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: March 31, 2009
[ ] 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
------------------------------------------------------
(Address of Principal Executive Offices)
(281) 334-5161
--------------
(Telephone # including Area Code)
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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [ ] 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 [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
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 May 18, 2009, there were 47,724,444 shares of the registrant's sole class
of common shares outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
----
Consolidated Balance Sheets - March 31, 2009 (Unaudited) and
December 31, 2007(Audited) F-1
Consolidated Statements of Operations (Unaudited) -
Three months ended March 31, 2009 and 2008 F-2
Consolidated Statements of Changes in Shareholders' Equity -
(Unaudited) March 31, 2009 F-3
Consolidated Statements of Cash Flows (Unaudited) -
Three months ended March 31, 2009 and 2008 F-4
Notes to the Unaudited Consolidated Financial Statements F-7
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 5
Item 4T. Controls and Procedures 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not Applicable 7
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 7
- - Not Applicable
Item 3. Defaults Upon Senior Securities - Not Applicable 7
Item 4. Submission of Matters to a Vote of Security Holders - Not Applicable 7
Item 5. Other Information - Not Applicable 7
Item 6. Exhibits 7
SIGNATURES 8
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.
MOMENTUM BIOFUELS, INC.
Consolidated Balance Sheets
March 31, 2009 December 31, 2008
---------------------------------------
(Unaudited) (Audited)
ASSETS
Current Assets
Cash $ 8,899 $ 34,559
Accounts Receivable, net - 2,190
Inventory - 73,552
Prepaid insurance - 32,063
----------------- -------------------
Total current assets 8,899 142,364
Property & equipment, net of accumulated depreciation and
amortization 2,490,307 2,617,902
Other Assets 310,420 327,469
----------------- -------------------
TOTAL ASSETS $ 2,809,626 $ 3,087,735
================= ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 792,429 $ 569,779
Accrued expenses 614,048 491,330
Advances - related parties 16,219 14,210
Loan payable - 150,000
Short term notes payable - related parties - -
----------------- -------------------
Total Current Liabilities 1,422,696 1,225,319
----------------- -------------------
Long Term Liabilities
Convertible notes payable - net of discount - related parties 57,380 53,318
Senior secured convertible note - net of discount 233,022 217,608
----------------- -------------------
Total Long Term Liabilities 290,402 270,926
---------------------------------------
Total Liabilities 1,713,098 1,496,245
----------------- -------------------
Stockholders' Equity
Common stock, $0.01 par value; 500,000,000 shares authorized,
47,724,444 shares issued and outstanding on March 31, 2009 and
December 31, 2008, respectively 477,244 477,244
Additional paid-in capital 14,693,877 14,299,482
Accumulated Deficit (14,074,593) (13,185,236)
----------------- -------------------
Total Stockholders' Equity 1,096,528 1,591,490
----------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,809,626 $ 3,087,735
================= ===================
See the accompanying notes to the consolidated financial statements.
F-1
MOMENTUM BIOFUELS, INC.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2009 & 2008
(Unaudited)
2009 2008
---------------- ----------------
Revenue $ 182,718 $ 348,930
Cost of goods sold 161,973 251,623
---------------- ----------------
Gross profit 20,745 97,307
Operating Expenses
Plant expenses 228,471 430,349
General and administrative 637,241 778,465
---------------- ----------------
Total Operating Expenses 865,712 1,208,814
---------------- ----------------
Loss from operations (844,967) (1,111,507)
---------------- ----------------
Other Income (Expense)
Interest income - 1,082
Interest expense (44,391) (2,310)
---------------- ----------------
Total Other Income (Expense) (44,391) (1,228)
---------------- ----------------
Net Loss $ (889,358) $(1,112,735)
================ ================
Per Share Information:
Weighted average number of common shares outstanding Basic and
Diluted 48,559,181 50,832,381
================ ================
Net Loss per Share $ (0.02) $ (0.02)
================ ================
See the accompanying notes to the consolidated financial statements.
F-2
MOMENTUM BIOFUELS, INC.
