ITEM 1. BUSINESS - ----------------
General
The following is a summary of some of the information contained in this document. Unless the context requires otherwise, references in this document to "Momentum," or the "Company" are to Momentum BioFuels, Inc.
HISTORY OF MOMENTUM BIOFUELS, INC. - ----------------------------------
Momentum BioFuels, Inc. was incorporated on January 29, 1987, in the state of Colorado, as Tonga Capital Corporation and was a non-operating entity classified as a shell company under Rule 12b-2 of the Securities Exchange Act of 1934. Prior to May 2006, the Company had limited activities and was essentially dormant.
On November 1, 2007, we changed our name from Tonga Capital Corporation to Momentum Biofuels, Inc. As result of the name change, our trading symbol was changed from TGCP.OB to MMBF.OB.
We maintain a website at www.momentumbiofuels.com, which is not incorporated in and is not a part of this report.
COMPANY OVERVIEW - ----------------
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.
We 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.
Since June 30, 2006, we have focused our business efforts on the construction of a biodiesel production facility located in LaPorte, Texas. Construction on the production facility was completed during the quarter ended June 30, 2007 and at that time we had the capability to produce biodiesel and sell product. We estimate that the production facility is capable of producing 1,667,000 gallons per month (approximately 20,000,000 gallons per year).
The production facility also includes production facility administration offices and laboratory space. All other administrative and sales formerly conducted at the League City offices were moved to the plant for productivity and expense reductions. The Company does have to make some improvements to the production facility as mandated by local municipalities in order to comply with evolving fire code ordinances and safety considerations.
Product Overview
The primary product that Momentum produces is pure biodiesel that is also known as B-100 ("biodiesel"). 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 it can be used in any concentration with petroleum-based diesel fuel in existing diesel engines with no major modification to the engines. Biodiesel is produced by a simple manufacturing process called transesterification, which removes glycerin from the vegetable oil or animal fat. The process leaves two products, biodiesel and glycerin.
Biodiesel is an alternative fuel choice to the use of pure petroleum-based diesel. Biodiesel provides several environmental, health and efficiency advantages over the use of pure petroleum-based diesel. The most significant of these advantages is that biodiesel burns cleaner than petroleum-based diesel. When used in conventional diesel engines, studies have shown biodiesel to reduce emissions of total unburned hydrocarbons by as much as 70% and total carbon monoxide and other particulate matter by almost 50%. The use of biodiesel essentially eliminates sulfur emissions altogether. The use of biodiesel also significantly reduces health risks associated with petroleum diesel. The Environmental Protection Agency ("EPA"), has surveyed a large body of studies whose findings show that biodiesel emissions exhibit decreased levels of polycyclic aromatic hydrocarbons ("PAH") and nitrated polycyclic aromatic hydrocarbons ("nPAH"), which have been identified as potential cancer causing compounds. In the health effects testing, PAH compounds were seen to be reduced by 75% to 85%, and targeted PAH compounds were reduced by 90% to 99%. These reductions in carcinogens are also realized in blends as low as B-20 (a mixture of 20% biodiesel and 80% petroleum diesel.) In May 2000, biodiesel became the only alternative fuel in the country that successfully completed the Tier I and Tier II Health Effects testing required under the Clean Air Act. These results clearly demonstrate that significant reductions in most currently regulated emissions can be achieved by using biodiesel.
Biodiesel has additional advantages over traditional petroleum-based diesel other than burning cleaner. Biodiesel has an extremely high flash point, making it safer to transport than petroleum diesel because it takes a higher temperature to flame. Biodiesel is also easier on diesel engines; increasing engine life with its usage, as well as reducing the odor that petroleum-based diesel produces. Biodiesel delivers similar torque, horsepower and miles-per-gallon as petroleum-based diesel, without any need to make engine modifications or changes in the fuel handling system or in the delivery system.
Industry Overview
The market awareness for biodiesel and alternative fuels is growing at a rapid pace due, in part, to fluctuations in petroleum prices, the continued availability of government subsidies and federal regulations. In 2002, approximately 15 million gallons of biodiesel were produced in the United States. Production increased from 25 million gallons in 2003 to 200 million gallons in 2006. In 2007, the U.S. biodiesel industry produced nearly 500 million gallons of high quality, clean burning, sulfur free biodiesel, an increase of 150%. The National Biodiesel Board ("NBB") has estimated that the number of consumer biodiesel stations rose nearly 50% last year to 200 biodiesel stations. The Company believes that biodiesel will be further integrated into the existing petroleum-delivery infrastructure as more terminals begin to carry it. Terminals currently carrying biodiesel are located in Kansas, Texas, Alabama, Georgia, Minnesota, Indiana, Wisconsin and Iowa. Recently, a major pipeline company announced that it intends to invest $100 million in a biodiesel storage facility located within close proximity to the Company's LaPorte plant. The Company believes that this is further evidence that the demand for biodiesel is increasing.
The U.S. Department of Energy ("DOE") has identified biodiesel as the fastest growing segment of the alternative fuel market. The DOE has estimated that biodiesel sales could reach approximately $2 billion annually through the use of government incentives; this represents approximately 8% of conventional highway diesel fuel consumption. Based on current rates of petroleum consumption, the DOE also predicts that demand for petroleum products will outstrip supply by 2037. These projected increases in the biodiesel market are driven by a combination of not only environmental and health concerns, but also by the need for the United States to reduce its dependence on petroleum.
The biodiesel industry is part of the broader alternative fuel industry. Alternative fuel is any fuel that can be substituted for traditional petroleum based gasoline or diesel fuels. Compressed natural gas, methanol, ethanol, propane, electricity, biodiesel and hydrogen are all federally recognized alternative fuel sources. There are vehicles that are currently designed to run on such alternative fuels. Biodiesel has the advantage over these fuels because it works in existing diesel engines, and eliminates engine modification costs that would ultimately be passed on to the consumer.
Federal, state, and local governments that operate fleets of diesel vehicles continue to be the main driver of demand for the biodiesel industry. The Energy Policy Act of 1992 ("EPAct") requires that these fleets earn alternative fuel vehicle credits, which can be accomplished by purchasing biodiesel. The NBB estimated that the federal fleets have increased usage of biodiesel from approximately 500,000 gallons in 2000 to around 30 million gallons in 2004. By May of 2004, according to the NBB, there were more than 400 major government fleets using biodiesel, including all branches of the United States military, Yellowstone National Park, NASA, several state departments of transportation, major public utility fleets, cities fleets such as Berkley, California and more than 50 school districts.
The extent of biodiesel's penetration in these markets is largely a result of the requirements of the EPAct. The EPAct requires federal, state and some local fleets to phase in partial use of alternative fuel vehicles by 2006. Government vehicles can meet the requirements of the Act by using B-20 in their existing diesel engines. Because B-20 does not require fleets to purchase new equipment, it is the cheapest way to comply with the EPAct. An NBB-sponsored survey of operators of 53 fleets representing more than 50,000 diesel-powered vehicles found that 91% of respondents were in favor of using biodiesel. Forty-five percent of the operators surveyed were currently using biodiesel and among them, B-20 was the fuel of choice. On March 21, 2007, Cummins, Inc., a major manufacturer of diesel engines, approved the use of B-20 in their 2002 and later emission-compliant engines. We believe that these types of endorsements will help drive the demand for the B-100 biodiesel product.
