UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended: June 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________________ to ________________
Commission file number 000-50619
MOMENTUM BIOFUELS, INC.
-----------------------
(Name of registrant in its Charter)
COLORADO 84-1069035
-------- ----------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2600 South Shore Blvd, Suite 100 League City, TX 77573
(281) 334-5161
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated file, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] (Do
not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X]
Indicate the number of share outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 14, 2008, there were 47,528,756 shares of the registrant's sole
class of common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
Unaudited Consolidated Balance Sheets -June 30, 2008 and
December 31, 2007 F-1
Unaudited Consolidated Statements of Operations -
Three and Six Months ended June 30, 2008 and 2007 and F-2
Unaudited Consolidated Statements of Changes in Stockholders' Equity -
June 30, 2008 F-3
Unaudited Consolidated Statements of Cash Flows -
Six months ended June 30, 2008 and 2007 and F-4
Notes to the Unaudited Consolidated Financial Statements F-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Not Applicable 5
Item 4. Controls and Procedures 6
Item 4T. Controls and Procedures 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 8
Item 3. Defaults Upon Senior Securities - Not Applicable 9
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable 9
Item 5. Other Information - Not Applicable 9
Item 6. Exhibits 9
SIGNATURES 10
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
For financial information, please see the financial statements and the notes
thereto, attached hereto and incorporated herein by this reference.
The financial statements have been prepared by Momentum Biofuels, Inc. without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted as allowed by such rules and
regulations, and management believes that the disclosures are adequate to make
the information presented not misleading. These financial statements include all
of the adjustments which, in the opinion of management, are necessary to a fair
presentation of financial position and results of operations. All such
adjustments are of a normal and recurring nature. These financial statements
should be read in conjunction with the audited financial statements at December
31, 2007, included in the Company's Form 10-KSB.
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
June 30, 2008 December 31, 2007
------------------- ------------------------------
ASSETS
Current Assets
Cash $ 196,270 $ 777,171
Accounts Receivable, net 14,645 3,859
Inventory 19,136 56,759
Prepaid insurance 26,646 33,766
------------------- ------------------
Total current assets 256,697 871,555
Property & equipment, net of accumulated
depreciation and amortization 2,991,723 3,253,410
Other Assets 367,249 26,278
------------------- ------------------
TOTAL ASSETS $ 3,615,669 $ 4,151,243
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 376,439 $ 194,226
Accounts payable - related parties 25,186 -
Accrued expenses 264,584 191,942
Advances - related parties 10,000 -
Short term notes payable - related parties - 315,891
------------------- ------------------
Total Current Liabilities 676,209 702,059
------------------- ------------------
Long Term Liabilities
Convertible notes payable - net of discount - related parties 43,850 -
Senior secured convertible note - net of discount 166,632 -
------------------- ------------------
Total Long Term Liabilities 210,482 -
------------------ ------------------
Total Liabilities 886,691 702,059
------------------- ------------------
Stockholders' Equity
Common stock, $0.01 par value; 500,000,000 shares authorized,
47,528,756 and 54,828,756 shares issued and outstanding on
June 30, 2008 and December 31, 2007, respectively 475,287 548,287
Additional paid-in capital 13,424,292 11,853,153
Accumulated Deficit (11,170,601) (8,952,256)
------------------- ------------------
Total Stockholders' Equity 2,728,978 3,449,184
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,615,669 $ 4,151,243
=================== ==================
See the accompanying notes to the consolidated financial statements.
F-1
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 2007
---------------- ---------------- ---------------- ----------------
Revenue $ (572) $ 137,760 $ 348,357 $ 137,760
Cost of goods sold - 167,192 251,623 167,192
---------------- ---------------- ---------------- ----------------
Gross profit (572) (29,432) 96,734 (29,432)
Operating Expenses
Plant expenses 357,591 - 787,939 -
Pre-operating plant expenses - 54,541 - 105,861
General and administrative 741,474 4,189,541 1,519,939 4,554,845
---------------- ---------------- ---------------- ----------------
Total Operating Expenses 1,099,065 4,244,082 2,307,878 4,660,706
---------------- ---------------- ---------------- ----------------
Loss from operations (1,099,637) (4,273,514) (2,211,144) (4,690,138)
---------------- ---------------- ---------------- ----------------
Other Income (Expense)
Interest income 229 853 1,311 2,042
Interest expense (6,202) (9,551) (8,512) (17,468)
---------------- ---------------- ---------------- ----------------
Total Other Income (Expense) (5,973) (8,698) (7,201) (15,426)
---------------- ---------------- ---------------- ----------------
Net Loss (1,105,610) (4,282,212) (2,218,345) (4,705,564)
================ ================ ================ ================
Per Share Information:
Weighted average number of common
shares outstanding - Basic and diluted 47,528,756 51,253,770 49,435,545 50,568,071
================ ================ ================ ================
Net Loss per Share $ (0.02) $ (0.08) $ (0.04) $ (0.09)
================ ================ ================ ================
See the accompanying notes to the consolidated financial statements.