Consolidated Statement of Stockholders' Equity
For the Period from January 1, 2009 through March 31, 2009
(Unaudited)
Common Stock Additional Accumulated
Shares Amount Paid-In Deficit Totals
Capital
--------------- -------------- --------------- ----------------- ---------------
Balance - January 1, 2009 47,724,444 $ 477,244 $ 14,299,482 $ (13,185,235) $1,591,491
Shares issued in private
placement for cash -
Note Conversion -
Conversion of interest on note -
Directors stock based on
compensation -
Shares issued for services -
Warrants issued for services -
Employee stock option
compensation 394,395 394,395
Net loss (889,358) (889,358)
--------------- -------------- --------------- ----------------- ---------------
Balance - March 31, 2009 47,724,444 $ 477,244 $ 14,693,877 $ (14,074,593) $1,096,528
=============== ============== =============== ================= ===============
See the accompanying notes to the consolidated financial statements.
F-3
MOMENTUM BIOFUELS, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2009 & 2008
(Unaudited)
2009 2008
----------------- ------------------
Cash Flows from Operating Activities
Net loss $ (889,358) $ (1,112,735)
Adjustments to reconcile net loss to cash used in operating
activities
Depreciation 127,595 130,843
Bad debt expense -
Deferred loan cost expense 17,049 -
Interest expense - amortization of debt discount 19,476 -
Share based compensation 394,395 335,254
Shares issued for service -
Changes in Assets and Liabilities
Accounts receivable 2,190 (17,770)
Inventory 73,552 37,623
Prepaid expenses and other current assets 32,063 5,298
Accounts payable 222,650 177,021
Accrued expenses 122,719 (8,716)
----------------- ------------------
Net Cash Used in Operating Activities 122,331 (453,182)
Cash Flows from Financing Activities
Payment of note payable (150,000) (315,891)
Loans from shareholders 2,009 10,000
Stock issued for cash - 80,000
Offering costs - -
Proceeds from loan payable - -
Proceeds from convertible notes - -
----------------- ------------------
Net Cash Provided (Used) by Financing Activities (147,991) (225,891)
----------------- ------------------
Net Increase (Decrease) in Cash (25,660) (679,073)
Cash and cash equivalents - Beginning of period 34,559 777,171
----------------- ------------------
Cash and cash equivalents - End of period $ 8,899 $ 98,098
================= ==================
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the period for:
Interest $ 44,391 $ 2,310
================= ==================
Income Taxes $ - $ -
================= ==================
Non-Cash Transactions - Investing activities:
Stock issued for services $ - $ -
================= ==================
Warrants issued for services $ - $ -
================= ==================
Capitalized interest during construction period $ - $ -
================= ==================
Financing activities
Cancellation of common shares $ - $ 75,000
================= ==================
Loan Discount $ 19,476 $ -
================= ==================
See the accompanying notes to the consolidated financial statements.
F-4
BIOFUELS, INC.
Notes to the Consolidated Financial Statements
For the Three Months Ended March 31, 2009 and 2008
(Unaudited)
Note 1 - Organization, Nature of Operations and Basis of Presentation
Momentum Biofuels, Inc. was incorporated in Texas on May 8, 2006, to engage in
the business of the production of biodiesel fuel. Tonga Capital Corporation was
incorporated on January 29, 1987, in Colorado, and was been a non-operating
entity classified as a shell company under Rule 12b-2 of the Securities Exchange
Act of 1934. On May 31, 2006, Tonga Capital Corporation (Tonga), a Colorado
Corporation, signed an Agreement and Plan of Reorganization with Momentum
Biofuels, Inc. The shareholders of Momentum Biofuels, Inc. received 39,275,000
shares of common stock of Tonga in exchange for 39,275,000 shares of Momentum
Biofuels, Inc. This transaction was accounted for as a reverse merger with
Momentum Biofuels, Inc. being treated as the accounting acquirer.
Our business purpose is to manufacture high quality biodiesel fuel for sale to
local distributors, jobbers, and state and local government fleets.
