assets of OCTuS, ranking before all preferred and common shareholders and subordinated to the existing senior convertible debt.  The Note 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 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 is $59,000.  The intrinsic value of the conversion feature totaled $63,817 resulting in a discount of $122,817 to the notes payable.  The securities were issued without any public solicitation, to a limited number of investors.  The shares were issued in reliance on Section 4(2) of the Securities Act.  Each investor represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the
Securities Act.  Each investor also represented that they had an opportunity to ask questions of management of OCTuS, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the securities and the business of the Company, that the recipient understood the speculative nature of the acquisition of the securities, understood the investment risks involved in acquiring the securities and was an accredited investor as defined in Regulation D.
 
 In January 2010, OCTuS entered into a three-month consulting agreement with each of Mananya Chansanchai to provide services relating to energy solutions program management, and Dave Glende to assist with development of the Company’s product and services roadmap and overall technology-based product offerings, and John Walter to assist with creation of a marketing plan for Wickool and assist with implementation of a distribution/dealer program for Wickool.  These agreements call for OCTuS to issue a total of 70,000 shares of common stock each month the contracts are in effect.  The
shares issuable under these agreements were issued in reliance on Section 4(2) of the Securities Act.  Each recipient of the shares represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, that the recipient understood the speculative nature of the acquisition of the shares, and that the
recipient was familiar with the business of OCTuS, had an opportunity to ask questions of the officers of OCTuS, and understood the investment risks involved in acquiring the shares.
 
 In January 2010, OCTuS entered into a three-month business and financial advisory services contract with DCA Partners LLC providing for OCTuS to issue 30,000 shares of common stock each month the contract is in effect.  The shares were issued in reliance on Section 4(2) of the Securities Act.  The recipient of the shares represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, that the recipient had a
pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, that the recipient understood the speculative nature of the acquisition of the shares, and that the recipient was familiar with the business of OCTuS, had an opportunity to ask questions of the officers of OCTuS, and understood the investment risks involved in acquiring the shares.
 
 In February 2010, OCTuS entered into a three-month consulting agreement with George Condon to provide services relating to development, implementation and management of Octus Energy Savings Program (OctusESP) for commercial brokers and other referral sources.  The agreement provided for OCTuS to issue 15,000 shares of common stock each month the contract is in effect.  The shares were issued in reliance on Section 4(2) of the Securities Act.  The recipient of the shares represented that the securities were being acquired for investment purposes, for the recipient’s own
account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, that the recipient understood the speculative nature of the acquisition of the shares, and that the recipient was familiar with the business of OCTuS, had an opportunity to ask questions of the officers of OCTuS, and understood the investment risks involved in acquiring the shares.
 
 15
 In February 2010, OCTuS entered into a six month agreement with TPC Holdings to provide public relations services.  The agreement provided for OCTuS to issue 1,000,000 shares of common stock at a purchase price of $0.0001 per share.  All services were not performed 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.  The shares were issued in
reliance on Section 4(2) of the Securities Act.  The recipient of the shares represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the shares and the business of the Company, that the recipient understood the speculative nature of the acquisition of the shares, and that the recipient was familiar with the business of OCTuS, had
an opportunity to ask questions of the officers of OCTuS, and understood the investment risks involved in acquiring the shares.
 
 During the first quarter of 2010, OCTuS issued convertible secured promissory notes (the “2010 Notes”) with a principal amount of $35,000 to five investors for proceeds of $30,000 and, in the case of one investor, conversion of an outstanding promissory note into a convertible note.  The 2010 Notes bear interest at a rate of 10% per annum and are due two years from the date of issuance.  Accrued interest is paid semi-annually, with the first payment due six months after the date the Notes were 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 note 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 $0.35 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 140,000 shares of OCTuS common stock at an exercise price of $0.01 per share.  The term of the warrants is eighteen months.  The securities were issued without any public solicitation, to a limited number of investors.  The shares were issued in reliance on Section 4(2) of the Securities Act.  Each investor represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act.  Each investor also represented that they had an opportunity to ask questions of management of OCTuS, understood the investment risks involved
in acquiring the securities, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the securities and the business of the Company and that the recipient understood the speculative nature of the acquisition of the securities and was an accredited investor as defined in Regulation D.


Equity Compensation Plans





We have a stock option plan for option grants to our directors, officers, employees and consultants.  Such options are granted at fair value, vest over three to five years, and expire not more than ten years from date of grant. As of December 31, 2009, we have reserved a total of 450,000 shares of common stock for exercise under the stock option plan.  As of December 31, 2009, one option for 15,000 shares and one option for 30,000 shares at a grant price of $0.39 per share were issued in August 2009 with a term of three years.  Accordingly, 405,000 shares are available for grant under the stock option plan.  The remaining life of the option is 2.75
years.





Penny Stock Regulation





Shares of our common stock are subject to rules adopted by the Securities and Exchange Commission that regulate broker-dealer practices in connection with transactions in "penny stocks". Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in those securities is provided by the exchange or system). The penny stock rules require that a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, deliver a standardized risk disclosure document prepared
by the Securities and Exchange Commission, which contains the following:


·
a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;


·
a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to violation to such duties or other requirements of securities' laws;


·
a brief, clear, narrative description of a dealer market, including "bid" and "ask" prices for penny stocks and the significance of the spread between the "bid" and "ask" price


·
a toll-free telephone number for inquiries on disciplinary actions;


·
definitions of significant terms in the disclosure document or in the conduct of trading in penny stocks; and


·
such other information and is in such form (including language, type, size and format), as the Securities and Exchange Commission shall require by rule or regulation.





Prior to effecting any transaction in penny stock, the broker-dealer also must provide the customer the following:


·
the bid and offer quotations for the penny stock;


·
the compensation of the broker-dealer and its salesperson in the transaction;





16


·
the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and


·
monthly account statements showing the market value of each penny stock held in the customer's account.





In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for a stock that becomes subject to the penny stock rules. Holders of shares of our common stock may have
difficulty selling those shares because our common stock will probably be subject to the penny stock rules.





Purchases of Equity Securities





None during the period covered by this report.





ITEM 6.SELECTED FINANCIAL DATA





As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.




ITEM 7.  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 THAT 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. NO
ASSURANCE CAN BE GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.





17


Critical Accounting Policy and Estimates





Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our 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 ongoing 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. As we did not engage in active business operations during 2008, the most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate amounts to accrue for accounting and legal expenses. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in this Annual Report.





Management's Discussion and Analysis of Financial Condition





This information should be read in conjunction with the audited consolidated financial statements and notes contained herein.





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 and demand response management program for the energy management market in the United States.





We are actively seeking technologies and business opportunities in the smart energy sector, which may include the licensing, acquisition or development of smart energy and energy efficiency products or technologies as part of the OctusSEP (Smart Energy Platform).  We intend to recruit management, advisors and affiliates with sufficient experience needed to review and qualify such technologies and business opportunities for our involvement.  Although we are seeking 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.  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.


Results of Operations for the Year Ended December 31, 2009 Compared to Year Ended December 31, 2008





We did not realize any revenues during either the year ended December 31, 2009 or the year ended December 31, 2008.





During the year ended December 31, 2009, we reported a net loss of $932,011 or $0.02 per share, compared to a net loss of $66,865 or $0.00 per share for the year ended December 31, 2008. We expect to incur losses until such time, if ever, we begin generating revenue from operations.




During the year ended December 31, 2009, our general and administrative expenses were $784,430, as compared to $31,866 for 2008. General and administrative expenses consisted primarily of payroll expenses and share based compensation.
 
 Interest expense for the year ended December 31, 2009 was $147,581 compared to $34,999 incurred during 2008.





18
 
 As of December 31, 2009, we had significant tax credits and research carry-forwards for federal tax reporting purposes that expire through 2009. Additionally, we have federal and state net operating loss carry-forwards, expiring through 2027. Because of a substantial change in our ownership resulting from an initial public offering, an annual limitation of approximately $600,000 has been placed on utilization of the loss carry forwards generated prior to our initial public offering.