F-2
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
For the Period from January 1,
2008 through June 30, 2008
Common Stock Additional
Paid-In Accumulated
Shares Amount Capital Deficit Totals
---------------- --------------- ----------------- ------------------ ---------------
Balance - December 31, 2007 54,828,756 $ 548,287 $11,853,153 $ (8,952,256) $ 3,449,184
Cancelled shares (7,500,000) (75,000) 75,000 -
Shares issued in private
placement for cash 200,000 2,000 78,000 80,000
Share based compensation 729,649 729,649
Debt Discount 389,519 389,519
Warrants issued for services 298,971 298,971
Net loss (2,218,345) (2,218,345)
------------------------------------------------------------------------------------------
Balance - June 30, 2008 47,528,756 $ 475,287 $13,424,292 $ (11,170,601) $ 2,728,978
==========================================================================================
See the accompanying notes to the consolidated financial statements.
F-3
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
2008 2007
------------------- ------------------
Cash Flows from Operating Activities
Net loss $ (2,218,345) $ (4,705,564)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation 261,687 18,020
Bad debt expense 29,866 -
Share based compensation 729,649 3,864,756
Changes in Assets and Liabilities
Accounts receivable (40,652) (20,837)
Inventory 37,623 (54,741)
Prepaid expenses and other current assets 7,120 2,626
Accounts payable 207,399 (64,591)
Accrued expenses 72,643 201,102
------------------- ------------------
Net Cash Used in Operating Activities (913,010) (759,229)
Cash Flows used in Investing Activities
Other Assets (42,000) -
Acquisition of fixed assets - (941,160)
------------------- ------------------
Net Cash Used in Investing Activities (42,000) (941,160)
Cash Flows from Financing Activities
Payment of note payable (315,891) (165,000)
Loans from shareholders 10,000 126,813
Stock issued for cash 80,000 1,820,000
Offering costs - (66,500)
Proceeds from convertible notes 600,000 -
------------------- ------------------
Net Cash Provided (Used) by Financing Activities 374,109 1,715,313
------------------- ------------------
Net Increase (Decrease) in Cash (580,901) 14,924
Cash and cash equivalents - Beginning of period 777,171 19,477
------------------- ------------------
Cash and cash equivalents - End of period $ 196,270 $ 34,401
=================== ==================
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the period for:
Interest $ 8,512 $ 30,472
=================== ==================
Income Taxes $ - $ -
=================== ==================
Non-Cash Transactions - Investing activities:
Warrants issued for services $ 298,971 $ -
=================== ==================
Capitalized interest during construction period $ - $ 36,953
=================== ==================
Financing activities
Cancellation of common shares $ 75,000 $ -
=================== ==================
Note payable converted to stock $ - $ 500,000
=================== ==================
See the accompanying notes to the consolidated financial statements.
F-4
Momentum Biofuels, Inc.
Notes to the Consolidated Financial Statements As of June 30, 2008
(Unaudited)
Note 1. -Basis of Presentation
The accompanying unaudited interim financial statements of Momentum Biofuels,
Inc., have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the Securities and
Exchange Commission, and should be read in conjunction with the audited
financial statements and notes thereto contained in Momentum's Annual Report
filed with the SEC on Form 10-KSB. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected for
the full year. Notes to the financial statements which substantially duplicate
the disclosure contained in the audited financial statements for fiscal 2007 as
reported in the Form 10-KSB have been omitted.