Basis of Presentation
Interim 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-K. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of financial position and the results of operations for the interim
periods presented have been reflected herein. The results of operations for
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 the year ended
December 31, 2008, as reported in the Form 10-K have been omitted.
Going Concern
Momentum has incurred significant losses from operations since inception and has
limited financial resources. These factors raise substantial doubt about
Momentum's ability to continue as a going concern. Momentum's financial
statements for the three months ended March 31, 2009 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
currently has an accumulated deficit of $14,074,593 through March 31, 2009.
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 financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
F-5
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Momentum and its wholly- owned subsidiary. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses during the reporting period. Our significant estimates
primarily relate to the assessment of warrants and debt and equity transactions
and the estimated lives and methods used in determining depreciation of fixed
assets. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents include highly liquid investments purchased with original
maturities of three months or less.
Accounts Receivable
Accounts receivable are presented at face value, net of the allowance for
doubtful accounts. The allowance for doubtful accounts is established through
provisions charged against income and is maintained at a level believed adequate
by management to absorb estimated bad debts based on historical experience and
current economic conditions. The accounts receivable balance at March 31, 2009
was zero.
Inventories
Inventories are stated at the lower of average cost basis or market. Abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials
(spoilage) 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 facilities.
F-6
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
computed using the straight-line method for financial reporting purposes at
rates based on the following estimated useful lives:
Description Life
- ------------------------------------------------------- ----------
Office equipment, furniture and fixtures 5 years
Computer equipment and software 3 years
Plant equipment 7 years
Leasehold improvements 5-6 years
The cost of asset additions and improvements that extend the useful lives of
property and equipment are capitalized. Routine maintenance and repair items are
charged to current operations. The original cost and accumulated depreciation of
asset dispositions are removed from the accounts and any gain or loss is
reflected in the statement of operations in the period of disposition.
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," management reviews long-lived asset groups for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset group may not be recoverable. Recoverability of asset groups to be held
and used is measured by a comparison of the carrying amount of an asset group to
future net cash flows expected to be generated by the asset group. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset group exceeds
the fair value of the assets in the group. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
Assets Being Developed for Our Own Use
Assets being developed for our own use are stated at cost, which includes the
cost of construction and other direct costs attributable to the construction. No
provision for depreciation is made on assets developed for our own use until
such time as the relevant assets are completed and put into service.
Revenue Recognition
Momentum recognizes revenue from product sales when the products are
shipped or delivered and the title and risk pass to the customer. Provisions for
any product returns or discounts given to customers are accounted for as
reductions in revenues in the same period revenues are recorded.
F-7
Share-Based Compensation
Momentum measures all share-based payments, including grants of employee stock
options, using a fair-value based method in accordance with Statement of
Financial Accounting Standards No. 123R, "Share-Based Payments." The cost of
services received in exchange for awards of equity instruments is recognized in
the statement of operations based on the grant date fair value of those awards
amortized over the requisite service period. Momentum utilizes a standard option
pricing model, the Black-Scholes model, to measure the fair value of stock
options granted.
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.
Net Loss per Common Share
Basic net loss per common share is calculated by dividing the net loss
applicable to common shares by the weighted average number of common and common
equivalent shares outstanding during the period. For the three months ended
March 31, 2009 and 2008, there were no potential common equivalent shares used
in the calculation of weighted average common shares outstanding as the effect
would be anti-dilutive because of the net loss.
F-8
Description 2009 2008
- ------------------------------------------------- ------------ -------------
Weighted average shares used to compute basic and
diluted net loss per common share: 47,724,444 48,559,181
Securities convertible into shares of common
stock, not used
Stock warrants for common stock 2,062,000 2,062,000
Options awarded to executives and consultants 9,250,000 9,250,000
------------ ------------
Total securities convertible into shares of common
stock 11,582,000 11,582,000
============ ============
Recent Accounting Pronouncements
Momentum does not expect that adoption of recently issued accounting
pronouncements will have a material impact on its financial position, results of
operations or cash flows.