Liquidity and Capital Resources





Cash on hand as of December 31, 2009 was $23,003. Our total assets were $24,689 as of December 31, 2009. Our current liabilities were $495,915 as of December 31, 2009, including $102,236 in accounts payable, $171,700 in stock payable,  $26,750 in accrued liabilities, $63,986 in accrued liabilities, $5,000 notes payable, $32,750 related parties, $88,500 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 Sasaima Holdings, SA who already held a promissory note in the amount of $113,747.  The terms 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 year ending December 31, 2009 was $28,146.  The current portion of this
note is $88,500 at December 31, 2009.  Upon conversion of the outstanding principal and accrued interest, this party would own greater than 10% of the outstanding shares on a fully diluted basis.





On December 6, 2009, we entered into a Reserve Equity Financing Agreement (“REF”) with AGS Capital Group, LLC (“AGS”), pursuant to which AGS committed to purchase, from time to time over a period of two years, shares of our common stock for cash consideration up to $5,000,000, subject to certain conditions and limitations.  In connection with the REF, we also entered into a registration rights agreement with AGS dated December 6, 2009.
 
 Under the REF, for a period of 24 months from the effectiveness of a registrationstatementfiled pursuant to the registration rights agreement (the “Registration Statement”), we may, from time to time, at our discretion, and subject to certain conditions that we must satisfy, draw down funds under the REF by selling shares of our common stock to AGS.  The purchase price of these shares will be 92% of the “VWAP” of the common stock during the five consecutive trading days after we give AGS a notice of an advance
of funds (an “Advance”) under the REF (the “Pricing Period”). “VWAP” generally means, as of any date, the daily dollar volume weighted average price of our common stock as reported by Bloomberg, L.P. or comparable financial news service.  The amount of an Advance will automatically be reduced by 50% if on any day during the Pricing Period, the VWAP for that day does not meet or exceed 85% of the VWAP for the five trading days prior to the notice of Advance (the “Floor Price”).  We also will issue unregistered shares of our common stock to AGS equaling 10% of the shares issued in each Advance.  The REF does not prohibit the Company from raising additional debt or equity financings, other than financings similar to the REF.
 
 Our ability to require AGS to purchase our common stock is subject to various limitations.  The maximum amount of each Advance is 50% of the average daily trading volume for the five days immediately preceding the notice of Advance, as reported by Bloomberg or comparable financial news service (the “Maximum Advance Amount”).  In addition, unless AGS agrees otherwise, a minimum of five calendar days must elapse between each notice of Advance.  In addition, before AGS is obligated to buy any shares of our common stock pursuant to a notice of Advance, the following
conditions, none of which is in AGS’s control, must be met:
 
 ·
The Company shall have filed with the SEC a Registration Statement with respect to the resale of the shares of common stock issued to AGS in accordance with and subject to the terms of the registration rights agreement.
 
 ·
The Company shall have obtained all permits and qualifications required by any applicable state in accordance with the registration rights agreement for the offer and sale of the shares of common stock, or shall have the availability of exemptions therefrom.  The sale and issuance of the shares of common stock shall be legally permitted by all laws and regulations to which the Company is subject.
 
 ·
There shall not be any fundamental changes to the information set forth in the Registration Statement which are not already reflected in a post-effective amendment to the Registration Statement.
 
 ·
The Company shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the REF agreement and the registration rights agreement to be performed, satisfied or complied with by the Company.
 
 ·
No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits the consummation of or which would materially modify or delay any of the transactions contemplated by the REF agreement, and no proceeding shall have been commenced that may have the effect of prohibiting the consummation of or materially modify or delay any of the transactions contemplated by the REF Agreement.
 
 19
 
 ·
The common stock is trading on a principal market (as defined in the REF, and including the OTC Bulletin Board).  The trading of the common stock is not suspended by the SEC or the principal market.  The issuance of shares of common stock with respect to the applicable closing will not violate the shareholder approval requirements of the principal market.  The Company shall not have received any notice threatening the continued quotation of the common stock on the principal market and the Company shall have no knowledge of any event that would be more likely than not to have the effect of causing the common stock to not be trading or quoted on a principal market.
 
 ·
The amount of an Advance shall not exceed the Maximum Advance Amount.  In no event shall the number of shares issuable to AGS pursuant to an Advance cause the aggregate number of shares of common stock beneficially owned by AGS and its affiliates to exceed 9.99% of the then outstanding shares of common stock of the Company (“Ownership Limitation”).  Any portion of an Advance that would cause AGS exceed the Ownership Limitation shall automatically be withdrawn.  For the purposes of this provision, beneficial ownership is calculated in accordance with Section 13(d) of the Exchange Act.
 
 ·
The Company has no knowledge of any event which would be more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective at Closing.
 
 ·
AGS shall have received an Advance notice executed by an officer of the Company and the representations contained in such Advance notice shall be true and correct.
 
 There is no guarantee that we will be able to meet the foregoing conditions or any other conditions under the REF agreement or that we will be able to draw down any portion of the amounts available under the REF.
 
 There is no contractual limit to the number of shares that we may be required to issue to obtain funds from the REF as it is dependent upon our share price, which varies from day to day.  If we draw down amounts under the REF when our share price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher.  This could cause downward pressure on the price of our common stock.
 
 The REF contains representations and warranties of the Company and AGS that are typical for transactions of this type.  AGS agreed that during the term of the REF, neither AGS nor any of its affiliates, nor any entity managed or controlled by it, will, or cause or assist any person to, enter into or execute any short sale of any shares of our common stock as defined in Regulation SHO promulgated under the Exchange Act.  The REF also contains a variety of covenants on the part of the Company which are typical for transactions of this type, as well as the obligation, without the prior written
consent of AGS, not to enter into any other equity line of credit agreement with a third party during the term of the REF.
 
 The REF obligates the Company to indemnify AGS for certain losses resulting from a misrepresentation or breach of any representation or warranty made by the Company or breach of any obligation of the Company.  AGS also indemnifies the Company for similar matters.
 
 The Company paid no fees, and is not obligated to pay any fees in the future, in connection with the REF, other than a due diligence fee of $10,000, which will be paid at the date of the first draw.
 
 The Company may terminate the REF effective upon fifteen trading days’ prior written notice to AGS; provided that (i) there are no Advances outstanding, and (ii) the Company has paid all amounts owed to AGS pursuant to the REF.  AGS is obligated to make an Advance to the Company pursuant to the REF within 15 days of such request by the Company.
 
 The Company financed its operations during the year ended December 31, 2009 primarily through advances from our CEO and CFO of $32,750 and issuance of convertible notes payable of $135,000.  See Note 6 to our financial statements for a description of the terms of these notes.
 
 20
 During the first quarter of 2010, OCTuS issued convertible secured promissory notes (the “2010 Notes”) with a principal amount of $35,000 to five investors for proceeds of $30,000 and, in the case of one investor, conversion of an outstanding promissory note into a convertible note.  The 2010 Notes bear interest at a rate of 10% per annum and are due two years from the date of issuance.  Accrued interest is paid semi-annually, with the first payment due six months after the date the Notes were 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 note 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 $0.35 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 140,000 shares of OCTuS common stock at an exercise price of $0.01 per share.  The term of the warrants is eighteen months.  The securities were issued without any public solicitation, to a limited number of investors.  The shares were issued in reliance on Section 4(2) of the Securities Act.  Each investor represented that the securities were being acquired for investment purposes, for the recipient’s own account, not as nominee or agent and not with a view to the resale or distribution of any part thereof in violation of the Securities Act.  Each investor also represented that they had an opportunity to ask questions of management of OCTuS, understood the investment risks involved
in acquiring the securities, that the recipient had a pre-existing relationship with the Company or one or more of its officers or directors of a nature and duration that enabled the recipient to be aware of the business of the Company, that the recipient had the opportunity to ask questions of, and receive from answers from, executive officers of the Company with respect to the acquisition of the securities and the business of the Company and that the recipient understood the speculative nature of the acquisition of the securities.
  In addition to revenues that we may receive from customers and sales of products and services, we will need to raise additional funds through debt or equity financing to achieve our current business strategy.  The financing we need may not be available when needed.  Even if this financing is available, it may be on terms that we deem unacceptable or are materially adverse to the interests of existing investors with respect to dilution of book value, dividend preferences, liquidation preferences, or other terms.  Our inability to obtain financing will inhibit our ability to
implement our development strategy, and as a result, could require us to diminish or suspend our development strategy and possibly cease our operations.  If we are unable to obtain financing on reasonable terms, we could be forced to delay, scale back or eliminate certain product and service development programs.  In addition, such inability to obtain financing on reasonable terms could have a negative effect on our business, operating results or financial condition to such an extent that we are forced to restructure, file for bankruptcy, sale assets or cease operations.  We cannot provide assurances that we will be able to enter into any new investment, or that the terms of any agreements relating to any new investment will be on terms favorable to the Company.


