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: September 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]
As of October 31, 2008, there were 47,724,444 shares of the registrant's sole
class of common shares outstanding.
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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
Consolidated Balance Sheets -September 30, 2008 (Unaudited) and
December 31, 2007(Audited) F-1
Consolidated Statements of Operations (Unaudited) -
Three and Nine months ended September 30, 2008 and 2007 F-2
Consolidated Statements of Changes in Shareholders' Equity -
(Unudited) September 30, 2008 F-3
Consolidated Statements of Cash Flows (Unaudited) - Nine
months ended September 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 - Not Applicable 8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 8
Item 3. Defaults Upon Senior Securities - Not Applicable 8
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable 8
Item 5. Other Information - Not Applicable 8
Item 6. Exhibits 8
SIGNATURES 9
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
September 30, 2008 December 31, 2007
------------------ ------------------
(Unaudited) (Audited)
ASSETS
Current Assets
Cash $ 831 $ 777,171
Accounts Receivable, net 750 3,859
Inventory 2,239 56,759
Prepaid insurance 11,020 33,766
------------------ ------------------
Total current assets 14,840 871,555
Property & equipment, net of accumulated depreciation
and amortization 2,882,225 3,253,410
Other Assets 344,518 26,278
------------------ ------------------
TOTAL ASSETS $ 3,241,583 $ 4,151,243
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 434,892 $ 194,226
Accounts payable - related parties 34,052 -
Accrued expenses 347,431 191,942
Advances - related parties 10,000 -
Short term notes payable - related parties - 315,891
------------------ ------------------
Total Current Liabilities 826,375 702,059
------------------ ------------------
Long Term Liabilities
Convertible notes payable - net of discount - related parties 49,262 -
Senior secured convertible note - net of discount 187,188 -
------------------ ------------------
Total Long Term Liabilities 236,450 -
------------------ ------------------
Total Liabilities 1,062,825 702,059
------------------ ------------------
Stockholders' Equity
Common stock, $0.01 par value; 500,000,000 shares authorized,
47,724,444 and 54,828,756 shares issued and outstanding
on September 30, 2008 and December 31, 2007, respectively 477,244 548,287
Additional paid-in capital 13,905,087 11,853,153
Accumulated Deficit (12,203,573) (8,952,256)
------------------ ------------------
Total Stockholders' Equity 2,178,758 3,449,184
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,241,583 $ 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 Nine Months Ended
September 30, September 30,
2008 2007 2008 2007
---------------- ---------------- ---------------- ----------------
Revenue $ 37,594 $ 389,697 $ 385,951 $ 487,486
Cost of goods sold 4,642 434,313 256,265 561,534
---------------- ---------------- ---------------- ----------------
Gross profit 32,952 (44,616) 129,686 (74,048)
Operating Expenses
Plant expenses 314,898 379,564 1,102,838 485,426
General and administrative 710,882 2,095,565 2,230,821 6,650,409
---------------- ---------------- ---------------- ----------------
Total Operating Expenses 1,025,780 2,475,129 3,333,659 7,135,835
---------------- ---------------- ---------------- ----------------
Loss from operations (992,828) (2,519,745) (3,203,973) (7,209,883)
---------------- ---------------- ---------------- ----------------
Other Income (Expense)
Interest income - 8,913 1,311 10,954
Interest expense (43,705) (24,666) (48,655) (42,133)
---------------- ---------------- ---------------- ----------------
Total Other Income (Expense) (43,705) (15,753) (47,344) (31,179)
---------------- ---------------- ---------------- ----------------
Net Loss $(1,036,533) $(2,535,498) $(3,251,317) $(7,241,062)
================ ================ ================ ================
Per Share Information:
Weighted average number of common
shares outstanding - Basic and diluted 47,500,965 52,791,432 49,407,753 51,315,424
================ ================ ================ ================
Net Loss per Share $ (0.02) $ (0.05) $ (0.07) $ (0.14)
================ ================ ================ ================
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 September 30, 2008
(Unaudited)
Common Stock Additional Accumulated Deficit
Shares Amount Paid-In Totals
Capital
---------------- --------------- ----------------- ------------------ ---------------
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 195,688 1,957 1,210,445 - 1,212,402
Debt Discount - - 389,518 - 389,518
Warrants issued for services - - 298,971 - 298,971
Net loss - - - (3,251,317) (3,251,317)
------------------------------------------------------------------------------------------
Balance - September 30, 2008 47,724,444 $ 477,244 $13,905,087 $ (12,203,573) $ 2,178,758
==========================================================================================
See the accompanying notes to the consolidated financial statements.