Note 2 - Going Concern
In Momentum's Annual Report on Form 10-KSB for 2007, the Report of the
Independent Registered Public Accounting Firm includes an explanatory paragraph
that describes substantial doubt about the Company's ability to continue as a
going concern. Momentum's financial statements for the six months ended June 30,
2008 have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company had an accumulated deficit of $11,170,600 at June 30,
2008.
Momentum's ability to continue as a going concern is dependent upon its ability
to develop additional sources of capital and, ultimately, achieve profitable
operations. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
Note 3 - Notes Payable to Related Parties
F-5
Notes payable as of June 30, 2008 and December 31, 2007 consisted of the following:
Description 2008 2007
- ------------------------------------------------ --------------- ---------------
Non-interest bearing note payable to Ultimate Investments Corporation, a company
wholly-owned by a shareholder. The note was paid in full in January, 2008. $ - $ 315,891
Notes payable originally issued to Richard Robert, Richard Cilento, David Fick
and J. Paul Consulting. The interest rate is 10% per annum, payable quarterly.
These notes are secured by all of the assets and property of Momentum. The notes
may be converted into shares of MMBI's common stock at any time at a conversion
price of $0.40 per share. If the notes are prepaid before May 1, 2010, Momentum
will issue the lenders a warrant to Purchase one share of Momentum common stock
for each $1.00 principal amount of the note. Momentum does not consider
prepayment likely. The notes mature on May 1, 2013. 125,000 -
The loan discount was calculated using the Beneficial conversion feature. The
warrants were valued per the Black Scholes method. The assumptions used to value
the Warrants included an expected term of 7 years, a risk-free interest rate of
3.78%, expected volatility using comparable company volatility of 215%, an
exercise price of $0.40 and a stock price on the date of grant of $0.50. The
discount will be amortized over the life of the notes. (81,250) -
--------------- ---------------
Total $ 43,850 $ 315,891
=============== ==+============
Note 4 - Advances from Related Parties
Non-interest bearing advance from Jeff Ploen, who beneficially owns J. Paul
Consulting Corporation. The advance is due upon demand with no maturity date.
F-6
Note 5 - Convertible Notes Payable
Notes payable as of June 30, 2008 and December 31, 2007 consisted of the following:
Description 2008 2007
----------- ---- ----
Notes payable originally issued to ten lenders. The interest rate is 10% per
annum, payable quarterly. These notes are secured by all of the assets and
property of Momentum. The notes may be converted into shares of MMBI's common
stock at any time at a conversion price of $0.40 per share. If the notes are
prepaid before May 1, 2010, Momentum will issue the lenders a warrant to
Purchase one share of Momentum common stock for each $1.00 principal amount of
the note. Momentum does not consider prepayment likely.
The notes mature on May 1, 2013. $ 475,000 $ -
The loan discount was calculated using the Beneficial conversion feature. The
warrants were valued per the Black Scholes method. The assumptions used to value
the Warrants included an expected term of 7 years, a risk-free interest rate of
3.78%, expected volatility using comparable company volatility of 215%, an
exercise price of $0.40 and a stock price on the date of grant of $0.50. The
discount will be amortized over the life of the notes. (308,368) -
--------------- ---------------
Total $ 166,632 $ -
=============== ==============
In conjunction with the note payable referred to above and in Note 3, a lending
agent was paid a placement fee of $42,000. In addition, the agent was issued
600,000 warrants with an exercise price of $0.40. Further explanation of the
valuation of the warants is found in Note 8.
Note 6 - Equity Financing
During the six months ended June 30, 2008, Momentum issued 200,000 shares of its
restricted common stock for cash of $80,000. The shares were sold at a price of
$0.40 per share.
On February 12, 2008, the Board of Directors of Momentum voted to cancel the
shares of the common stock held by the Momentum Employees & Consultant Trust.
The Momentum Employees & Consultant Trust held 7,500,000 shares of restricted
common stock. The shares were previously controlled by Charles Phillips, a
shareholder and former director of Momentum, and the shares were cancelled with
his consent.
Note 7 - Options
Options were originally issued in conjunction with employment agreements for key
employees and consultants.