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.





21





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





OCTUS , Inc.Table of ContentsPageReport of Independent Registered Public Accounting Firm
23Consolidated Balance Sheets
24Consolidated Statements of Operations
25Consolidated Statements of Changes in Stockholders’ Deficit
26Consolidated Statements of Cash Flows
27Notes to Consolidated Financial Statements
28





22





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the Shareholders and Board of Directors


Octus, Inc.


Davis, California





We have audited the accompanying consolidated balance sheets of Octus, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for the years ended December 31, 2009 and 2008.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States.)  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Octus, Inc. as of December 31, 2009 and 2008, and the results of its operations, and its cash flows for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.





The accompanying consolidated financial statements have been prepared assuming that Octus will continue as a going concern.  As discussed in Note 2 to the consolidated financial statements, Octus has suffered recurring losses from operations and has working capital and stockholders’ deficits.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also discussed in Note 2.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.




/s/ GBH CPAs, PC




GBH CPAs, PC


www.gbhcpas.com


Houston, Texas


April 15, 2010





23


OCTUS , INC.


CONSOLIDATED BALANCE SHEETS





December 31, 2009


December 31, 2008ASSETSCURRENT ASSETSCash

23,003


-Other receivable

1,686


-Total current assets

24,689


-TOTAL ASSETS

$
24,689


$
-LIABILITIES AND STOCKHOLDERS’ DEFICITCURRENT LIABILITIESAccounts payable

$
102,236


$
32,151Accrued liabilities


26,750



-Stock payable


171,700



-Accounts payable - related parties


4,993



3,169Accrued liabilities - related parties


63,986



43,542Notes payable


5,000



-Notes payable - related parties


32,750



-Convertible notes payable – related parties


88,500



441,853Total current liabilities


495,915



520,715LONG TERM LIABILITIESConvertible notes payable - related parties


392,039



-Convertible notes payable, less debt discount of $17,709 and $0, respectively


117,291



-Total liabilities


1,005,245



520,715Commitments 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 sharesauthorized, 43,867,072 and 13,437,072 shares issued and outstanding, respectively


43,867



13,437Additional paid-in capital


23,299,212



22,857,472Accumulated deficit


(24,323,635
)


(23,391,624
)Total stockholders’ deficit


(980,556
)


(520,715
)TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

$
24,689


$
-


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





24


OCTUS , INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008





2009


2008Revenues

$
-


$
-General and administrative expenses


784,430



31,866Loss from operations


(784,430
)


(31,866
)Interest expense


147,581



34,999Net loss

$
(932,011
)

$
(66,865
)Net loss per common share – basic and diluted

$
(0.02
)

$
(0.00
)Weighted average shares outstanding – basic and diluted


39,223,812



13,437,072





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





25


OCTUS , INC.


CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT


FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008





Common stockNumber





Additionalof





Paid-in


AccumulatedShares


Amount


Capital


Deficit


TotalBalance as of December 31, 2007


13,437,072


$
13,437


$
22,857,472


$
(23,324,759
)

$
(453,850
)Net loss


-



-



-



(66,865
)


(66,865
)Balance as of December 31, 2008


13,437,072



13,437



22,857,472



(23,391,624
)


(520,715
)Common shares issued for services


30,430,000



30,430



304,270



-



334,700Stock options issued for services


-



-



14,653



-



14,653Discount  on convertible notes


-



-



122,817



-



122,817Net loss














(932,011
)


(932,011
)Balance as of December 31, 2009


43,867,072


$
43,867


$
23,299,212


$
(24,323,635
)

$
(980,556
)





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





26


OCTUS , INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008





2009


2008OPERATING ACTIVITIESNet loss

$
(932,011
)

$
(66,865
)Adjustments to reconcile net loss to net cashused in operating activities:Amortization of debt discount


105,108



-Share-based compensation


349,353



-Changes in operating assets and liabilitiesAccounts payable and accrued liabilities:


96,835



14,840Stock payable


171,700



-Accounts payable and accrued liabilities – related parties


60,954



34,999Net cash used in operating activities


(148,061
)


(17,026
)INVESTING ACTIVITIESIncrease in deposit


(1,686
)


-Net cash provided by investing activities


(1,686
)


-FINANCING ACTIVITIESProceeds from notes payable – related parties


32,750



17,026Proceeds from notes payable


5,000



-Proceeds from convertible debt


135,000



-Net cash provided by financing activities


172,750



17,026Net change in cash


23,003



-CASH AT BEGINNING OF YEAR


-



-CASH AT END OF YEAR

$
23,003


$
-SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid for interest

$
1,090


$
-Cash paid for income taxes

$
-


$
-NONCASH INVESTING AND FINANCING ACTIVITIES:Conversion of accrued interest into convertible notes

$
38,686


$
-Debt discount from warrants issued with convertible debt

$
122,817


$
-Conversion of liabilities into convertible notes payable - related parties

$
-


$
442,643
  The accompanying notes are an integral part of these consolidated financial statements.




27


OCTUS , INC.


Notes to Consolidated Financial Statements





Note 1 – Summary of Significant Accounting Policies





Organization





Octus, Inc. (“OCTuS”) was formed as a California corporation in 1983.  On December 29, 2001, a majority of the shareholders voted to change our state of incorporation from California to Nevada.  In December 2003, the change was completed and OCTuS became a Nevada corporation.  Today OCTuS is seeking to become a leading renewable energy efficiency company that brings innovative energy efficiency and renewable energy solutions to the commercial and public sector markets.  OCTuS intends to pursue and facilitate renewable energy efficiency projects involving energy efficiency systems, and products that OCTuS may develop, acquire, license or
distribute.  OCTuS believes that the market demand for energy conservation and energy creation presents an attractive business opportunity.





Principles of Consolidation





All of our subsidiaries are inactive.  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.





Reclassification





Certain amounts for prior periods have been reclassified to conform to the current presentation.





Cash and Cash Equivalents





For the purpose of the statements of cash flows, all highly liquid investments with the maturity of three months or less are considered to be cash equivalents.





Revenue Recognition





We currently have no revenue generating operations.  We plan to record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.





Income Taxes





OCTuS is a taxable entity and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.  Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when the temporary differences reverse.  The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change.  A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be
realized.  Interest and penalties associated with income taxes are included in selling, general and administrative expense.





OCTuS has adopted ASC 740 “Accounting for Uncertainty in Income Taxes” (formerly FIN 48) which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that OCTuS has taken or expects to take on a tax return.  ASC 740 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits.  The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority
having full knowledge of all relevant information.  As of December 31, 2009, OCTuS had not recorded any tax benefits from uncertain tax positions.





Fair Value of Financial Instruments





Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2009.  The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values.  These financial instruments include accounts payable, accrued expenses and notes payable.  Fair values were assumed to approximate carrying values because these financial instruments are short term, their carrying amounts approximate fair values, or they are payable on demand.