F-3
MOMENTUM BIOFUELS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2008 2007
------------------- ------------------
Cash Flows from Operating Activities
Net loss $ (3,251,317) $ (7,241,062)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation 393,458 146,688
Bad debt expense 29,866 -
Deferred loan cost expense 22,731 -
Interest expense - amortization of debt discount 25,968 -
Share based compensation 1,124,044 5,676,109
Shares issued for service 88,358 -
Changes in Assets and Liabilities
Accounts receivable (26,757) (49,686)
Inventory 54,520 (31,671)
Prepaid expenses and other current assets 22,746 (16,156)
Accounts payable 274,718 (418,572)
Accrued expenses 155,490 129,514
------------------- ------------------
Net Cash Used in Operating Activities (1,086,175) (1,804,836)
Cash Flows used in Investing Activities
Other Assets (42,000) -
Acquisition of fixed assets (22,274) (945,184)
------------------- ------------------
Net Cash Used in Investing Activities (64,274) (945,184)
Cash Flows from Financing Activities
Payment of note payable (315,891) (230,556)
Loans from shareholders 10,000 67,736
Stock issued for cash 80,000 5,111,500
Offering costs - (90,863)
Proceeds from convertible notes 600,000 -
------------------- ------------------
Net Cash Provided by Financing Activities 374,109 4,857,817
------------------- ------------------
Net (Decrease) increase in Cash (776,340) 2,107,797
Cash and cash equivalents - Beginning of period 777,171 19,477
------------------- ------------------
Cash and cash equivalents - End of period $ 831 $ 2,127,274
=================== ==================
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the period for:
Interest $ 12,661 $ 40,403
=================== ==================
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 September 30, 2008
(Unaudited)
Note 1. -Basis of Presentation
The accompanying unaudited interim financial statements of Momentum Biofuels,
Inc. (the Company), 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 (SEC), 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 nine months ended
September 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
$12,203,573 at September 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.
F-5
Note 3 - Notes Payable to Related Parties
Notes payable as of September 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. (75,738) -
--------------- ---------------
Total $ 49,262 $ 315,891
=============== ==============
Note 4 - Advances from Related Parties
During the nine months ended September 30, 2008, a director of the Company,
Jeffery Ploen, who beneficially owns J. Paul Consulting Corporation, advanced
the Company funds of $34,052. The advance is non-interesting bearing and is due
upon demand.
F-6
Note 5 - Convertible Notes Payable
Notes payable as of September 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. (287,812)
--------------- --------------
Total $ 187,188 $ -
=============== ==============
In conjunction with the notes 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 warrants is found in Note 8.
Note 6 - Equity Financing
During the nine months ended September 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.
F-7
Note 7 - Options
Options were originally issued in conjunction with employment agreements for key
employees and consultants. Option activity for the nine months ended September
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 September
30, 2008 was $1.00.
F-8
Note 8 - Warrant Activity
Warrants activity for the nine months ended September 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 September
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.
(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.
F-9
(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-10
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 September 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 LaPorte 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 September 30, 2008 Compared To The
Three Months Ended September 30, 2007
The Company recognized revenue of $37,594 for the three months ending September
30, 2008, compared to $389,697 of revenue during the three months ended
September 30, 2007.
During the three months ended September 30, 2008, the Company incurred $4,642 in
cost of sales, resulting in a gross profit of $32,952 compared to $434,313 in
cost of goods sold; resulting in a gross loss of $44,616 for the three months
ended September 30, 2007. During the three months ended September 30, 2008, the
Company incurred operating expenses of $1,025,780 compared to $2,475,129 during
the three months ended September 30, 2007. Operating expenses during the three
months ended September 30, 2008 included, $314,898 in plant expenses and
$710,882 in general and administrative expenses, compared to $379,564 in plant
expenses and $2,095,565 in administrative expenses for the three months ended
September 30, 2007. Included in the general and administrative expenses for the
three months ended September 30, 2008 is $394,395 for executive stock options.