We believe that the new "clean diesel" rules promulgated by the EPA also have the potential to increase demand for biodiesel. Starting in 2006, the EPA required diesel refiners to reduce nitrogen oxide emissions by removing up to 99% of the sulfur content in the fuel. Sulfur gives petroleum-based products greater lubrication and reducing sulfur in petroleum-based diesel reduces the fuel's lubricity which can lead to engine damage. However, biodiesel produced from soybean oil has no sulfur and serves as a good lubricator. This provides a solution to refiners seeking compliance with these new regulations. In May 2004, the EPA announced that these same rules would apply, starting in 2007, to diesel refiners for "off-road" diesel vehicles, such as farm and construction equipment. Those industries affected by the change will include agriculture, construction and mining, all of which rely heavily on larger diesel machinery.
Product Development
The primary product that the Company produces is pure biodiesel (B-100). The Company also sells the glycerin that is produced as a by-product of the biodiesel manufacturing process. Glycerin is a primary component used in the manufacturing of soap and other products. While the Company is also committed to providing other alternative fuels in the future, at this time, the Company may at some later date produce and market products other than B-100 and glycerin.
Momentum has successfully, completed plant construction and plant acceptance testing, allowing management to be positioned to sell biodiesel to distributors, jobbers, local and governmental fleets located throughout Texas. The Company intends to concentrate on building a market presence in Texas through the sale of B-100.
The Company continues the process of establishing relationships with distributors in Texas and with national distributors interested in purchasing biodiesel. In addition to marketing to local distributors, the Company intends to directly market its product to government fleets and metropolitan public transport fleets.
The Company's continued focus will be on efficiently operating the LaPorte plant at its planned capacity and sales of the product. The Company does contemplate in the future building additional plants in the Gulf Coast region. The Company hopes to identify and secure additional production sites which are adjacent to or co-located with marine fuel terminals. This strategy would allow the Company to take advantage of waterborne logistics for delivery of feedstock and delivery of finished products, including access to the expanding European marketplace. Biodiesel finished products must eventually converge into the traditional fuel supply chain; access to terminal storage and integration into the domestic fuel pipeline and fuel terminal infrastructure is a key consideration of liquidity and marketability of biodiesel.
Cost/Price of Product
Momentum forecasts the price of its biodiesel as of December 31, 2008 at $2.95 per gallon and the price of its biodiesel by-products at $0.10 per gallon. These prices represent estimates used when forecasting sales and are subject to change depending on market conditions. B-100, on average, costs about $1.00 more per gallon than the petroleum diesel spot price because of the costs of the vegetable oil or animal fats used in production. Momentum believes that strong demand exists despite the added cost, due to the need of users to meet the requirements of the Energy Policy Act, EPA regulations, the recent $1.00 tax incentive for blenders of biodiesel and the added benefits that biodiesel has over petroleum-based diesel. Pricing for additional products being contemplated by the company will be determined at the time such products are produced. It is management's opinion that these products will be at a higher profit margin to the Company than straight B100.
Momentum estimates the current cost of raw materials necessary to produce one gallon of biodiesel to be approximately $2.75. Momentum anticipates that earnings potential will improve as we bring the La Porte Plant into full production status and bring additional plants and revenue generating derivatives online, however, increases in commodities prices could raise production costs to the point of unprofitability.
Patents and Trademarks
Because the process for making biodiesel is well known, Momentum does not own or utilize patents related to the production of its products. However, certain configurations of equipment and certain systems in use at the La Porte plant are believed to be patentable. Momentum intends to pursue the development and filing of patent applications for such equipment and systems and alternative use products. Momentum intends to utilize "Momentum" as a trademark and trade name in connection with the sale and marketing of its products. Momentum intends to monitor the use of future developed intellectual property and will evaluate from time to time if it is in the best interest to patent such property.
Regulations
The products that Momentum intends to produce are subject to meeting standard ASTM D 6751 set forth by the American Society for Testing and Materials for biodiesel. Production is also subject to federal, state and local regulations concerning the environment and occupational safety and health. The Company anticipates that Momentum will not experience difficulty in complying with these regulations.
COMPETITION, MARKETS, REGULATION AND TAXATION
Competition
The current biodiesel industry in Texas is fragmented. There is no one producer dominating any segment of the market. The market is composed mainly of small producers scattered around the state and several larger producers either in production, or scheduled to be in production within the next year.
In addition to the above mentioned producers, major integrated oil and chemical companies who have substantial access to resources could choose to enter the market and offer significant competition to the company. The Company also faces competition from those companies who provide alternative fuel sources, other than biodiesel and from existing petroleum-based diesel producers.
Marketing Strategy.
Unlike its competitors, Momentum does not intend to sell its biodiesel product directly to the end user other than government and municipalities. Instead, Momentum plans to market its product to companies and government organizations that will distribute the product to the end user. Nevertheless, Momentum does intend to employ a marketing strategy that involves direct contact with certain targeted groups of potential customers. These groups include city transit, county equipment, the military, school bus fleets, fuel distributors and other state and local fleets.
Momentum plans to take advantage of government programs, including the EPA's Clean School Bus USA Program that is dedicated to ensuring cleaner school bus transportation. Momentum believes that the availability of government grants under this program will provide an incentive for a portion of the school districts in Texas to switch to biodiesel. Some school districts have utilized these government funds to experiment with biodiesel.
The Company's coastal Texas location gives Momentum access to one of the larger ports in the world, the Port of Houston, and it also is a strategic waterway in the United States, itself. The Intercoastal Waterway provides Momentum a very cost effect channel to deliver feedstock to our plant and to deliver finished product into the U.S. diesel fuel supply chain. The Port of Houston provides ready access to European and other developing non U.S. marketplaces.
Fuel Distributors
There are a number of wholesale fuel distributors across the country that provide biodiesel as an alternative to diesel. Momentum's strategy is to align with these distributors and take advantage of the anticipated increase in demand as biodiesel usage gains popularity. Management also intends to market its product to existing distributors of petroleum-based fuels in Texas and along the Gulf Coast.
State and Local Fleets
The Energy Conservation Act of 1998 allows federal, state and alternative fuel provider fleets who must comply with the Energy Policy Act to meet up to one-half of their light duty alternative fueled vehicle purchase requirements with biodiesel. Biodiesel allows city fleets to move toward compliance without purchasing new vehicles, providing a cheap and attractive alternative to overhauling existing fleets.
Tolling and Off-Take Agreements
In addition to the above mentioned marketing opportunities, Momentum will actively pursue tolling and off-take opportunities to reduce its exposure to commodity prices and to lock-up margins on finished product. Under a tolling agreement, Momentum is provided with feedstock and on occasion other chemicals required to produce biodiesel. Momentum is then paid a set amount for each gallon of product produced. The product is then turned over to the tolling partner for distribution. These types of arrangements can be beneficial for young companies like Momentum who have the processing capabilities and want to utilize their capital for expansion instead of tying it up in raw materials inventory.