Note 3 - Concentration of Credit Risk
At various times during the year, Momentum may have bank deposits in excess of
the FDIC insurance limits. Momentum has not experienced any losses from
maintaining cash accounts in excess of the federally insured limit. Management
believes that it is not exposed to any significant credit risk on cash accounts.
During the three months ended March 31, 2009, one customer accounted for 100% of
Momentum's revenue. Momentum performs ongoing credit evaluations of its
customers' financial condition. Momentum's accounts receivable are unsecured.
Note 4 - Inventories
As of March 31, 2009 and December 31, 2008, inventory consisted of the
following:
Description 2009 2008
- ----------- ---- ----
Finished Goods $ 0 $ 1,980
Raw Materials 0 71,572
----------- -----------
Total $ 0 $ 73,552
============ ==========
Note 5 - Property and Equipment
Property, plant and equipment as of March 31, 2009 and December 31, 2008
consisted of the following:
Description 2009 2008
- ----------- ---- ----
Plant $ 3,279,592 $ 3,279,592
Plant machinery and equipment 44,455 44,455
Office furniture and equipment 52,239 52,239
Computer software 3,220 3,220
Leasehold Improvements 41,251 41,251
---------------- --------------
Total Assets 3,420,757 3,420,757
---------------- --------------
Accumulated Depreciation & Amortization (930,450) (802,855)
---------------- --------------
$ 2,490,307 $ 2,617,902
================ ==============
F-9
Note 6 - Assets Being Developed For Our Own Use
The asset developed for our own use consists of a biodiesel refinery plant for
which construction was completed in early 2007. On June 25, 2007, these assets
were placed into service pursuant to applicable accounting principles. For the
three months ended March 31, 2009 and 2008, depreciation and amortization
expense was $127,595 and $130,844, respectively.
Note 7 - Loans Payable
During the year ended December 31, 2008, Momentum entered into an account
purchasing agreement, payable to Crown Financial to sell certain accounts to
Crown Financial totaling $150,000. The agreement accrued interest at 12% per
annum. On January 31, 2009, Momentum paid the agreement in full and accrued
interest of $15,000.
Note 8 - Notes Payable - Related Parties
Notes payables to related parties as of March 31, 2009 and December 31, 2008,
consisted of the following:
Description 2009 2008
- -------------------------------------------- -------------- --------------
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 $ 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. (67,620) (71,682)
----------------- -------------
$ 57,380 $ 53,318
================= =============
F-10
Note 9 - Convertible Notes Payable
Convertible notes payable as of March 31, 2009 and December 31, 2008 consisted
of the following:
Description 2009 2008
- ------------------------------------------- --------------- ---------------
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 $ 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. (256,978) (272,392)
Note payable originally issued to Thomas Prasil
in the amount of $15,000. The interest rate is
10% per annum, payable quarterly. This note is
unsecured. 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. 15,000 15,000
-------------- -------------
Total $ 233,022 $ 217,608
============== =============
In conjunction with the notes payable referred to above, 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 14.
F-11
Note 10 - Obligations and Commitments
Momentum has leased office and plant space and also office and plant equipment.
Pursuant to these agreements, Momentum is obligated to make the following
payments:
Year Ending
December 31, Amount
- ------------------------------------ --------------------
2009 $ 289,163
2010 $ 317,074
2011 $ 303,343
2012 $ 117,619
Rental expense for the three months ended March 31, 2009 was $76,253. Rental
expense for the three months ended March 31, 2008 was $76,253.
Note 11 - Income
Taxes Momentum did not incur any income tax expense due to operating losses and
the related increase in the valuation allowance. The tax effects of the
temporary differences that give rise to deferred tax assets and liabilities as
of March 31, 2009 and December 31, 2008 are as follows:
2009 2008
------------------ -------------------
Deferred tax assets:
Loss carry forwards $ 1,439,000 $ 1,439,000
Less valuation allowance (1,439,000) (1,439,000)
------------------ -------------------
Net deferred tax assets $ - $ -
================== ===================
As of December 31, 2008, Momentum had a net operating loss carryforward for
federal income tax purposes of approximately $4,824,518 that may be offset
against future taxable income. As more fully disclosed in Note 1, Momentum
experienced a change in control during 2006. Internal Revenue Code Section 382
imposes restrictions upon a company's ability to utilize net operating loss
carryforwards subsequent to a change in control. Any limitations upon Momentum's
ability to utilize its net operating loss carryforwards against future taxable
income have not yet been determined.