F-7
Option activity for the six months ended June 30, 2008 is as follows:
Expiration Exercise
Grant Date Date Price Beginning Granted Forfeited Ending
- ----------- ------------- ---------- ------------- ---------- ------------ -----------
04/20/07 04/20/12 $1.00 2,250,000 2,250,000
10/15/07 10/15/10 $1.00 50,000 (50,000) -
10/16/07 10/16/12 $1.00 7,000,000 (1,000,000) 6,000,000
11/01/07 11/01/12 $1.00 1,000,000 1,000,000
------------ ---------- ------------- ----------
10,300,000 (1,050,000) 9,250,000
============ ========== ============= ==========
The weighted average exercise price for all options outstanding as of June 30,
2008 was $1. Note 8 - Warrant Activity Warrants activity for the six months
ended June 30, 2008 is as follows:
Expiration Exercise
Grant Date Date Price Beginning Granted Exercised Ending
- ------------ ------------ ----------- -------------- ---------- ---------- ------------
06/27/2006 06/27/2016 $1.00 100,000 (1) 100,000
11/30/2006 11/30/2016 $1.00 10,000 (2) 10,000
12/31/2006 12/31/2016 $1.00 10,000 (2) 10,000
01/31/2007 01/31/2017 $1.00 10,000 (3) 10,000
02/01/2007 02/01/2012 $1.00 2,000 (3) 2,000
08/31/2007 08/31/2009 $1.00 1,000,000 (4) 1,000,000
10/04/2007 10/04/2009 $1.00 150,000 (5) 150,000
06/25/2008 06/25/2015 $0.40 (6) 300,000 300,000
06/25/2008 06/25/2015 $0.40 (7) 600,000 600,000
--------------- ---------- ---------- -----------
$ 1,282,000 900,000 $ 2,182,000
=============== ========== ========== ===========
The weighted average exercise price for all warrants outstanding as of June 30,
2008 was $1.
(1) Momentum calculated the relative fair value of these warrants at $162,822
using the Black-Scholes option pricing model and allocated a portion of the
original proceeds to these warrants as a discount to the note through additional
paid-in capital. The assumptions used to value the warrants included an expected
term of 10 years, a risk-free interest rate of 4.98%, expected volatility using
comparable company volatility of 145%, an exercise price of $1 and a stock price
on the date of grant of $1.65.
F-8
(2) Momentum calculated the fair value of these warrants at $33,558 using the
Black-Scholes option pricing model and this amount has been charged to general
and administrative expenses and credited to additional paid-in capital for the
period from inception (May 8, 2006) through December 31, 2006. The assumptions
used to value the warrants include an expected term of 10 years, a risk free
interest rate of 4.98%, expected volatility using comparable company volatility
of 145%, an exercise price of $1 and an average stock price on the date of grant
of $1.65.
(3) Momentum calculated the fair value of these warrants at $18,895 using the
Black-Scholes option pricing model and this amount has been charged to general
and administrative expenses and credited to additional paid-in capital for the
year ending December 31, 2007. The assumptions used to value the warrants
include an expected term of 10 years, a risk free interest rate of 4.98%,
expected volatility using comparable company volatility of 145%, an exercise
price of $1 and a stock price on the date of grant of $1.60.
(4) Momentum calculated the fair value of these warrants at $547,579 using the
Black-Scholes option pricing model and this amount has been charged to general
and administrative expenses and credited to additional paid-in capital for the
year ending December 31, 2007. The assumptions used to value the warrants
include an expected term of 2 years, a risk free interest rate of 6.50%,
expected volatility using comparable company volatility of 154%, an exercise
price of $1 and a stock price on the date of grant of $0.95.
(5) Momentum calculated the fair value of these warrants at $95,746 using the
Black-Scholes option pricing model and this amount has been charged to general
and administrative expenses and credited to additional paid-in capital for the
year ending December 31, 2007. The assumptions used to value the warrants
include an expected term of 2 years, a risk free interest rate of 4.17%,
expected volatility using comparable company volatility of 186%, an exercise
price of $1 and a stock price on the date of grant of $0.80.
(6) Momentum calculated the fair value of these warrants at $149,624 using the
Black-Scholes option pricing model and allocated a portion of the original
proceeds to these warrants as a discount to the note through additional paid-in
capital. The assumptions used to value the warrants included an expected term of
7 years, a risk-free interest rate of 3.78%, expected volatility using
comparable company volatility of 215%, an exercise price of $0.40 and a stock
price on the date of grant of $0.50. The relative fair value of these warrants
was combined with the value of the beneficial conversion feature of the
convertible notes described in Note 9, and recorded as a discount on the notes.