Governmental Regulation and Environmental Consideration.
The biodiesel product that the Company intends to produce is subject to meeting standard D 6751 set by the American Society for Testing and Materials. Production is also subject to federal, state and local regulations concerning the environment and occupational safety and health. The Company anticipates that it will not experience difficulty in complying with these regulations.
Tax Credits and Governmental Grants
Governmental subsidies for producers of biodiesel exist at the state and federal level. Chapter 16 of the Texas Agriculture Code entitles a producer of biodiesel to receive $0.20 per gallon of fuel ethanol or biodiesel produced in each plant registered according to the guidelines of the chapter until the tenth anniversary of the date production from the plant begins. The statute further provides that for each fiscal year, a producer of biodiesel may not receive grants for more than 18 million gallons of fuel ethanol or biodiesel produced at any one registered plant. The state of Texas requires the producer to pay $0.032 per gallon of biodiesel produced, thus providing a net subsidy of $0.168 per gallon. The Company also intends to make use of the $0.10 per gallon Federal Tax Credit, which is part of the IRS Small Agri-producer Tax Credit program. This program provides a Tax credit up to $1.5 million per year. However, the Texas legislature failed to fund this program at the last legislative session and no grants or payments are currently being made. This program will be re-introduced to the Texas legislature in the next biannual budget authorized by the Texas legislature in 2009.
Biodiesel and blended biodiesel distributors receive a credit of $1.00 per gallon of B-100 biodiesel marketed against their Federal Excise Tax due on petroleum-based diesel. This credit should permit the Company to market its biodiesel to distributors at a price of approximately $1.00 greater than petroleum-based diesel and remain competitive with petroleum diesel. The Company intends to fully utilize these government programs.
Company Sponsored Research and Development. - -------------------------------------------
Momentum is not currently conducting any research.
Number of Persons Employed. - --------------------------
As of March 1, 2009, we had no paid employees. Our Chief Executive Officer with the assistance of 2 other individuals provide services to the Company.
ITEM 1A.
ITEM 1A. RISK FACTORS - ---------------------
Risk Factors
OUR COMPANY RISK FACTORS
THE COMPANY HAS BEEN A DEVELOPMENT STAGE COMPANY AND HAS MINIMAL EXPERIENCE IN THE BIODIESEL INDUSTRY, WHICH INCREASES THE RISK OF ITS ABILITY TO OPERATE THE BIODIESEL PLANT.
We have been a development stage company that has minimal operating history on which an investor can base an evaluation of its business and its prospects. We are subject to the business risks and uncertainties associated with any new business, including the risk that the business objectives may not be achieved.
Momentum has recently emerged from development stage company status and has limited experience in the biodiesel industry, which increases the risk of Momentum's inability to build and operate the biodiesel plant. Momentum has recently begun limited production but has not commenced ratable production. Momentum's only asset is the completed plant in La Porte, Texas. Momentum has only a minimal operating history on which an investor can base an evaluation of its business and its prospects. Momentum is subject to the business risks and uncertainties associated with any new business, including the risk that the business objectives may not be achieved. If this occurs, the value of an investor's investment in the Securities could decline substantially or an investor could lose its entire investment. The success of Momentum's business is highly dependent upon Momentum's ability to execute its business plan.
THE COMPANY'S LACK OF BUSINESS DIVERSIFICATION COULD RESULT IN THE DEVALUATION OF THE COMPANY'S COMMON STOCK IF REVENUES FROM MOMENTUM'S PRODUCTS DO NOT MEET PROJECTIONS.
The Company expects Momentum's business to consist of the production and sale of biodiesel and its co-products and potential plant construction activities. Neither the Company nor Momentum has any other lines of business or other sources of revenue if Momentum is unable to complete the construction and operation of the plant. This lack of business diversification could cause investors to lose all or some of their investment if Momentum is unable to generate revenues by the production and sale of biodiesel and its co-products because management does not expect to have any other lines of business or alternative revenue sources.
MOMENTUM'S OFFICERS AND DIRECTORS ARE NOT EMPLOYED FULL-TIME BY THE COMPANY WHICH COULD BE DETRIMENTAL TO THE BUSINESS.
Momentum's directors and officers are, or may become, in their individual capacities, officers, directors, controlling shareholder and/or partners of other entities engaged in a variety of businesses. Thus, there exist potential conflicts including time and efforts involved in participation with such other business entities. Each officer and director of Momentum's business is engaged in business activities outside of Momentum's business, and the amount of time they devote as Officers and Directors to Momentum's business will be up to 40 hours per week.
Momentum does not know of any reason other than outside business interests that would prevent them from devoting full-time to Momentum, when the business may demand such full-time.
RISKS RELATED TO OPERATION OF THE BIODIESEL PLANT
THE COMPANY WILL DEPEND ON KEY EMPLOYEES, CONTRACTORS AND SUPPLIERS, WHOSE FAILURE TO PERFORM COULD HINDER MOMENTUM'S ABILITY TO OPERATE PROFITABLY.
Momentum will depend on the management team to train personnel in operating the plant and its failure to do so could cause Momentum to halt or discontinue production of biodiesel, which could damage Momentum's ability to generate revenues.
The Company expects that our success will be highly dependent upon management's ability to recruit, retain and train personnel to operate the plant in a safe and productive manner. Management is also in the process of developing Plant Safety and Plant Operations programs to ensure that the plant is operated safely and to the level of productivity expected by the business plan. If the plant does not operate to the level anticipated, we will rely on the management team to address such deficiencies. There is no assurance that the management team will be able to address such deficiencies in an acceptable manner. Failure to do so could cause us to halt or discontinue production of biodiesel, which could damage our ability to generate revenues and profit. We will also be highly dependent upon the management team to manage the plant operations, procure raw materials and market finished products. If the management team is unable to perform these tasks satisfactorily, our ability to generate revenues could be impacted.
CHANGES IN PRODUCTION TECHNOLOGY COULD REQUIRE MOMENTUM TO COMMIT RESOURCES TO UPDATING THE BIODIESEL PLANT OR COULD OTHERWISE HINDER ITS ABILITY TO COMPETE IN THE BIODIESEL INDUSTRY OR TO OPERATE AT A PROFIT.
Advances and changes in the technology of biodiesel production are expected to occur. Such advances and changes may make our biodiesel production technology less desirable or obsolete. The plant is a single-purpose plant and has no use other than the production of biodiesel and associated products. Much of the cost of the plant is attributable to the cost of production technology, which may be impractical or impossible to update. Changes in technology could cause us to operate the plant at less than full capacity for an extended period of time or cause us to abandon its business.
THE PLANT IS A SPECIAL USE FACILITY. THE ENTIRE INVESTMENT IN THE PLANT MAY BE LOST IF MOMENTUM CANNOT USE IT SUCCESSFULLY TO PRODUCE BIODIESEL PRODUCTS.