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 years ended December 31, 2009 and 2008, common stock equivalents were not included in the calculation, as their effect would be anti-dilutive.





28





Stock-Based Compensation





OCTuS follows the Accounting Standards Codification ASC 718 - Compensation - Stock Compensation (formerly SFAS No. 123 (R). Under ASC 718, OCTuS estimates the fair value of each stock option award at the grant date by using the Black-Scholes option pricing model and common shares based on the last quoted market price of OCTuS’ common stock on the date of the share grant. The fair value determined represents the cost for the award and is recognized over the vesting period during which an employee is required to provide service in exchange for the award. As share-based compensation expense is recognized based on awards ultimately expected to vest, OCTuS reduces the expense for
estimated forfeitures based on historical forfeiture rates. Previously recognized compensation costs may be adjusted to reflect the actual forfeiture rate for the entire award at the end of the vesting period. Excess tax benefits, as defined in ASC 718, if any, are recognized as an addition to paid-in capital.





Subsequent Events





OCTuS evaluated events occurring between the end of our fiscal year, December 31, 2009, and April 15, 2010 when the consolidated financial statements were issued.





Recent Pronouncements





Effective January 1, 2009, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 (ASC 810 “Consolidation”) which requires companies:




•
To recharacterize minority interests, previously classified within liabilities, as noncontrolling interests reported as a component of consolidated equity on the balance sheet,




•
To include total income in net income, with separate disclosure on the face of the consolidated income statement of the attribution of income between controlling and noncontrolling interests, and




•
To account for increases and decreases in noncontrolling interests as equity transactions with any difference between proceeds of a purchase or issuance of noncontrolling interests being accounted for as a change to the controlling entity’s equity instead of as current period gains/losses in the consolidated income statement. Only when the controlling entity loses control and deconsolidates a subsidiary will a gain or loss be recognized.





SFAS No. 160 was effective prospectively for fiscal years beginning on or after December 15, 2008 except for its specific transition provisions for retroactive adoption of the balance sheet and income statement presentation and disclosure requirements for existing minority interests that are reflected in these consolidated financial statements for all periods presented. The new authoritative guidance did not have an impact on OCTuS’ consolidated financial statements.





In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168” or ASC 105-10). SFAS 168 (ASC 105-10) establishes the Codification as the sole source of authoritative accounting principles recognized by the FASB to be applied by all nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS 168 (ASC 105-10) was prospectively effective for financial statements issued for fiscal years ending on or after September 15, 2009, and interim periods within those fiscal years. The adoption of SFAS 168 (ASC 105-10) on July 1, 2009 did not impact
OCTuS’ results of operations or financial condition. The Codification did not change GAAP; however, it did change the way GAAP is organized and presented. As a result, these changes impact how companies reference GAAP in their financial statements and in their significant accounting policies. OCTuS implemented the Codification in this Report by providing references to the Codification topics alongside references to the corresponding standards.





There were various other accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our consolidated financial position, operations or cash flow.





Note 2 – Going Concern





The accompanying 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 $471,226, a stockholders’ deficit of $980,556, and an accumulated deficit of $24,323,635 as of December 31, 2009.  In addition, OCTuS has generated recurring losses, aggregating $932,011 and $66,865 in 2009 and 2008, respectively, and currently has no revenue generating operations.





We are actively seeking technologies and business endeavors in the alternative energy sector, which may include the licensing or acquisition of alternative energy and energy efficiency products or technologies.  Although we are seeking such opportunities, it is unlikely that we will be able to consummate any such transaction which would generate sufficient revenues to sustain our operations. 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.  OCTuS is reliant on a related party to provide working capital.  There is no assurance that such related party will continue to provide working capital.





29





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 – 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 for an
interim period to defer receipt of payment of some or all of their base salaries based on the outstanding achievements of one or more of the milestones described below and OCTuS’ ability to pay salaries. 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 year ended December 31, 2009.





Under the terms of the restricted stock purchase agreements, a portion of the shares is subject to repurchase by OCTuS if certain milestones are not achieved before the first anniversary of the date of the purchase agreements.  For each of the following events that are not achieved before the first anniversary of the date of the purchase agreements, 25% of the shares are subject to repurchase by OCTuS at the original purchase price per share.  If all four milestones are achieved, then all repurchase rights of OCTuS will lapse.  The milestone events are:  completion of sale of equity securities of OCTuS with proceeds to OCTuS of $100,000 or more;
execution by OCTuS of a license agreement or purchase contract with at least two third-party persons or entities to acquire or license technologies and/or products related to OCTuS’ intended business; receipt of revenues from the sale by OCTuS of products licensed or owned by OCTuS; and execution by OCTuS of a renewable energy and/or energy efficiency project contract.  In the event of a change in control of OCTuS, defined in the agreement to include events such as a merger or sale of assets transaction which results in more than a 50% change of ownership of OCTuS, all restrictions lapse and the shares will become fully vested. The milestones were met in their entirety prior to February 24, 2010 resulting in the lapse of all repurchase rights OCTuS held.





There were 43,437,072 shares of common stock outstanding after the issuance of the shares in accordance with the purchase agreements.  The 30,000,000 shares issued pursuant to the purchase agreements represented approximately 69% of the then outstanding shares of OCTuS.





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 (including accrued but unused vacation leave) 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.


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 Sasaima Holdings, SA who already held a promissory note in the amount of $113,747.  The terms 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 year ending
December 31, 2009 was $28,146.  The current portion of this note is $88,500 at December 31, 2009.  Upon conversion of the outstanding principal and accrued interest, this party would own greater than 10% of the outstanding shares on a fully diluted basis.


Note 4 – 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. During February 2010, this loan and accrued interest were converted into the convertible note and warrant offering.





Note 5 – 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.  In November and December 2009, Mr. Soderquist loaned OCTuS an additional $17,500 and $5,250, respectively for total proceeds for the year ended December 31, 2009 of $32,750.  These loans bear interest at 10% and are due upon demand.





Note 6 – Convertible Notes Payable




30
 
 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 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 year ending December 31, 2009 was $28,146. The current
portion of this note is $88,500 at December 31, 2009.
 
 In June through December of 2009, OCTuS issued convertible secured promissory notes (the “Note”) with an aggregate principal amount of $135,000 to investors.  The Note bears interest at a rate of 10% per annum and is 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 Note is 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 note a security interest of all assets of OCTuS, ranking before all preferred and common shareholders and subordinated to the existing senior convertible debt.  The Note 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 Note, OCTuS issued warrants to the note holder
to purchase 540,000 shares of OCTuS common stock at an exercise price of $0.01 per share.  The term of the warrants is 180 days.  The relative fair value of the warrants is $59,000.  The intrinsic value of the conversion feature totaled $63,817 resulting in a discount of $122,817 to the notes payable.  The discount will be amortized over the life of the notes.  The details are as follows:
 
 Face value of notes payable

$
135,000Less:  discount related to warrants


(59,000
)discount related to conversion feature


(63,817
)Add:  amortization of debt discount


105,108Carrying value of notes at December 31, 2009

$
117,291


Note 7 – Equity Transactions





On February 24, 2009, OCTuS issued the CFO and CEO each 15,000,000 shares of common stock.  These shares were valued at $270,000 and recorded as share-based compensation during the year ended December 31, 2009.





On May 5, 2009, OCTuS entered into an employment agreement with John Argo pursuant to which Mr. Argo will serve as Director, Energy Projects & Finance of OCTuS. The employment agreement has a term of three years, through April 30, 2012, with a base annual salary of $120,000. Concurrently, OCTuS issued 250,000 shares of common stock, valued at $12,500 to Mr. Argo, and recorded as share-based compensation.