(7) Momentum calculated the fair value of these warrants at $298,971 using the
Black-Scholes option pricing model and allocated a portion of the original
proceeds to these warrants as a discount to the note through additional paid-in
capital. The assumptions used to value the warrants included an expected term of
7 years, a risk-free interest rate of 3.78%, expected volatility using
comparable company volatility of 215%, an exercise price of $0.40 and a stock
price on the date of grant of $0.50.
F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FORWARD-LOOKING STATEMENTS CAUTIONARY
This Item 2 and the report on Form 10-Q for the period ended June 30, 2008 may
contain "forward-looking statements" regarding Momentum Biofuels, Inc. (the
"Company" or "Momentum"). In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "could," "expects,"
"plans," "intends," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. These forward-looking statements include, without limitation,
statements about our market opportunity, our strategies, competition, expected
activities and expenditures as we pursue our business plan, and the adequacy of
our available cash resources. Although we believe that the expectations
reflected in any forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Actual results
may differ materially from the predictions discussed in these forward-looking
statements. Changes in the circumstances upon which we base our predictions
and/or forward-looking statements could materially affect our actual results.
Additional factors that could materially affect these forward-looking statements
and/or predictions include, among other things: (1) our limited operating
history; (2) our ability to pay down existing debt; (3) the Company's ability to
obtain contracts with suppliers of raw materials (for the Company's production
of biodiesel fuel) and distributors of the Company's biodiesel fuel product; (4)
the risks inherent in the mutual performance of such supplier and distributor
contracts (including the Company's production performance (5) the Company's
ability to secure and retain management capable of managing growth; (6) the
Company's ability to raise necessary financing to execute the Company's business
plan; (7) potential litigation with our shareholders, creditors and/or former or
current investors; (8) the Company's ability to comply with all applicable
federal, state and local government and international rules and regulations; and
(9) other factors over which we have little or no control.
The independent registered public accounting firm's report on the Company's
financial statements as of December 31, 2007, includes a "going concern"
explanatory paragraph that describes substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to the
factors prompting the explanatory paragraph are discussed below and also in Note
2 to the unaudited quarterly financial statements.
PLAN OF OPERATIONS
Momentum is a "pure play" biodiesel producer focused on servicing the U.S. Gulf
Coast and in the future, international biodiesel markets. Momentum plans to
manufacture high quality, low cost and socially responsible biodiesel fuels that
complement and integrate with the existing diesel fuel supply chain. Biodiesel
is a domestic, renewable fuel for use in diesel engines that is derived from
natural vegetable oils and animal fats. Biodiesel contains no petroleum, but can
be used in any concentration with petroleum-based diesel fuel in existing diesel
engines without engine modification.
1
Our initial plant in LaPorte, Texas, has been completed and is currently in
limited production. The Company's initial focus will be on efficiently operating
the La Porte plant at its planned capacity and on sales of our product. Our
marketing strategy will focus on wholesale distribution to fuel jobbers,
corporate fleets and government users. We will also use established alternative
fuel brokers where appropriate.
RESULTS OF OPERATIONS
Results of Operations For Three Months Ended June 30, 2008 Compared To The Three
Months Ended June 30, 2007 The Company recognized revenue of $(572) for the
three months ending June 30, 2008 compared to $137,760 of revenue during the
three months ended June 30, 2007. During the three months ended June 30, 2008
there were no cost of sales compared to $167,192 for the three months ended June
30, 2007.
During the three months ended June 30, 2008, the Company incurred total expenses
of $1,099,065 compared to $4,244,082 during the three months ended June 30,
2007. Included in the total expenses for the three months ended June 30, 2008
are share based compensation costs of $394,395 compared to $3,864,756 for the
three months ended June 30, 2007. The increase in total expenses, net of the
share based compensation of $325,344 is a result of the increased operations of
the Company during the three months ended June 30, 2008. Total expenses during
the six months ended June 30, 2008 included, $357,591 in plant expenses and
$741,474 in general and administrative expenses.