Momentum's LaPorte biodiesel plant is a special use facility. Though it could be modified for other uses, the value of the plant would be drastically reduced if the plant becomes unable to economically produce biodiesel. This could be caused by emerging technologies, local taxes, repeal of State and Federal subsidies for alternative fuels or other factors not controlled by management.
PLANT LOCATION
Though the plant is located in an area accessible to both rail and trucking lines, increases in either of these transportation expenses due to increased fuel costs or other factors outside of Momentum's control could adversely affect the profitability of the Company.
RISKS RELATED TO BIODIESEL PRODUCTION AND MARKETING
THE SUCCESS OF MOMENTUM IS DEPENDENT ON PRODUCING BIODIESEL TO COMMERCIAL STANDARDS.
Momentum has produced or marketed the intended product in limited quantities. The Company cannot assure that we will have success in marketing its product on a larger scale. The inability to successfully market and sell its product would have an adverse effect on our profitability.
MOMENTUM'S ABILITY TO OPERATE AT A PROFIT IS LARGELY DEPENDENT ON MARKET PRICES FOR BIODIESEL.
Results of operations and financial condition will be significantly affected by the selling price of biodiesel and related by-products. Price and supply are subject to and determined by market forces over which neither the Company nor Momentum has control. Revenues will be heavily dependent on the market prices for biodiesel. The NBB has estimated that in 2007 biodiesel production capacity was 864 million gallons per year, but only 200 million gallons were being produced. The NBB also suggests that there is over 1.7 billion gallons of capacity planned or under construction. Though large, this total planned capacity represents only 4% of the 2007 U.S. diesel fuel consumption of 60 Billion gallons. If this total production capacity comes on-line, there can be no assurances that demand will rise to meet the increase in supply. Further, increased production of biodiesel may lead to lower prices which could significantly reduce the value of the Company.
Increased biodiesel production will likely also lead to increased supplies of other products derived from the production of biodiesel, such as glycerin. Glycerin prices in Europe have already declined over the last several years due to increased biodiesel production and saturation of the glycerin market. Those increased supplies could outpace demand in the United States, which would lead to lower prices for those products. There can be no assurance as to the price of biodiesel or any of its related products in the future. Any downward changes in the price of biodiesel or its related products may result in less income, which would decrease the Company's revenues.
COMPETITION FROM OTHER SOURCES OF FUEL MAY ADVERSELY AFFECT MOMENTUM'S ABILITY TO MARKET BIODIESEL.
Although the price of diesel fuel has increased over the last several years and continues to rise, diesel fuel prices per gallon remain at levels below or equal to the price of biodiesel. In addition, other more cost-efficient domestic alternative fuels may be developed and displace biodiesel as an environmentally-friendly alternative to petroleum-based products. If diesel prices do not continue to increase or a new fuel is developed to compete with biodiesel, it may be difficult to market biodiesel, which could result in the loss of revenues.
MOMENTUM'S BUSINESS IS SENSITIVE TO FEEDSTOCK PRICES, WHICH COULD INCREASE PRODUCTION COSTS AND DECREASE REVENUES.
The main ingredient that will be used to produce biodiesel is soybean oil. The cost of soybean oil represents approximately 85% of the cost of biodiesel production. Soybean oil is an international commodity, the prices for which are subject to the international agricultural market. Changes in the price of soybean oil can significantly affect our business. The price of soybean oil varies dramatically from month to month and year to year based on complex factors at play in the world soybean oil market. The price of soybean oil has fluctuated between $0.16 and $0.65 per pound over the last 3 years. Increased biodiesel production may also lead to an increase in the price of feedstock. Rising feedstock prices may produce lower profit margins. Soybean prices may also be affected by other market sectors, because soybeans are comprised of 80% meal used for feed and only 20% oil. Because there is little or no correlation between the price of feedstock and the price of biodiesel, we cannot pass along increased feedstock prices to our biodiesel customers. There is no guarantee that we will be successful in controlling costs of soybean oil. Adverse pricing in the world market may have an adverse affect on our profitability or ability to continue as a going concern. While management is committed to testing its process with other feedstock (i.e. sunflower oil, palm oil, rapeseed oil, and chicken or beef tallow), there is no guarantee that the use of these feed stocks will result in increased profit margins for the Company. As a result, the inability to control feedstock prices may result in decreased profits or the inability to produce biodiesel at a profit.
ASIAN SOYBEAN RUST AND OTHER PLANT DISEASES COULD INCREASE THE COST AND AVAILABILITY OF FEEDSTOCK, THEREBY REDUCING MOMENTUM'S REVENUES.
Our current feedstock supply is highly dependent upon the availability and price of soybeans. Asian soybean rust is a plant fungus that attacks certain plants including soybean plants. Asian soybean rust is abundant in certain areas of South America and its presence in the United States was recently confirmed. Left untreated, it can reduce soybean harvests by as much as 80%. Although it can be killed with chemicals, the treatment increases production costs for farmers by approximately 20%. Increases in production costs and reduced soybean supplies could cause the price of soybeans to rise and increase the cost of soybean oil as a feedstock to the plant. An increase in the cost of feedstock supply would increase the cost of producing biodiesel and could decrease profits from operations.
RELIANCE UPON THIRD-PARTIES FOR RAW MATERIAL SUPPLY MAY HINDER MOMENTUM'S ABILITY TO PROFITABLY PRODUCE BIODIESEL.
In addition to being dependent upon the availability and price of feedstock and chemical supplies, Momentum will be dependent on relationships with third parties, including feedstock suppliers. Momentum must be successful in establishing feedstock agreements with third parties. Although Momentum is in discussions with several feedstock suppliers and has purchased feedstock for minimal production under several tolling agreements, it has no binding commitments from anyone to supply its feedstock long-term. Assuming that Momentum can formalize feedstock purchase contracts, those suppliers could still interrupt Momentum's supply by not meeting their obligations under the contracts. If, because of market conditions, Momentum is forced into a competitive environment for procurement of raw soy oil, animal fats and other feedstock or Momentum is unable to obtain adequate quantities of feedstock at economical prices, Momentum's business model could be unsustainable resulting in a significant reduction in the value of the Securities.
AUTOMOBILE MANUFACTURERS AND OTHER INDUSTRY GROUPS HAVE EXPRESSED RESERVATIONS REGARDING THE USE OF BIODIESEL, WHICH COULD AFFECT MOMENTUM'S ABILITY TO MARKET OUR BIODIESEL.
Because it is a relatively new product, the research of biodiesel use in automobiles and its effect on the environment is ongoing. Some industry groups and standards, including the World Wide Fuel Charter, have recommended that blends of no more than 5% biodiesel be used for automobile fuel due to concerns about fuel quality, engine performance problems and possible detrimental effects of biodiesel on rubber components and other parts of the engine. Although some manufacturers have encouraged the use of biodiesel fuel in their vehicles, cautionary pronouncements by others may affect our ability to market our product. In addition, studies have shown that nitrogen oxide emissions from pure biodiesel increase by 10%. Nitrogen oxide is the chief contributor to ozone or smog. New engine technology is available and is being implemented to eliminate this problem. However, these emissions may decrease the appeal of our product to environmental groups and agencies who have been historic supporters of the biodiesel industry.