Warrant and option activity during the year ended December 31, 2009 is as follows:





Warrants


Weighted Average Exercise Price


Weighted Average Remaining Contractual Term ( in Years)Outstanding at December 31, 2008


-


$
-



-Granted


540,000



0.01



1.3Exercised


-



-



-Forfeited


-



-



-Outstanding at December 31, 2009


540,000


$
0.01



1.1Exercisable at December 31, 2009


540,000





Options


Weighted Average Exercise Price


Weighted Average Remaining Contractual Term ( in Years)Outstanding at December 31, 2008


-


$
-



-Granted


35,000



0.36



3.0Exercised


-



-



-Forfeited


-



-



-Outstanding at December 31, 2009


35,000


$
0.36



2.6Exercisable at December 31, 2009


35,000





On August 17, 2009, OCTuS entered into consulting agreements and granted two consultants the option to purchase a total of 35,000 shares of OCTuS’ common stock at $0.39 per share.  These options vest ratably over six months and expire on August 17, 2012. The options had a value of $19,538 on the date of grant.





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 weighted-average assumptions used for grants during the year ended December 31, 2009 as follows:





December 31, 2009Dividend yield

0.00%Expected volatility

191% to 424%Risk free interest rate

1.54% to 2.75%Expected lives in years

0.5 to 3





31


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 effect.  OCTuS issued 70,000 shares under this agreement during the year ended December 31, 2009, valued at $20,900 and recorded as share-based compensation.





In July 2009, OCTuS entered into a three-month consulting agreement which calls for OCTuS to issue 20,000 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 $2,000 stipend each month the contract is in effect.  OCTuS issued 80,000 shares under this agreement during the year ended December 31, 2009, valued at $22,200 and recorded as share-based compensation.





In July 2009, OCTuS entered into a three-month consulting agreement which provides for OCTuS to issue 10,000 shares of common stock each month the contract is in effect.  OCTuS issued 30,000 shares under this agreement during the year ended December 31, 2009, valued at $9,300 and recorded as share-based compensation.





In August 2009, OCTuS entered into a twelve-month consulting agreement which calls for OCTuS to pay $3,000 and issue 10,000 shares of common stock each month the contract is in effect.  OCTuS issued 30,000 shares under this agreement during the year ended December 31, 2009, valued at $9,300 and recorded as share-based compensation.





In September 2009, OCTuS entered into a software development contract that required OCTuS to issue 91,000 shares of common stock as part of the developer’s compensation upon execution of the agreement.  The shares were valued at $30,000 and recorded as share-based compensation.  OCTuS sent a notice of termination of this Agreement to the contractor on January 13, 2010 and considers the contract null and void.





As of December 31, 2009, OCTuS had recorded a stock payable of $171,700 for 511,000 shares not issued pursuant to the terms of the consulting agreements noted above.





Preferred Stock





Octus has authorized a total of 2,000,000 shares of $0.001 par value preferred stock.  Of the Series A Preferred Stock, 300,000 shares are authorized and of the Series B Preferred Stock, 910,000 shares are authorized.  The Cumulative Series C Preferred Stock had 250,000 shares authorized.  The Series classification of the remaining authorized preferred shares has not yet been determined and such designation is at the discretion of the board of directors.  There were no preferred shares outstanding as of December 31, 2009 and 2008.





Note 8 – Income Taxes





Deferred income taxes are provided on a liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities as well as operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.





Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income. At December 31, 2009 the Company has recorded a 100% valuation allowance as management believes it is likely that any deferred tax assets will not be realized.





At December 31, 2009, the Company had net operating loss carryforwards of $23,869,174 that will expire between 2009 through 2029.





No tax benefit has been reported in the December 31, 2009 financial statements since the potential tax benefit is offset by the valuation allowance. Due to the change in the Tax Reform Act of 1986, net operating loss carryforwards for federal income tax reporting purposes may be subject to annual limitations in the event of certain changes in ownership. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years.




32





Note 9 – License Agreement





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 of $2,000 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 one and one half (11⁄2%) percent of net sales 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 ofmilestone conditions including:


(a) Milestone #1: Funding of Licensee:  $250,000 by December 31, 2010;
 (b) Milestone #2:  Manufacturing of Licensed Product: begins (including by a third party on behalf of Licensee) by May 31, 2010;
 (c) Milestone #3:  First Sales of Licensed Product or Licensed Services: by August 31, 2010; and
 (d) Milestone #4:  1,000 units of Licensed Product Sold: by August 31, 2011.
 
 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.


Note 10 – Equity Line of Credit





On December 6, 2009, OCTuS entered into a “Reserve Equity Financing Agreement” with AGS Capital Group, LLC (the “Facility”).  The signed agreement authorizes 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.   There have been no issuances under the Facility.





Note 11 – Subsequent Events





In January 2010, OCTuS entered into three three-month consulting agreements which call for OCTuS to issue 70,000 shares of common stock each month the contract is in effect.





In January 2010, OCTuS entered into an investment advisory services contract which calls for OCTuS to issue 30,000 shares of common stock each month the contract is in effect.  The term of the contract is three months and may be extended on a month to month basis.





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 effect.





In February 2010, OCTuS entered into a public relations contract which calls for OCTuS to issue 1,000,000 shares of common stock at a purchase price of $0.0001 per share.





During the first quarter of 2010, OCTuS issued convertible secured promissory notes (the “2010 Note”) with a principal amount of $30,000 to investors.  The 2010 Note bears interest at a rate of 10% per annum and is due two years from the date of issuance.  Accrued interest is paid semi-annually, with the first payment due six months after the date the Note is 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 note a security interest of all assets of OCTuS, ranking before all preferred and common shareholders and subordinated to the existing senior convertible debt.  The Note 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 $0.35 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 note holder to purchase 120,000 shares of OCTuS common stock at an exercise price of $0.01 per
share.  The term of the warrants is 18 months.





33





ITEM 9A(T).CONTROLS AND PROCEDURES





Disclosure Controls and Procedures





Our management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable
assurance of achieving the desired control objectives and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on such evaluation, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that as of December 31, 2009, the Company’s disclosure controls and procedures were not effective, at the reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Principal Executive Officer and
Principal Accounting Officer, as appropriate to allow timely discussions regarding required disclosure; due to the material weaknesses described below.
 
 In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure that our financial statements were prepared in accordance with generally accepted accounting principles.  Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations, changes in shareholder’s equity and cash flows for the periods presented.
 
 Management Report on Internal Control Over Financial Reporting
 
 Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.  Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Our internal control over financial reporting includes those policies and procedures that:
 
 1.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
 
 2.
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
 
 3.
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our financial statements.
 
 All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and reporting.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard No. 5) or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
 
 34
 Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of the period covered by this report based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  Based on the results of management’s assessment and evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our
internal control over financial reporting was not effective due to the material weaknesses described below:
 
 1.
Overall 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-K,
 
 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 no or minimal amounts of cash until the receipt of proceeds from issuance of convertible Notes at the end of June 2009 and December 2009 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-K.  Accordingly, notwithstanding the existence of the material weaknesses described in this Item, management believes that
the financial statements included in this Annual Report on Form 10-K 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.
 
 Remediation of Material Weaknesses
 
 The Company 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.
 
 Attestation Report of the Independent Registered Public Accounting Firm
 
 This amended annual report does not include an attestation report by the Company’s registered public accounting firm regarding internal control over financial reporting, because Management’s report in the annual report was not subject to attestation by the Company’s independent registered public accounting firm, pursuant to the temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
 
 Inherent Limitations on the Effectiveness of Controls
 
 Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in a cost-effective control system, no
evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.
 
 These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Projections of any
evaluation of controls effectiveness to future periods are subject to risks.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
 35
 Changes in Internal Control over Financial Reporting
 
 There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.