During the three months ended June 30, 2008, the Company recognized a net loss
of $1,105,610 compared with a net loss of $4,282,212 for the three months ending
June 30, 2007. The decrease of $3,176,602 was due primarily to decrease in share
based compensation and increases in plant operations and general and
administrative expenses, as discussed above. The net loss per share for the
three months ended June 30, 2008, was $0.02 per share compared to a net loss per
share of $0.08 for the three months ending June 30, 2007.
Results of Operations For The Six Months Ended June 30, 2008 Compared To The Six
Months Ended June 30, 2007
The Company recognized revenue of $348,357 for the six months ending June 30,
2008 compared to $137,760 of revenue during the six months ended June 30, 2007.
The Company's revenues were from its activities in processing and sale of its
biodiesel product. During the six months ended June 30, 2008, the Company
incurred cost of goods sold of $251,623, resulting in a gross profit of $96,734
compared to $167,192 in cost of goods sold, resulting in a gross loss of $29,432
for the six months ended June 30, 2007.
During the six months ended June 30, 2008, the Company incurred total expenses
of $2,307,878 compared to $4,660,706 during the six months ended June 30, 2007.
Included in the total expenses for the six months ended June 30, 2008 are share
based compensation costs of $729,649 compared to $3,864,756 for the six months
ended June 30, 2007. The increase in total expenses, net of the share based
compensation of $782,279 is a result of the increased operations of the Company
during the six months ended June 30, 2008. Total expenses during the six months
ended June 30, 2008 included, $787,940 in plant expenses and $1,519,939 in
general and administrative expenses.
2
During the six months ended June 30, 2008, the Company recognized a net loss of
$2,218,345 compared with a net loss of $4,705,564 for the six months ending June
30, 2007. The decrease of $2,478,219 was due primarily to decrease in share
based compensation and increases in plant operations and general and
administrative expenses, as discussed above. The net loss per share for the six
months ended June 30, 2008, was $0.04 per share compared to a net loss per share
of $0.09 for the six months ending June 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2008, the Company had $196,270 in cash and $3,419,399 in other
assets with which to conduct its operations. There can be no assurance that the
Company will be able to carry out its business plan. Historically, our cash
needs have been satisfied primarily through proceeds from private placements of
our equity securities and debt instruments, but we cannot guarantee that such
financing activities will be sufficient to fund our current and future projects
and our ability to meet our cash and working capital needs. No commitments to
provide additional funds have been made by management or other stockholders.
Irrespective of whether the Company's cash assets prove to be inadequate to meet
the Company's operational needs, the Company might seek to compensate providers
of services by issuances of its common stock in lieu of cash.
Net cash used in operating activities during the six months ended June 30, 2008
was $913,011. During the six months ended June 30, 2007, the Company used net
cash of $759,229 in operating activities. During the six months ended June 30,
2008, net losses of $2,218,345 were adjusted for non-cash items that included
$261,687 in depreciation and amortization expense and $729,649 in share based
compensation. During the six months ended June 30, 2007, net losses of
$4,705,564 were adjusted for the non-cash item of $18,020 in depreciation and
amortization expense and $3,864,756 in share based compensation.
During the six months ended June 30, 2008, the Company used $42,000 in cash from
its investing activities. During the six months ended June 30, 2007, the Company
used $941,160 from its investing activities.
Net cash received by financing activities during the six months ended June 30,
2008 was $374,109. During the six months ended June 30, 2007, the Company
received funds of $1,715,313 from its financing activities.
On March 7, 2008, Momentum initiated a private placement of 8,000,000 shares of
common stock at a price of $0.40 per share. During the six months ended June 30,
2008, the Company sold 200,000 shares of its restricted common stock for cash of
$80,000. The shares were sold for $0.40 per share.
On January 11, 2008, the Company made final payment on the outstanding $400,000
promissory note held by Ultimate Investment Corp ("Ultimate"). The promissory
note had an issue date of June 30, 2006 and had been accruing interest at a rate
of 12% per annum, at the default rate. The final payment was $319,792, cash,
including accrued interest of $3,901.
On June 25, 2008, the Company closed $600,000 of Senior Secured Convertible
Debt. The notes are held by fourteen different lenders, four of which are
related parties. The note has an issue date of June 25, 2008 and accrues
interest at 10% per annum, payable quarterly. Note holders may at any time
convert the balance of the note into common shares at a conversion price of
$0.40. The notes mature on May 1, 2013.