MOMENTUM FACES SUBSTANTIALLY DIFFERENT RISKS IN THE BIODIESEL INDUSTRY THAN DO ETHANOL MANUFACTURERS.
The ethanol industry enjoys over 3 billion gallons of annual domestic demand and a vast existing production, marketing, and transportation network servicing a substantial demand. Conversely, in 2006, the biodiesel industry supplied only approximately 200 million gallons of fuel for domestic consumption. The entire diesel fuel market constitutes only about one-third of the gasoline market as a whole. The trucking industry consists of approximately 56% percent of the diesel market. Furthermore, diesel vehicles make up about only 4% of all passenger vehicle sales. Acceptance of biodiesel by consumers has been slow, and the biodiesel industry has faced opposition from the trucking industry and others about legislative mandates for its use. The present marketing and transportation network for biodiesel must expand significantly before biodiesel can become a significant component of the alternative fuels marketplace, making marketing of the final product difficult. For example, unlike ethanol, biodiesel is often not readily available at pumps in gasoline stations. Therefore, the Company may be unable to market its biodiesel profitably.
In addition, the Company faces a substantially different market than do ethanol producers for the supply of raw material. Manufacturers of ethanol often purchase raw grains directly from producers, which presents an almost unlimited supply from thousands of corn growers. We purchase only raw or partially refined oils and fats from a very limited number of suppliers. Accordingly, we may be unable to obtain the necessary supply of raw materials and may be unable to operate at profitable levels.
The ethanol industry has historically enjoyed substantially more governmental support than the biodiesel industry on both the federal and state levels. Although the Energy Policy Act of 2005 enacted or extended certain tax credits for the biodiesel industry, such incentives had been previously available to the ethanol industry. In addition, various states offer other production subsidies for ethanol. Subsidies for ethanol make its production more profitable. These and other differences between the ethanol industry and our industry make risk and investment comparisons between the two industries unreliable.
MOMENTUM WILL COMPETE FOR CUSTOMERS IN AN UNDEFINED MARKETPLACE THAT IS IN ITS INFANCY.
The biodiesel industry is relatively new, and therefore the long-term customer base has not been adequately defined. Customers may include municipalities, school districts, the military, federal fleets and retail. Because the customer base may be narrow, it is possible that other producers of biodiesel may provide significant competition for these markets. The Company has not conducted a market study to substantiate the fact that significant competition might not arise or that the market would not be sensitive to such competition. The Company may not be able to compete successfully in the marketplace.
MOMENTUM WILL COMPETE FOR RAW MATERIALS FOR WHICH MANY OTHER MATURE INDUSTRIES ALSO COMPETE.
In order for Momentum to produce biodiesel, it must have a continuing supply of soy oil, vegetable fat sources, and animal fats from which to make our product. Momentum will compete for raw materials with other industries that also have a need for those materials. If Momentum cannot compete successfully to acquire raw materials, Momentum will have to secure tolling agreements, reduce production or increase the cost of production, thereby affecting the overall profitability.
RISKS RELATED TO REGULATION AND GOVERNMENTAL ACTION
The biodiesel industry relies on federal legislation to create demand for the biodiesel product, which creates an artificial market. If the federal government ceases to provide incentives for biodiesel products, the demand for biodiesel products will decline.
Much of the existing demand for biodiesel is a result of the need of certain entities to comply with the requirements of the Energy Policy Act of 1992 (and amendments thereto) and clean air regulations promulgated by the EPA. The Company can give no assurance that these rules and regulations will continue to remain in effect throughout the lifetime of Momentum. If these rules and regulations were repealed, the incentive for a substantial portion of Momentum's targeted customer base to purchase biodiesel would be eliminated, having a materially adverse effect on the profitability of Momentum.
REGULATION OF MOMENTUM'S BUSINESS
The biodiesel industry is subject to federal, state, and local government regulations, including those relating to the certification of manufacturing and product, taxes on fuel, as well as transportation, emissions, environmental, building, and zoning requirements. Also, we will be subject to laws governing our relationships with employees, such as minimum wage requirements, overtime, working conditions, and work permit requirements (including the Immigration and Nationality Act of 1990, which requires employers to ask employees to present certain original documents to establish their identity and employment eligibility and to verify on INS Form I-9 that they are eligible to be employed in the U.S.). The failure to comply with such laws, obtain or retain certification, permit or license approvals, or an increase in the minimum wage rate, employee benefit costs, or other costs associated with employees could have an adverse affect upon us.
LOSS OF FAVORABLE TAX AND PRODUCTION BENEFITS FOR BIODIESEL PRODUCTION COULD HINDER MOMENTUM'S ABILITY TO OPERATE AT A PROFIT.
The Company is currently eligible for certain state subsidies and federal tax credits which offset the cost differential between biodiesel and conventional petroleum-based diesel products. These subsidies and tax incentives have been approved by state entities, but are unfunded by the state and may not continue, or, if they continue, the incentives may not remain at the same level. The elimination or reduction of tax incentives and subsidies to the biodiesel industry would reduce demand for biodiesel, decreasing our revenues and profitability.
A CHANGE IN ENVIRONMENTAL REGULATIONS OR VIOLATIONS THEREOF COULD RESULT IN ADDITIONAL COSTS FOR THE COMPANY, WHICH COULD HAVE AN ADVERSE EFFECT ON PROFITABILITY.
Momentum is subject to extensive air, water and other environmental regulations and is required to obtain a number of environmental permits to construct and operate the plant. In addition, biodiesel producers are required to satisfy the fuel quality standards of the Environmental Protection Agency (EPA). Momentum has either applied for or are in the process of applying for all required permits and does not anticipate that any of these permits will be denied, or that the permitting process will delay scheduled production. However, if for any reason Momentum is unable to obtain any of these permits, costs could increase and the plant completion could be delayed. Additionally, environmental laws and regulations, both at the federal and state level, are subject to change, and changes can be made retroactively. Consequently, even if the Company has the proper permits at the proper time, it may be required to invest or spend considerable resources to comply with future environmental regulations or new or modified interpretations of those regulations.
Under various federal, state, and local laws, ordinances and regulations, an owner and operator of a biodiesel plant may be liable for the costs of removal or remediation of certain hazardous substances released or located on its property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. The presence of such substances, or the failure to properly remediate such substances, when released, may adversely affect the owner's ability to sell such plant or to borrow funds using such plant as collateral. In addition to clean-up actions brought by federal, state and local agencies, the presence of hazardous waste on the plant site could result in personal injury or similar claims by private plaintiffs. Though the Company intends to properly utilize the plant, there is always the possibility that through accident or otherwise, environmental liabilities might arise, and in such case, the clean up thereof might prove very expensive, thereby decreasing the profitability or increasing the liabilities of the Company.