PART III




ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The following sets forth certain information about each of our executive officers and directors and their current positions with the Company. The information set forth below was provided by these individuals:





NAME
POSITION HELD
DIRECTOR SERVICE

AGEChristian Soderquist
President and Chief Executive Officer; Director
2009


41George Ecker
Chief Financial Officer; Director
2009


50





Christian Soderquist, 41, has more than 17 years of experience founding, managing, capitalizing and selling companies.  From 2004 to 2008 he served as a Director of Sierra Energy Corporation.  From 2004 to 2007 he co-founded and was Managing Director of Crescendo, a luxury real estate investment firm that was acquired in 2008 by Abercrombie and Kent.  From 2007 to 2008 he was a business consultant to companies in a variety of industries.  He also created and sold a marketing strategy firm that he grew to 130 clients, and founded and directed several software
companies.  Previously, Mr. Soderquist managed two business incubators, Technology Development Center and Venture Lab, and served on the board of directors of the Sacramento Entrepreneurship Academy (of which he was president for three years), the Sacramento Area Regional Technology Alliance, and UC Davis Connect.  He earned a BS from Cal Poly, San Luis Obispo, and an MBA from the University of California, Davis.  The board has concluded that Mr. Soderquist should serve on our board based on his experience in assisting, operating and growing start-up companies, and his knowledge of the markets in which the Company competes and intends to compete, and his knowledge of our company gained from his position as an officer of the Company.
 
 George Ecker, 50, has over 25 years of entrepreneurial and management experience in international and domestic ventures.  He is presently the President and Director of Nova Mobility Systems, a company specializing in the design and manufacture of rugged handheld mobile computers.  From 2002 until 2006 Mr. Ecker was the President of the Channel Financial Group, a financial services company providing corporate finance consulting as well as strategic services to international private equity managers.  He holds a Bachelor of Science degree in Finance, with honors, from the University
of the State of New York.  The board has concluded that Mr. Ecker should serve on our board based on his financial and executive experience in companies of different sizes, his financial background, and his knowledge of our company gained from his position as an officer of the Company.
 
 There are no orders, judgments, or decrees of any governmental agency or administrator, or of any court of competent jurisdiction, revoking or suspending for cause any license, permit or other authority to engage in the securities business or in the sale of a particular security or temporarily or permanently restraining any of our officers or directors from engaging in or continuing any conduct, practice or employment in connection with the purchase or sale of securities, or convicting such person of any felony or misdemeanor involving a security, or any aspect of the securities business or of theft or of any felony. Nor are any of the officers or directors of any corporation or entity affiliated with us so enjoined.





36


BOARD INDEPENDENCE





Standard of Independence





At this time, the Company is not subject to the requirements of a national securities exchange or an inter-dealer quotation system with respect to the need to have a majority of its directors be independent. In the absence of such requirements, the Company has elected to use the definition established by the NASDAQ independence rule which defines an “independent director” as “a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.”
The definition further provides that the following relationships are considered bars to independence regardless of the board's determination:





Employment by the Company. Employment of the director or a family member by the Company or any parent or subsidiary of the Company at any time thereof during the past three years, other than family members in non-executive officer positions.





$100,000 Compensation. Acceptance by the director or a family member of any compensation from the Company or any parent or subsidiary in excess of $100,000 during any twelve month period within three years of the independence determination.





Auditor Affiliation. A director or a family member of the director, being a partner of the Company's outside auditor or having been a partner or employee of the company's outside auditor who worked on the Company's audit, during the past three years.





Payments to or from an Affiliated Entity. A director who is, or has a family member who is, a partner in, or a controlling shareholder or an executive officer of, any organization to which the Company made, or from which the Company received, payments for property or services in the current or any of the past three fiscal years that exceed 5% of the recipient's consolidated gross revenues for that year, or $200,000, whichever is more, other than (i) payments arising solely from investments in the Company’s securities or (ii) payments made under non-discretionary charitable contribution matching programs.





Service on Compensation Committee of Another Entity. A director of the Company who is, or has a family member who is, employed as an executive officer of another entity where at any time during the past three years any of the executive officers of the Company serve on the compensation committee of such other entity.





Based on the foregoing definition, the board of directors has determined that we do not have any independent directors.





Standing Committees of the Board





At this time, the Company is a small business issuer whose common stock is authorized for quotation on the OTC Bulletin Board and is not subject to the requirements of a national securities exchange or an inter-dealer quotation system with respect to the establishment and maintenance of any standing committees. In any event, the Company, in February 2008, established a separate standing audit committee, compensation committee and nominating committee.





The only members of our audit committee are Directors Christian Soderquist and George Ecker. The firm is in search of additional qualified candidates. The audit committee performs the following functions: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; and (3) engaging outside advisors. The Company is not a "listed company" under SEC rules and therefore its audit committee is not required to be comprised of only independent directors. The members of the audit committee are not independent directors.  The audit committee does
not include an independent director who is an "audit committee financial expert" within the meaning of the rules and regulations of the SEC. The board has determined, however, that the members of the audit committee are able to read and understand fundamental financial statements and have substantial business experience that results in the member's financial sophistication. Accordingly, the board believes that the members of the audit committee have the sufficient knowledge and experience necessary to fulfill their duties and obligations required to serve on the audit committee.





The only members of our compensation committee are Directors Christian Soderquist and George Ecker.  This committee has two primary responsibilities: (1) to establish, review and approve CEO compensation and to review and approve other senior executive compensation, and (2) to monitor our management resources, structure, succession planning, development and selection process as well as the performance of key executives. It also oversees our Equity Plan and any other compensation and equity-based plans.





All of our directors serve on our nominating committee.





37


Compensation of the Board of Directors





Directors are not paid any fees or compensation for services as members of our board of directors or any committee thereof, but are reimbursed for their out-of-pocket expenses incurred in connection with attendance at meeting of the board of directors. We may, in the future, compensate non-employee directors who serve on our board of directors by paying cash compensation and/or the issuance of options under an equity incentive plan.





Section 16(A) Beneficial Ownership Reporting Compliance





Section 16(a) of the Securities Act of 1934 requires our directors, executive officers, and any persons who own more than 10% of a registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. SEC regulation requires executive officers, directors and greater than 10% stockholders to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during the year ended December 31, 2008, that none of our executive officers, directors, or greater than 10% stockholders were
subject to any applicable filing requirements.





Code of Ethics





A code of ethics relates to written standards that are reasonably designed to deter wrongdoing and to promote:




·
Honest and ethical conduct, including the ethical handling of actual or perceived conflicts of interest between personal and professional relationships;


·
Full, fair, accurate, timely and understandable disclosure in reports and documents that are filed with, or submitted to, the SEC and in other public communications made by an issuer;


·
Compliance with applicable governmental laws, rules and regulations;


·
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and


·
Accountability for adherence to the code.





In March 2004, we adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that our employees, officers (including executive officers, which include our principal executive officer and principal financial and accounting officer and persons performing similar functions) and directors are asked to uphold. This Code of Ethics covers all of the above-described standards of conduct.





A copy of our Code of Ethics may be requested from the Company, without charge, by contacting the Company’s chief financial officer at the Company’s principal executive offices.  We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K relating to any future amendments to or waivers from any provision of our Code of Ethics that relate to one or more of the items set forth in Item 406(b) of Regulation S-K by describing such amendments and/or waivers on such website, within four business days following the date of a waiver or a substantive amendment; and if we do not make such disclosures on our web site then we intend to make such disclosures on a
Form 8-K within the required time periods. Information on our Internet website is not, and shall not be deemed to be a part of this annual report on Form 10-K or incorporated into any other filings we make with the SEC.





ITEM 11.  EXECUTIVE COMPENSATION





Summary Compensation Table





There was no compensation required to be report under this Item paid to our executive officers or directors for the fiscal years ended December 31, 2008.