Momentum has established a valuation allowance for the full amount of the
deferred tax assets as management does not currently believe that it is more
likely than not that these assets will be recovered in the foreseeable future.
To the extent not utilized, the net operating loss carryforwards will expire
starting in 2026.
F-12
Note 12 - Equity Transactions
During the three months ended March 31, 2009, Momentum did not issue any shares
of its common stock.
Note 13 - Options
Options were originally issued in conjunction with employment agreements for key
employees and consultants.
Option activity for the period from January 1, 2009 through March 31, 2009 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
10/16/07 10/16/12 $1.00 6,000,000 6,000,000
11/01/07 11/01/12 $1.00 1,000,000 1,000,000
The weighted average exercise price for all options outstanding as of March 31,
2009 was $1.
Note 14 - Warrant Activity
Warrants activity for the period from January 1, 2009 through March 31, 2009 is
as follows:
Expiration Exercise
Grant Date Date Price Beginning Granted Exercised Ending
- ---------- ----------- -------- --------- ------- --------- -------
06/27/2006 06/27/2016 $1.00 100,000 100,000
11/30/2006 11/30/2016 $1.00 10,000 10,000
12/31/2006 12/31/2016 $1.00 10,000 10,000
01/31/2007 01/31/2017 $1.00 10,000(1) 10,000
02/01/2007 02/01/2017 $1.00 2,000(1) 2,000
08/31/2007 08/31/2009 $1.00 1,000,000(2) 1,000,000
10/04/2007 10/04/2009 $1.00 150,000(3) 150,000
06/25/2008 06/25/2015 $0.40 300,000(4) 300,000
06/25/2008 06/25/2015 $0.40 600,000(5) 600,000
----------- ------ ---------- ---------
$ 2,182,000 $2,182,000
=========== ====== ========== =========
The weighted average exercise price for all warrants outstanding as of March 31,
2009 was $0.75.
(1) 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.
F-13
(2) 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.
(3) 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.
(4) 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 10, and recorded as a discount on the notes.
(5) 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-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS CAUTIONARY
This Item 2 and the report on Form 10-Q for the period ended March 31, 2009 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, 2008, 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
1 to the unaudited quarterly financial statements.
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.
We intend to manufacture high quality biodiesel fuel for sale to local
distributors, jobbers, and state and local government fleets. Biodiesel is a
domestic, renewable fuel for use in diesel engines that is derived from
vegetable oils or animal fats, and can be blended with petroleum-based diesel
fuel for use in existing diesel engines. We derive the biodiesel that we produce
from soybean oil.
1
During the year ended December 31, 2008, petroleum diesel was as high as $5.10
per gallon and as low as $1.85 per gallon. Biodiesel prices tracked very closely
with this price fluctuation. The raw materials used to produce biodiesel
(feedstock and chemicals) also varied wildly with feedstock being as low as $.15
per pound ($1.15 per gallon) and $.65 per pound ($4.97 per gallon). Chemicals,
such as Methanol, varied similarly in price from $3.00 per gallon to as low as
$.80 per gallon. Federal, state and local mandates were put on hold, temporarily
ignored or postponed while the government and the market sort out the future for
alternative fuels, especially biodiesel.
In the continuance of Momentum's business operations it does not intend to
purchase or sell any significant assets and the Company does expect to have to
hire additional employees, if it is able to secure financing or sees an increase
in orders.
The Company is dependent on raising additional equity and/or, debt to fund any
negotiated settlements with its outstanding creditors and meet the Company's
ongoing operating expenses. There is no assurance that Momentum will be able to
raise the necessary equity and/or debt that it will need to be able to negotiate
acceptable settlements with its outstanding creditors or fund its ongoing
operating expenses. Momentum cannot make any assurances that it will be able to
raise funds through such activities.