MOMENTUM HAS AGREED TO INDEMNIFICATION OF OFFICERS AND DIRECTORS AS IS PROVIDED BY COLORADO REVISED STATUTE.
Colorado Revised Statutes provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities our behalf. Momentum will also bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person's promise to repay us therefore if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us that we will be unable to recoup.
MOMENTUM DIRECTORS' LIABILITY TO US AND SHAREHOLDERS IS LIMITED.
Colorado Revised Statutes exclude personal liability of our directors and our stockholders for monetary damages for breach of fiduciary duty except in certain specified circumstances. Accordingly, we will have a much more limited right of action against our directors that otherwise would be the case. This provision does not affect the liability of any director under federal or applicable state securities laws.
MOMENTUM MAY DEPEND UPON OUTSIDE ADVISORS, WHO MAY NOT BE AVAILABLE ON REASONABLE TERMS AND AS NEEDED.
To supplement the business experience of our officers and directors, we may be required to employ accountants, technical experts, appraisers, attorneys, or other consultants or advisors. Our Board without any input from stockholders will make the selection of any such advisors. Furthermore, we anticipate that such persons will be engaged on an "as needed" basis without a continuing fiduciary or other obligation to us. In the event we consider it necessary to hire outside advisors, we may elect to hire persons who are affiliates, if they are able to provide the required services.
RISK FACTORS RELATED TO OUR STOCK
THERE ARE LIMITED TRADING MARKETS FOR THE COMPANY'S COMMON STOCK, THEREBY LIMITING A SHAREHOLDERS' OPPORTUNITY TO SELL SUCH COMMON STOCK.
Currently, only a limited trading market exists for the Company's common stock. The common stock trades on the Over-The-Counter Bulletin Board ("OTCBB") under the symbol "MMBF." The OTCBB is a limited market and subject to substantial restrictions and limitations in comparison to the NASDAQ system. Any broker/dealer that makes a market in the Company's stock or other person that buys or sells our stock could have a significant influence over its price at any given time. The Company cannot assure its shareholders that a market for the Company's common stock will be sustained. There is no assurance that the Company's common stock will have any greater liquidity than shares that do not trade on a public market. A shareholder may be required to retain their shares for an indefinite period of time, and may not be able to liquidate their shares in the event of an emergency or for any other reasons.
THE REGULATION OF PENNY STOCKS BY SEC AND FINRA MAY DISCOURAGE THE TRADABILITY OF OUR SECURITIES.
We are a "penny stock" company. None of our securities currently trade in any market and, if ever available for trading, will be subject to a Securities and Exchange Commission rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or accredited investors. For purposes of the rule, the phrase "accredited investors" means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse's income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Effectively, this discourages broker-dealers from executing trades in penny stocks. Consequently, the rule will affect the ability of purchasers in this offering to sell their securities in any market that might develop therefore because it imposes additional regulatory burdens on penny stock transactions.
In addition, the Securities and Exchange Commission has adopted a number of rules to regulate "penny stocks". Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange Act of 1934, as amended. Because our securities constitute "penny stocks" within the meaning of the rules, the rules would apply to us and to our securities. The rules will further affect the ability of owners of shares to sell our securities in any market that might develop for them because it imposes additional regulatory burdens on penny stock transactions.
Shareholders should be aware that, according to Securities and Exchange Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) "boiler room" practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
THE COMPANY WILL PAY NO FORESEEABLE DIVIDENDS IN THE FUTURE.
We have not paid dividends on our common stock and do not ever anticipate paying such dividends in the foreseeable future.
RULE 144 SALES IN THE FUTURE MAY HAVE A DEPRESSIVE EFFECT ON OUR STOCK PRICE.
All of the outstanding shares of common stock held by our present officers, directors, and affiliate stockholders are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended. As restricted Shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Act and as required under applicable state securities laws. Rule 144 provides in essence that a person who has held restricted securities for six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1.0% of a company's outstanding common stock or the average weekly trading volume during the four calendar weeks prior to the sale. There is no limit on the amount of restricted securities that may be sold by a non-affiliate after the owner has held the restricted securities for a period of two years. A sale under Rule 144 or under any other exemption from the Act, if available, or pursuant to subsequent registration of shares of common stock of present stockholders, may have a depressive effect upon the price of the common stock in any market that may develop.
MOMENTUM STOCK WILL IN ALL LIKELIHOOD BE THINLY TRADED AND AS A RESULT YOU MAY BE UNABLE TO SELL AT OR NEAR ASK PRICES OR AT ALL IF YOU NEED TO LIQUIDATE YOUR SHARES.
The shares of our common stock may be thinly-traded on the OTC Bulletin Board, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-adverse and would be reluctant to follow an unproven, early stage company such as ours or purchase or recommend the purchase of any of our Securities until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our Securities is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on Securities price. We cannot give you any assurance that a broader or more active public trading market for our common Securities will develop or be sustained, or that any trading levels will be sustained. Due to these conditions, we can give investors no assurance that they will be able to sell their shares at or near ask prices or at all if you need money or otherwise desire to liquidate the Securities of our Company.
MOMENTUM COMMON STOCK MAY BE VOLATILE, WHICH SUBSTANTIALLY INCREASES THE RISK THAT YOU MAY NOT BE ABLE TO SELL YOUR SECURITIES AT OR ABOVE THE PRICE THAT YOU MAY PAY FOR THE SECURITY.
Because of the limited trading market for Momentum's common stock and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. The inability to sell your Securities in a rapidly declining market may substantially increase your risk of loss because of such illiquidity and because the price for our shares may suffer greater declines because of our price volatility.
The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you may pay. Certain factors, some of which are beyond our control, that may cause our share price to fluctuate significantly include, but are not limited to the following:
o Variations in our quarterly operating results;
o Loss of a key relationship or failure to complete significant transactions;
o Additions or departures of key personnel; and
o Fluctuations in stock market price and volume.
Additionally, in recent years the stock market in general, and the over-the-counter markets in particular, have experienced extreme price and volume fluctuations. In some cases, these fluctuations are unrelated or disproportionate to the operating performance of the underlying company. These market and industry factors may materially and adversely affect our stock price, regardless of our operating performance. In the past, class action litigation often has been brought against companies following periods of volatility in the market price of those companies common stock. If we become involved in this type of litigation in the future, it could result in substantial costs and diversion of management attention and resources, which could have a further negative effect on your investment in our stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS - ----------------------------------
Not Applicable.
ITEM 2.
ITEM 2. PROPERTIES - ------------------
Corporate Offices
Our headquarters are located in our production plant at 4700 New West Dr. Pasadena, Texas 77507. The Company leases a 3,661 sq. foot space at 2600 South Shore Blvd., Suite 100, League City Texas. The lease is for a period of five years and has an annual rent of approximately $95,000. This space has been sub-leased on a short term agreement to reduce expenses.