Included in the general and administrative expenses for the three months ended
September 30, 2007 was $794,878 of expenses for executive stock options. In
addition, included in the general and administrative expenses for the three
months ended September 30, 2007 were $547,579 relating to the warrants awarded
to TES Energy Development, LLC and $450,000 relating to stock provided to
members of the Board of Directors as compensation.
During the three months ended September 30, 2008, the Company incurred net
interest expense of $43,705, compared to $15,753 for the three months ended
September 30, 2007.
During the three months ended September 30, 2008, the Company recognized a net
loss of $1,036,533 compared with a net loss of $2,535,498 for the three months
ended September 30, 2007. The decrease of $1,498,965 was due primarily to
decrease in warrant expense, Board of Director compensation and share based
compensation, as discussed above. The net loss per share for the three months
ended September 30, 2008, was $0.02 per share compared to a net loss per share
of $0.05 for the three months ending September 30, 2007.
Results of Operations For The Nine Months Ended September 30, 2008 Compared To
The Nine Months Ended September 30, 2007
The Company recognized revenue of $385,951 for the nine months ending September
30, 2008, compared to $487,486 of revenue during the nine months ended September
30, 2007. The Company's revenues were from its activities in processing and sale
of its biodiesel product. During the nine months ended September 30, 2008, the
Company incurred cost of goods sold of $256,265, resulting in a gross profit of
$129,686 compared to $561,534 in cost of goods sold; resulting in a gross loss
of $74,048 for the nine months ended September 30, 2007.
2
During the nine months ended September 30, 2008, the Company incurred operating
expenses of $3,333,659 compared to $7,135,835 during the nine months ended
September 30, 2007. Included in the operating expenses for the nine months ended
September 30, 2008 are share based compensation costs of $1,124,044 compared to
$4,659,635 for the nine months ended September 30, 2007. The increase in total
expenses, net of the share based compensation of $266,585 is a result of the
increased operations of the Company during the nine months ended September 30,
2008. Total expenses during the nine months ended September 30, 2008 included,
$1,102,838 in plant expenses and $2,230,821 in general and administrative
expenses.
During the nine months ended September 30, 2008, the Company recognized a net
loss of $3,251,317 compared with a net loss of $7,241,062 for the nine months
ending September 30, 2007. The decrease of $3,989,745 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 nine months ended September 30, 2008, was $0.07 per share compared to a
net loss per share of $0.14 for the nine months ending September 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2008, the Company had $831 in cash and $3,240,752 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 nine months ended September 30,
2008 was $1,086,175. During the nine months ended September 30, 2007, the
Company used net cash of $1,804,836 in operating activities. During the nine
months ended September 30, 2008, net losses of $3,251,317 were adjusted for
non-cash items that included $393,458 in depreciation and amortization expense
and $1,124,044 in share based compensation. During the nine months ended
September 30, 2007, net losses of $7,241,062 were adjusted for the non-cash
items of $146,688 in depreciation and amortization expense and $5,676,109 in
share based compensation.
During the nine months ended September 30, 2008, the Company used $64,274 in
cash in its investing activities. During the nine months ended September 30,
2007, the Company used $945,184 in its investing activities.
Net cash received by financing activities during the nine months ended September
30, 2008 was $374,109. During the nine months ended September 30, 2007, the
Company received funds of $4,857,817 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 nine months ended
September 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.
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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.
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. Management cannot make any assurances it will be able to complete such
a transaction.
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.
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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.
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
September 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 September 30, 2008.
Based on the evaluation, management concluded that there is a material weakness
in our internal control over financial reporting. 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.
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 September 30, 2008.
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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 have analyzed our processes for all business units
and the established 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 have evaluated 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
September 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 September 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.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not make any unregistered sales of its securities from July 1,
2008 through September 30, 2008.
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: November 14, 2008 By: /s/ Gregory A. Enders
---------------------
Gregory A. Enders,
President, Chief Executive Officer,
and Principal Accounting Officer
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