Name and Principal Position
Year
Salary

($)
Bonus

($)
Stock Awards

($)
Option Awards

($)
Other Compensation

($)
Total

($)Christian J. Soderquist

Chief Executive Officer
2009
19,230
-0-
135,000

(1)
-0-
-0-
154,230Georg M. Ecker

Chief Financial Officer
2009
19,230
-0-
135,000

(1)
-0-
-0-
154,230David S. Pere

[President, Financial Officer] (2)
2009
-0-
-0-
-0-
-0-
-0-
-0-


(1)
The stock awards reflected in the above table were valued in the aggregate based on the market price at the grant date in accordance with FASB ASC Topic 718.  The shares were issued to each of the above persons pursuant to restricted stock purchase agreements in consideration of their agreement to join the company as executive officers and directors, for services rendered to the company in connection with the development of business plans and strategies, and for related proprietary ideas concerning the company’s business strategy.  See the “Employment Contracts” below for a description of additional terms of the restricted stock purchase agreements relating to these shares.
  (2)
The named person was an executive officer of the Company, but resigned when Mr. Soderquist and Mr. Ecker became officers and directors of the Company.


Employment Contracts





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 the Company and Mr. Ecker will serve as Chief Financial Officer of the Company. Mr. Soderquist and Mr.Ecker were also appointed directors of the Company. Concurrently the Company executed restricted stock purchase agreements dated February 24, 2009, with each of Mr. Soderquist and Mr. Ecker.




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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 has agreed to 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 agreed to irrevocably waive their rights to any unpaid compensation for the 2009 year.  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.  The agreements provide that the Company will issue to each person 15,000,000 shares of common stock for services rendered and contributed to the Company, with the shares issued to each person having a fair market value of $135,000 based on the market price of the shares on the date of the agreements.
 Under the terms of the restricted stock purchase agreements, a portion of the shares is subject to repurchase by the Company if certain milestones are not achieved before the first anniversary of the date of the purchase agreements.  For each of the following events that are not achieved before the first anniversary of the date of the purchase agreements, 25% of the shares are subject to repurchase by the Company at the original purchase price per share.  If all four milestones are achieved, then all repurchase rights of the Company will lapse.  The milestone events
are:  completion of sale of equity securities of the Company with proceeds to the Company of $100,000 or more; execution by the Company of a license agreement or purchase contract with at least two third-party persons or entities to acquire or license technologies and/or products related to the Company’s intended business; receipt of revenues from the sale by the Company of products licensed or owned by the Company; and execution by the Company of a renewable energy and/or energy efficiency project contract.  In the event of a change in control of the Company, defined in the agreement to include events such as a merger or sale of assets transaction which results in more than a 50% change of ownership of the Company, all restrictions lapse and the shares will become fully vested.  The Company’s board of directors determined that the four
milestone events were met prior to February 24, 2010.  The financing milestone was satisfied by completion of the Company’s $100,000 financing transaction in June 2009.  The purchase contract milestone was satisfied by the Wickool license with the University of California and the February 2010 license agreement with EcoNexus, LLC.  The revenue milestone was achieved in February 2010 with the sale of a Wickool product.  The milestone relating to execution of a renewal energy or energy efficiency project contract was satisfied with the January 2010 contract with Quantum Energy Solutions to pursue specific joint projects and the February 2010 evaporative cooling project installation for an industrial building manager.  Since the board of directors consists of Mr. Soderquist and Mr. Ecker, the determination that the milestones
were satisfied was made by the persons who benefitted from that determination, and accordingly was not made by disinterested persons.
 
 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 her death, the officer (or his estate) is entitled to receive in cash payment an amount equal to all previously accrued but unpaid compensation (including accrued but unused vacation leave) 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.





Stock Options/SAR Grants





We did not grant any stock options to our named executive officers during either fiscal 2009 or 2008. We do not have any outstanding stock appreciation rights.





Long Term Incentive Plans





As of December 31, 2009, we had no group life, health, hospitalization, or medical reimbursement or relocation plans in effect. Further, we had no pension plans or plans or agreements which provide compensation on the event of termination of employment or corporate change in control.





Outstanding Equity Awards at Fiscal Year-End





None.





Director Compensation





There was no compensation paid to our directors for their services as directors during the fiscal year ended December 31, 2009.





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ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The following table sets forth certain information regarding the beneficial ownership of our Voting Stock as of April 12, 2010, by (i) each of our named executive officers and directors; (ii) our named executive officers and directors as a group; and (iii) shareholders known by us to beneficially own more than 5% of any class of our voting securities.  The beneficial ownership of securities is defined in accordance with the rules of the Securities and Exchange Commission and means generally the power to vote or exercise investment discretion with respect to securities, regardless of any economic interests therein. Except as otherwise indicated, we believe that the beneficial
owners of the securities listed below have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Unless otherwise indicated, the business address for each of the individuals or entities listed below is c/o OCTuS, Inc., 803 Second Street, Suite 303, Davis, CA  95616.





Title of Class
Name of Beneficial Owner
Amount and Nature of Beneficial Ownership

Percent

of ClassCommon Stock
Christian Soderquist
15,000,000 common shares

Officer and Director*


34.20
%Common Stock
George Ecker
15,000,000 common shares

Officer and Director*


34.20
%Common Stock
All officers and directors

as a group
30,000,000 common shares


68.40
%





Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. In accordance with Securities and Exchange Commission rules, shares of our common stock which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within 60 days of the date of the table are deemed beneficially owned by the optionees. Subject to community property laws, where applicable, the persons or entities named in the table above have sole voting and investment power with respect to all shares of our common stock indicated as beneficially
owned by them.




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 related party, Sasaima Holdings, SA who already held a promissory note in the amount of $113,747.  The terms 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 accrued under borrowings from this related party during the twelve months ending December 31, 2009 was $36,590.  Upon
conversion of principal and accrued interest totally $520,029, 5,200,290 shares would be owned by this party giving them greater than 10% interest in the company on a fully-diluted basis.  Upon conversion of these shares the beneficial ownership table above would be reflected as:
  Title of Class
Name of Beneficial Owner
Amount and Nature of Beneficial Ownership

Percent

of ClassCommon Stock
Christian Soderquist
15,000,000 common shares

Officer and Director*


34.20
%Common Stock
George Ecker
15,000,000 common shares

Officer and Director*


34.20
%Common Stock
Sasaima Holdings, SA
5,220,290 common shares


11.90
%Common Stock
All officers and directors

as a group excluding Sasaima Holdings, SA
30,000,000 common shares


68.40
%





Changes in Control





There are approximately 43,867,000 shares of common stock outstanding, and therefore the 30,000,000 shares issued pursuant to the purchase agreements entered into by Octus and Mr. Soderquist and Mr. Ecker collectively represent approximately 68% of the outstanding shares of the Company. A change in control of the Company therefore occurred by virtue of the issuance of shares to Mr. Ecker and Mr. Soderquist and their appointment as directors and officers of the Company.  Our management is not aware of any arrangements which may result in "changes in control" as that term is defined by the provisions of Item 403(c) of Regulation S-B outside of these two share issuances.





Equity Compensation Plan Information





We have a stock option plan for option grants to our directors, officers, employees and consultants.  Such options are granted at fair value, vest over three to five years, and expire not more than ten years from date of grant. As of December 31, 2009, we have reserved a total of 450,000 shares of common stock for exercise under the stock option plan.





As of December 31, 2009, there were two options outstanding and there has been no option transactions during the two years ended December 31, 2009.  The options outstanding were issued in August 2009 for a total of 35,000 shares at a strike price of $0.39 per share with a term of three years.





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ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





Conflicts Related to Other Business Activities





The persons serving as our officers and directors have existing responsibilities and, in the future, may have additional responsibilities, to provide management and services to other entities in addition to us. As a result, conflicts of interest between us and the other activities of those persons may occur from time to time.





We will attempt to resolve any such conflicts of interest in our favor. Our officers and directors are accountable to us and our shareholders as fiduciaries, which requires that such officers and directors exercise good faith and integrity in handling our affairs. A shareholder may be able to institute legal action on our behalf or on behalf of that shareholder and all other similarly situated shareholders to recover damages or for other relief in cases of the resolution of conflicts in any manner prejudicial to us.