LaPorte Plant
The Company has completed construction of its biodiesel production facility located in LaPorte, Texas. The production facility is housed in a 14,160 square foot office/warehouse building. The production facility sits on 8.7 acres of land. The facility is leased for a period of six years and has an annual rent and estimated CAM of $217,143.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - -------------------------
In February 2008, subsequent to the close of the 2007 fiscal year end, Momentum received notice of its inclusion in a legal complaint filed against Vertex Energy by Purity Water Company of San Antonio in the Circuit Court of Mobile, Alabama. The complaint alleges that Vertex, the defendant, contracted with Purity Water, the plaintiff, to remove water from two million gallons of Biodiesel stored in Alabama. The complaint further alleged that Vertex engaged several other companies, including Momentum Biofuels, Inc., as subcontractors to service the contract.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -----------------------------------------------------------
No matters were submitted during the period covered by this report to a vote of security holders of the Company, through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND - -------------------------------------------------------------------------------- ISSUER PURCHASES OF EQUITY SECURITIES - -------------------------------------
Market Information
PRICE RANGE OF COMMON STOCK
The Common Stock is presently traded on the over-the-counter market on the OTC Bulletin Board maintained by the Financial Industry Regulatory Authority ("FINRA"). The Common Stock of the Company trades on the OTC Bulletin Board under the trading symbol "MMBF."
The following table sets forth the range of high and low bid quotations for the common stock of each full quarterly period during the fiscal year or equivalent period for the fiscal periods indicated below. The quotations were obtained from information published by the FINRA and reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
High Low ---- --- 2008 Fiscal Year ---------------- March 31, 2008 $0.99 $0.35 June 30, 2008 $0.88 $0.28 September 30, 2008 $0.70 $0.08 December 31, 2008 $0.35 $0.07
2007 Fiscal Year ---------------- March 31, 2007 $1.65 $1.60 June 30, 2007 $1.62 $1.60 September 30, 2007 $0.80 $0.80 December 31, 2007 $0.65 $0.61 Holders
As of December 31, 2008, there were 393 shareholders of record. There are beneficial shareholders. In many instances, a registered stockholder is a broker or other entity holding shares in street name for one or more customers who beneficially own the shares.
Our transfer agent is Mountain Share Transfer, Inc. 1625 Abilene Drive, Broomfield, Colorado 80020. The telephone number is 303-460-1149.
Dividend Policy
Holders of Momentum's common stock are entitled to receive such dividends as may be declared by Momentum's board of directors. The Company has not declared or paid any dividends on its common shares and it does not plan on declaring any dividends in the near future. The Company currently intends to use all available funds to finance the operation and expansion of its business.
Shares Eligible for Future Sale
Momentum currently has 47,724,444 shares of common stock outstanding as of December 31, 2008. A current shareholder who is an "affiliate" of Momentum, defined in Rule 144 as a person who directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with Momentum will be required to comply with the resale limitations of Rule 144. Of these shares a total of 28,800,000 shares have been held for 6 months or more and are eligible for resale under Rule 144. Sales by affiliates will be subject to the volume and other limitations of Rule 144, including certain restrictions regarding the manner of sale, notice requirements, and the availability of current public information about Momentum. The volume limitations generally permit an affiliate to sell, within any three month period, a number of shares that does not exceed the greater of one percent of the outstanding shares of common stock or the average weekly trading volume during the four calendar weeks preceding his sale. A person who ceases to be an affiliate at least three months before the sale of restricted securities beneficially owned for at least two years may sell the restricted securities under Rule 144 without regard to any of the Rule 144 limitations.
Recent Sales of Unregistered Securities
During the year ended December 31, 2008, the Company made the following sales of its unregistered securities.
Exemption From Registration Claimed
All of the sales by Momentum of its unregistered securities were made in reliance upon Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act"). The entity listed above that purchased the unregistered securities was an existing shareholder, known to the Company and its management, through pre-existing business relationships, as a long standing business associate. The entity was provided access to all material information, which it requested, and all information necessary to verify such information and was afforded access to Momentum's management in connection with the purchases. The purchaser of the unregistered securities acquired such securities for investment and not with a view toward distribution, acknowledging such intent to the Company. All certificates or agreements representing such securities that were issued contained restrictive legends, prohibiting further transfer of the certificates or agreements representing such securities, without such securities either being first registered or otherwise exempt from registration in any further resale or disposition.
Issuer Purchases of Equity Securities
Momentum did not repurchase any shares of its common stock during the year ended December 31, 2008.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - -------------------------------
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - -------------
FORWARD-LOOKING STATEMENTS CAUTIONARY
This Report on Form 10-K for the year ended December 31, 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, 2008, includes a "going concern" explanatory paragraph that describes substantial doubt about the Company's ability to continue as a going concern.
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.
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.
During 2007, we completed construction of our plant in LaPorte, Texas, have had limited production. The Company's initial focus has been on and continues to be on efficiently operating the La Porte plant at its planned capacity and on sales of our product. Our marketing strategy will focus on wholesale distribution to fuel jobbers, corporate fleets and government users. We will also use established alternative fuel brokers where appropriate.
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 - ---------------------
For the Year Ended December 31, 2008 Compared to the Year Ended December 31,
The Company recognized revenue of $418,263 for the year ended December 31, 2008, compared to $702,295 of revenue during the year ended December 31, 2008. The $283,672 decrease was a result of the rising costs of raw materials and the decrease in demand for biodieseal.
During the year ended December 31, 2008, the Company incurred $256,265 in cost of sales, resulting in a gross profit of $161,998 compared to $784,665 in cost of goods sold; resulting in a gross loss of $82,370 for the year ended December 31, 2007.
During the year ended December 31, 2008, the Company incurred operating expenses of $4,297,162 compared to $7,561,277 during the year ended December 31, 2007. The decrease of $3,264,115 was a result of a decrease of $3,160,956 decrease in share based compensation. Operating expenses during the year ended December 31, 2008 included, $1,463,792 in plant expenses and $2,833,370 in general and administrative expenses, compared to $1,107,023 in plant expenses and $6,454,254 in administrative expenses for the year ended December 31, 2007.
During the year ended December 31, 2008, the Company incurred net interest expense of $97,816, compared to $29,990 for the year ended December 31, 2007.
During the year ended December 31, 2008, the Company recognized a net loss of $4,232,980 compared with a net loss of $7,673,637 for the year ended December 31, 2007. The decrease of $3,440,657 was due primarily to the $3,264,115 decrease in operating expenses offset by a $67,826 increase in net interest expense combined with the $241,626 increase in gross profits.
The net loss per share for the year ended December 31, 2008, was $0.09 per share compared to a net loss per share of $0.15 for the year ended December 31, 2007.
LIQUIDITY - ---------
At December 31, 2008, the Company had $34,559 in cash and $142,364 in total current assets with which to conduct its operations. Total current assets consisted of $34,559 in cash, $2,190 in accounts receivable, $73,552 in inventory and $32,063 in prepaid expenses. At December 31, 2008, total current liabilities were $1,225,319. At December 31, 2008, the Company has a total working capital deficit of $1,367,683.