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In addition to the Convertible Notes, the Company has issued Investor Warrants
exercisable for a total of 300,000 shares of the Company's common stock. The
warrants have an exercise price of $0.40 per share and a term of 7 years. The
warrants provide for cashless exercise and have piggy back registration rights.
The Company issued 1 warrant for each $1.00 note sold, to the Placement Agent,
in total 600,000 were issued to the Agent. The warrants have an exercise price
of $0.40 per share and a term of 7 years. The warrants provide for cashless
exercise and have piggy back registration rights.
Management will need to seek and obtain additional funding, via loans or private
placements of stock, for future operations and to provide required working
capital.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements included in this Quarterly Report on
Form 10-Q requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments. Management bases its estimates and judgments on historical
experiences and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The more significant
accounting estimates inherent in the preparation of the Company's financial
statements include estimates as to the valuation of equity related instruments
issued, and valuation allowance for deferred income tax assets. Our accounting
policies are described in the notes to financial statements included in the
Annual Report on Form 10-K. The more critical accounting policies are as
described below.
The Company believes that the following are some of the more significant
accounting policies and methods used by the Company: o revenue recognition; o
value of long-lived assets; o inventories; and o income taxes. REVENUE
RECOGNITION The Company will recognize revenue when the product has been
delivered to the customer, the sales price is fixed or determinable, and
collectability is reasonably assured.
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INVENTORIES
Inventories are stated at the lower of average cost basis or market. Abnormal
amounts of idle facility expenses, freight, handling costs, and wasted materials
are recognized as current period charges. Fixed production overhead is allocated
to the costs of conversion into inventories based on the normal capacity of the
production facility.
VALUATION OF LONG-LIVED ASSETS
The Company assesses the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors the Company considers important which could trigger an
impairment review include negative projected operating performance by the
Company and significant negative industry or economic trends. The Company does
not believe that there has been any impairment to long-lived assets as of June
30, 2008.
INCOME TAXES
Momentum and its subsidiary file a consolidated federal tax return. Momentum
uses the asset and liability method in accounting for income taxes. Deferred tax
assets and liabilities are recognized for temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, and are measured using the tax rates expected to be in effect when
the differences reverse. Deferred tax assets are also recognized for operating
loss and tax credit carryforwards. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the results of operations
in the period that includes the enactment date. A valuation allowance is used to
reduce deferred tax assets when uncertainty exists regarding their realization
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has reviewed recently issued accounting pronouncements and the
Company does not expect that the adoption of recently issued accounting
pronouncements will have a material impact on its financial position, results of
operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -
NOT APPLICABLE
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ITEM 4 CONTROLS AND PROCEDURES
Disclosures Controls and Procedures
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). As a result of this evaluation, we identified
material weaknesses in our internal control over financial reporting as of
December 31, 2007. Accordingly, we concluded that our disclosure controls and
procedures were not effective as of December 31, 2007.
As required by SEC Rule 15d-15(b), our Chief Executive Officer carried out an
evaluation under the supervision and with the participation of our management,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 15d-14 as of the end of the period
covered by this report. Based on the foregoing evaluation, our Chief Executive
Officer has concluded that our disclosure controls and procedures are not
effective in timely alerting them to material information required to be
included in our periodic SEC filings and to ensure that information required to
be disclosed in our periodic SEC filings is accumulated and communicated to our
management, including our Chief Executive Officer, to allow timely decisions
regarding required disclosure as a result of the deficiency in our internal
control over financial reporting discussed below.
The material weakness identified in our annual report on Form 10-KSB for the
year ended December 31, 2007 was related to a lack of an accounting staff
resulting in a lack of segregation of duties and accounting technical expertise
necessary for an effective system of internal control.
ITEM 4T. CONTROLS AND PROCEDURES
Management's Quarterly Report on Internal Control over Financial Reporting.