Related Party Transactions


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 related party, Sasaima Holdings, SA who already held a promissory note in the amount of $113,747.  The terms 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 accrued under borrowings from this
related party during the twelve months ending December 31, 2009 was $36,590.  Upon conversion of principal and accrued interest totally $520,029, 5,200,290 shares would be owned by this party giving them greater than 10% interest in the company on a fully-diluted basis.
 
 A former officer and director paid certain expenses on behalf of Octus for periods prior to 2007.  As of December 31, 2009, amounts accrued and unpaid to this individual totaled $3,169 and are included in accounts payable-related parties.  Also during the year, the current CEO, Chrisian J. Soderquist paid company expenses on his personal credit card in the amount of $1,824.  These amount total $4,993 at December 31, 2009.
 
 At December 31, 2009, there is $27,396 of accrued officer payroll and payroll related taxes for the current officers of the company, Christian J. Soderquist and George M. Ecker.


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 for an interim period to defer receipt of payment of some or all of their base salaries based on the outstanding achievements of one or more of the milestones described below and OCTuS’ ability to pay salaries. 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 year ended December 31, 2009.





Under the terms of the restricted stock purchase agreements, a portion of the shares is subject to repurchase by OCTuS if certain milestones are not achieved before the first anniversary of the date of the purchase agreements.  For each of the following events that are not achieved before the first anniversary of the date of the purchase agreements, 25% of the shares are subject to repurchase by OCTuS at the original purchase price per share.  If all four milestones are achieved, then all repurchase rights of OCTuS will lapse.  The milestone events are:  completion of sale of equity securities of OCTuS with proceeds to OCTuS of $100,000 or more; execution
by OCTuS of a license agreement or purchase contract with at least two third-party persons or entities to acquire or license technologies and/or products related to OCTuS’ intended business; receipt of revenues from the sale by OCTuS of products licensed or owned by OCTuS; and execution by OCTuS of a renewable energy and/or energy efficiency project contract.  In the event of a change in control of OCTuS, defined in the agreement to include events such as a merger or sale of assets transaction which results in more than a 50% change of ownership of OCTuS, all restrictions lapse and the shares will become fully vested. The milestones were met in their entirety prior to February 24, 2010 resulting in the lapse of all repurchase rights the Company held.





There were 43,437,072 shares of common stock outstanding after the issuance of the shares in accordance with the purchase agreements.  The 30,000,000 shares issued pursuant to the purchase agreements represented approximately 69% of the then outstanding shares of OCTuS.





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 (including accrued but unused vacation leave) 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.





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.  In November and December 2009, Mr. Soderquist loaned OCTuS an additional $17,500 and $5,250, respectively for total related party proceeds for the year end December 31, 2009 of $32,750.  These loans bear interest at 10% and are due upon demand.





41


With regard to any future related party transactions, we plan to fully disclose any and all related party transactions, including, but not limited to, the following:


·
disclose such transactions in prospectuses where required;


·
disclose in any and all filings with the Securities and Exchange Commission, where required;


·
obtain disinterested directors consent; and


·
obtain shareholder consent where required.





Director Independence





Members of our Board of Directors are not independent as that term is defined by defined in Rule 4200(a)(15) of the Nasdaq Marketplace Rules.





PART IV


ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES




EXHIBIT

NUMBER
DESCRIPTION
NOTES3.1
Amended and Restated Articles of Incorporation
(2)3.2
Certificate of Determination of Preferences of Series C Preferred Stock of Octus, Inc.
(5)3.3
Amended Bylaws
(11)3.4
Certificate of Amendment to Articles of Incorporation
(7)10.1
Form of Indemnification Agreements entered into by and between Octus, Inc. and its officers and directors
(1)10.2
Directors 1993 Stock Option Plan, Form of Stock Option Agreement, Non-Qualified Options, 1993 Directors Stock Option Plan
(2)10.3
Convertible Promissory Notes dated September 30, 2008 with Sasaima Holdings SA
(8)10.4
Convertible Promissory Notes dated September 30, 2008 with Grupo Dynastia SA
(8)14.1
Code of Ethics
(6)10.5
Restricted Stock Purchase Agreement, dated February 24, 2009, between the Company and Christian Soderquist
(9)10.6
Restricted Stock Purchase Agreement, dated February 24, 2009, between the Company and George M. Ecker
(9)10.7
Employment Agreement, effective February 24, 2009, between the Company and Christian Soderquist
(9)10.8
Employment Agreement, effective February 24, 2009, between the Company and George M. Ecker
(9)10.9
Loan Modification Agreement (Sasaima Holdings SA letter to Octus Inc.), executed March 31, 2009
(9)10.10
Employment Agreement, effective May 5, 2009, between the Company and John Argo
(10)10.11
Restricted Stock Purchase Agreement, dated May 5, 2009, between the Company and John Argo
(10)10.12
Employment Agreement, effective April 1, 2009, between the Company and John Argo
(11)10.13
Convertible Secured Promissory Note, dated June 22, 2009, between the Company and Margaret Wong
(11)10.14
Common Stock Purchase Warrant, dated June 22, 2009, between the Company and Margaret Wong
(11)10.15
Note Amendment with the Senior Lender, dated March 31, 2009
(11)10.16
Salary Agreement, dated August 10, 2009, between the Company and George Ecker
(11)10.17
Salary Agreement, dated August 10, 2009, between the Company and Christian Soderquist
(11)10.18
Exclusive License Agreement for Wicking Condensate Evaporator at AC Condenser, effective August 1, 2009, between The Regents of the University of California, acting through its Davis Campus Technology Transfer Services, at the University of California, Davis and Octus Energy, Inc.
(12)10.19
Reserve Equity Financing Agreement, dated December 6, 2009, between AGS Capital Group, LLC and the Company
(13)10.20
Registration Rights Agreement, dated December 6, 2009, between AGS Capital Group, LLC and the Company
(13)10.21
Eco Nexus Non-exclusive License Agreement
(14)31.1
Section 302 Certification31.2
Section 302 Certification32.1
Certification Pursuant to 18 U.S.C. Section 135032.2
Certification Pursuant to 18 U.S.C. Section 1350
  (1)
Incorporated by reference from the Company’s Form S-1, as amended, SEC registration number 33-51862, which was declared effective January 15, 1993.
 (2)
Incorporated by reference from the Company’s Post-Effective Amendment No. 1 on Form S-3 to Form S-1, bearing the SEC registration number 33-51862, which was declared effective January 6, 1995.
 (3)
Incorporated by reference from the Company’s Quarterly Report on Form 10-QSB for the period ended December 31, 1994 filed with the SEC July 6, 1995.
 (4)
Incorporated by reference from the Company’s Form 8-K filed with the SEC November 13, 1995.
 (5)
Incorporated by reference from the Company’s Form 8-K filed with the SEC on August 12, 1996.
 (6)
Incorporated by reference from the Company’s Annual Report on Form 10-KSB for the period ended December 31, 1993.
 (7)
Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on June 16, 2005.
 (8)
Incorporated by reference to the Company’s Form 8-K filed with the Securities and Exchange Commission on June 16, 2005.
 (9)
Incorporated by reference to exhibits filed with the Form 10-K filed with the SEC on April 15, 2009.
 (10)
Incorporated by reference to exhibits filed with the Form 10-Q filed with the SEC on May 15, 2009.
 (11)
Incorporated by reference to exhibits filed with the Form 10-Q filed with the SEC on August 14, 2009.
 (12)
Incorporated by reference to exhibit filed with the Form 10-Q filed with the SEC on November 23, 2009.
 (13)
Incorporated by reference to exhibits filed with the Form 8-K filed with the SEC on December 10, 2009.
 (14)
Filed herewith.


42





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





OCTUS, INC.Dated: September 26, 2011
By:
/s/ Christian J. SoderquistChristian J. Soderquist

President and Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Name

Title

Date/s/ Christian J. Soderquist

President Chief Executive Officer, Chairman

September 26, 2011Christian J. Soderquist

(Principal Executive Officer)/s/ George M. Ecker

Principal Financial and Accounting Officer,

September 26, 2011George M. Ecker

Director






43