In addition, the United States and the global business community is experiencing
severe instability in the commercial and investment banking systems which is
likely to continue to have far-reaching effects on the economic activity in the
country for an indeterminable period. The long-term impact on the United States
economy and the Company's operating activities and ability to raise capital
cannot be predicted at this time, but may be substantial.
RESULTS OF OPERATIONS
Results of Operations For Three Months Ended March 31, 2009 Compared To The
Three Months Ended March 31, 2008.
The Company recognized revenue of $182,718 for the three months ending March 31,
2009, compared to $348,930 of revenue during the three months ended March 31,
2008.
During the three months ended March 31, 2009, the Company incurred $161,973 in
cost of sales, resulting in a gross profit of $20,745 compared to $251,623 in
cost of goods sold; resulting in a gross profit of $97,307 for the three months
ended March 31, 2008. During the three months ended March 31, 2009, the Company
incurred operating expenses of $865,712 compared to $1,208,814 during the three
months ended March 31, 2008. Operating expenses during the three months ended
March 31, 2009 included, $228,471 in plant expenses and $637,241 in general and
administrative expenses, compared to $430,349 in plant expenses and $778,465 in
administrative expenses for the three months ended March 31, 2008.
2
During the three months ended March 31, 2009, the Company incurred net interest
expense of $44,391, compared to $1,228 for the three months ended March 31,
2008.
During the three months ended March 31, 2009, the Company recognized a net loss
of $889,358 compared with a net loss of $1,112,735 for the three months ended
March 31, 2008. The decrease of $223,377 was due primarily to decrease in
payroll expense and consulting fees. The net loss per share for the three months
ended March 31, 2009, was $0.02 per share compared to a net loss per share of
$0.02 for the three months ending March 31, 2008.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2009, the Company had $8,899 in cash and $2,800,727 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 provided by operating activities during the three months ended March
31, 2009 was $122,331. During the three months ended March 31, 2008, the Company
used net cash of $453,182 in operating activities. During the three months ended
March 31, 2009, net losses of $889,358 were adjusted for non-cash items that
included $127,595 in depreciation and amortization expense and $394,395 in share
based compensation. During the three months ended March 31, 2008, net losses of
$1,112,735 were adjusted for the non-cash items of $130,843 in depreciation and
amortization expense and $335,254 in share based compensation.
During the three months ended March 31, 2009, the Company used $0 in cash in its
investing activities. During the three months ended March 31, 2008, the Company
used $0 in its investing activities.
Net cash used by financing activities during the three months ended March 31,
2009 was $147,991. During the three months ended March 31, 2008, the Company
used funds by financing activities was $225,891.
On January 31, 2009, the Company paid in full the outstanding loan held by Crown
Financial. The loan had an issue date of December 1, 2008 and bears an interest
rate of 12% per annum. The final payment was $165,000, cash, including fees and
interest.
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.
3
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.
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 March
31, 2009.
4
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
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, 2008. Accordingly, we concluded that our disclosure controls and
procedures were not effective as of March 31, 2009.
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-K for the year
ended December 31, 2008 were 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. Which have not been resolved as of
March 31, 2009.
5
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 March 31, 2009. Based
on the evaluation, management concluded that there is a material weakness in our
internal control over financial reporting. The 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 March 31, 2009.
Remediation of Material Weakness
As discussed in Management's Annual Report on Internal Control over Financial
Reporting, as of December 31, 2008, 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, 2008 and March
31, 2009. 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.
This quarterly report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this quarterly report.
6
Changes in Internal Control Over Financial Reporting.
There was no change in our internal control over financial reporting that
occurred during the period ended March 31, 2009, that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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.
7
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: May 18, 2009 By: /s/ Gregory A. Enders
---------------------
Gregory A. Enders,
President, Chief Executive Officer,
and Principal Accounting Officer
8