Management's assessment of the effectiveness of the registrant's internal
control over financial reporting is as of the period ended June 30, 2008. Based
on the evaluation, management concluded that there is a material weakness in our
internal control over financial reporting. The material weakness relates to the
monitoring and review of work performed by contracted accounting personnel in
the preparation of audit and financial statements, footnotes and financial data
provided to Momentum's registered public accounting firm in connection with the
annual audit. Until October 2007, all of our financial reporting was carried out
by our Chief Financial Officer, and we did not have an audit committee
established until October 12, 2007. This lack of an accounting staff results in
a lack of segregation of duties and accounting technical expertise necessary for
an effective system of internal control.
A material weakness is a control deficiency, or combination of control
deficiencies, in ICFR such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis by employees in the normal course of
their assigned functions.
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Notwithstanding this material weakness, we believe that the consolidated
financial statements included in this report fairly present, in all material
respects, our consolidated financial position and results of operations as of
and for the period ended June 30, 2008. Remediation of Material Weakness As
discussed in Management's Annual Report on Internal Control over Financial
Reporting, as of December 31, 2007, there were material weaknesses in our
internal control over financial reporting. We are in the process of analyzing
our processes for all business units and the establishment of formal policies
and procedures with necessary segregation of duties, which will establish
mitigating controls to compensate for the risk due to lack of segregation of
duties. In addition, we are evaluating the necessary steps to improve our
controls over financial reporting and we are in the initial planning phase of
upgrading, where possible, certain of our information technology systems
impacting financial reporting.
Through these steps, we believe we are addressing the deficiencies that affected
our internal control over financial reporting as of December 31, 2007 and June
30, 2008. However, the effectiveness of any system of internal controls is
subject to inherent limitations and there can be no assurance that our internal
control over financial reporting will prevent or detect all errors. Because the
remedial actions require hiring of additional personnel, upgrading certain of
our information technology systems, and relying extensively on manual review and
approval, the successful operation of these controls for at least several
quarters may be required before management may be able to conclude that the
material weakness has been remediated.
The aggregate costs of remediation are unknown at this time.
Changes in Internal Control Over Financial Reporting.
There was no change in our internal control over financial reporting that
occurred during the period ended June 30, 2008, that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In February 2008, Momentum received notice of its inclusion in a legal complaint
filed against Vertex Energy by Purity Water Company of San Antonio in the
Circuit Court of Mobile, Alabama. The complaint alleges that Vertex, the
defendant, contracted with Purity Water, the plaintiff, to remove water from two
million gallons of Biodiesel stored in Alabama. The complaint further alleges
that Vertex engaged several other companies, including Momentum Biofuels, Inc.,
as subcontractors to service the contract. Momentum submitted an affidavit to
the court on April 25, 2008, attesting that the Company had no contractual
agreement with either the plaintiff or any of the other parties named in the
complaint. Momentum has since been dismissed from the suit without prejudice by
the presiding District Court in Mobile, Alabama.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company made the following unregistered sales of its securities from May 1, 2008 through June 30, 2008.
Date of Sale Title of No. of Shares Consideration Class of Purchaser
Securities
- --------------------------------------------------------------------------------------------------------------------
6/25/08 Convertible Notes 1,500,000 $600,000 Business Associate
6/25/08 Warrants 300,000 $600,000 Business Associate
6/25/08 Warrants 600,000 $600,000 Business Associate
Exemption From Registration Claimed
All of the sales by the Company of its unregistered securities were made by the
Company in reliance upon Section 4(2) of the Act. All of the individuals and/or
entities listed above that purchased the unregistered securities were all known
to the Company and its management, through pre-existing business relationships,
as long standing business associates, friends, and employees. All purchasers
were provided access to all material information, which they requested, and all
information necessary to verify such information and were afforded access to
management of the Company in connection with their purchases. All purchasers of
the unregistered securities acquired such securities for investment and not with
a view toward distribution, acknowledging such intent to the Company. All
certificates or agreements representing such securities that were issued
contained restrictive legends, prohibiting further transfer of the certificates
or agreements representing such securities, without such securities either being
first registered or otherwise exempt from registration in any further resale or
disposition.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS.
The following is a complete list of exhibits filed as part of this Form 10-Q.
Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of
Regulation S-K.
31.1 Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act.
32.1 Certification by the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MOMENTUM BIOFUELS, INC.
(The Registrant)
Date: August 19, 2008 By: /s/ Gregory A. Enders
---------------------
Gregory A. Enders,
President, Chief Executive Officer,
and Principal Accounting Officer
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