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 year ended December 31, 2008 was $1,356,657, compared $2,874,569 used in operating activities in the year ended December 31, 2007. During the year ended December 31, 2008, net losses of $4,232,980 were adjusted for non-cash items that included $522,781 in depreciation and amortization expense and $1,518,439 in share based compensation, other non-cash adjustments totaled $203,448. During the year ended December 31, 2007, net losses of $7,673,637 were adjusted for the non-cash items of $277,896 in depreciation and amortization expense, $4,679,395 in share based compensation, $29,866 in bad debt expense and $18,894 in penalty expenses.
During the year ended December 31, 2008, the Company used $112,726 in cash in its investing activities. During the year ended December 31, 2008, the Company sold fixed assets worth $135,000. During the year ended December 31, 2007, the Company used $954,674 in its investing activities for the acquisition of property and plant equipment.
Net cash received by financing activities during the year ended December 31, 2008 was $501,319. During the year ended December 31, 2007, the Company received funds of $4,586,937 from its financing activities.
During the year ended December 31, 2008, the Company sold 200,000 shares of its restricted common stock for cash of $80,000. The shares were sold for $0.40 per share.
On January 11, 2008, the Company made final payment on the outstanding $400,000 promissory note held by Ultimate Investment Corp ("Ultimate"). The promissory note had an issue date of June 30, 2006 and had been accruing interest at a rate of 12% per annum, at the default rate. The final payment was $319,792, cash, including accrued interest of $3,901.
On June 25, 2008, the Company closed $600,000 of Senior Secured Convertible Debt. The notes are held by fourteen different lenders, four of which are related parties. The note has an issue date of June 25, 2008 and accrues interest at 10% per annum, payable quarterly. Note holders may at any time convert the balance of the note into common shares at a conversion price of $0.40. The notes mature on May 1, 2013.
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 Annual Report on Form 10-K 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 this Annual Report on Form 10K. 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 allowance for accounts receivable o value of long-lived assets o inventories o share-based compensation
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.
ALLOWANCE FOR 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. Management believes all receivables will be collected and therefore the allowance has been established to be zero at December 31, 2008.
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 December 31, 2008.
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.
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.
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 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------
Momentum's operations do not employ financial instruments or derivatives which are market sensitive. Short term funds are held in non-interest bearing accounts and funds held for longer periods are placed in interest bearing accounts. Large amounts of funds, if available, will be distributed among multiple financial institutions to reduce risk of loss. The Company's cash holdings do not generate interest income.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------
The audited financial statements of Momentum BioFuels, Inc. for the years ended December 31, 2008 and 2007, appear as pages through.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE - --------------------
Malone-Bailey, P.C. formerly the independent registered public accountant for Momentum, was dismissed as the Company's independent registered public accountant on November 10, 2008.
On November 10, 2008, the Board of the Company approved the engagement of new auditors, Larry O'Donnell, CPA, PC, of Aurora, Colorado to be the Company's independent registered public accountant. No audit committee exists, other than the members of the Board of Directors.
The action to engage new auditors was approved by the Board of Directors. No audit committee exists, other than the members of the Board of Directors.
In connection with audit of fiscal years ended December 31, 2007 and 2006 and the cumulative period of January 1, 2008 through June 30, 2008 and through the date of termination of the accountants, no disagreements exist with the former independent registered public accountant on any matter of accounting principles or practices, financial statement disclosure, internal control assessment, or auditing scope of procedure, which disagreements if not resolved to the satisfaction of the former accountant would have caused them to make reference in connection with their report to the subject of the disagreement(s).
The audit report by Malone-Bailey, PC for the fiscal years ended December 31, 2007 and 2006, contained an opinion which included a paragraph discussing uncertainties related to continuation of the Company as a going concern.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES - --------------------------------
Disclosures Controls and Procedures
We have adopted and maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC's rules and forms and that the information is gathered and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) to allow for timely decisions regarding required disclosure.
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, Mr. Enders 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, as a result of material weaknesses in our internal control over financial reporting discussed below.
ITEM 9A(T). CONTROLS AND PROCEDURES - -----------------------------------
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management's assessment of the effectiveness of the small business issuer's internal control over financial reporting is as of the year ended December 31, 2008. Based on the evaluation, management concluded that there is a material weakness in our internal control over financial reporting. The material weakness relates to the monitoring and review of work performed by contracted accounting personnel in the preparation of audit and financial statements, footnotes and financial data provided to Momentum's registered public accounting firm in connection with the annual audit. Until October 2007, all of our financial reporting is carried out by our Chief Financial Officer, during the year ended December 31, 2008, the Company continued to function without a Chief Financial Officer. 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.
This annual 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 SEC that permit the Company to provide only management's report in this annual report.
There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2008, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION - --------------------------
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE - ---------------------------------------------------------------
The following table sets forth information as to persons who currently serve as Momentum BioFuels, Inc. directors or executive officers, including their ages as of December 31, 2008.
Name Age Position - ---------------------------- ------------------------- ------------------------- Gregory A. Enders 54 Chief Executive Officer and Director Gary Johnson 52 Chief Operating Officer Richard C. Cilento* 47 Director David M. Fick 56 Director Jeffrey P. Ploen 57 Director Richard A. Robert** 43 Director
*Mr. Cilento resigned as a director of Momentum on February 2, 2009. **Mr. Roberts resigned as a director of Momentum on March 25, 2009.
Momentum's directors serve an annual term.
The directors named above will serve until the next annual meeting of Momentum's stockholders. Thereafter, directors will be elected for one-year terms at the annual stockholders' meeting. Officers will hold their positions at the pleasure of the board of directors absent any employment agreement. There is no arrangement or understanding between the directors and officers of Momentum and any other person pursuant to which any director or officer was or is to be selected as a director or officer.
Biographical Information
GREGORY A. ENDERS (54). Mr. Enders has served as the Chief Executive Officer and a Director of the Company since October 20, 2007. Mr. Enders has served as Chief Executive Officer of several public and private companies including Stratasoft, Inc., Commerciant Holdings, Inc., Intermat, Inc., Strategic Distribution, MRO Software, Inc., Integration Systems, Inc. (d/b/a Bizmart Computer Super Centers) and Computer Productivity, Inc. Most of these companies have been involved in existing and emerging technologies and have included high volume hardware sales, technology development, professional skills training, communications and electronics. For 15 years, he has simultaneously served as Chairman and CEO of Enders Racing, LLC, a motorsports marketing and competition company to operate an NHRA Pro Stock Championship Drag Racing Team. This team was the subject of the Disney Movie, "Right on Track". In addition, Mr. Enders has served as President and CEO of GEAM, Inc., an acquisitions and management company established for the purpose of consulting in the areas of business acquisitions, financial restructuring, strategic planning and implementation of client companies. Mr. Enders served in the United States Air Force (both active duty and reserves) from 1972 - 1978. From 2002 until August of this 2007 Mr. Enders served on the Development Board of Texas A&M's Mays Business School.
GARY A. JOHNSON (52). Mr. Johnson has served as the Chief Operating Officer of the Company since October 16, 2007. Mr. Johnson has over 20 years of executive level management experience delivering products, services and solutions to Global 2000 clients. Prior to joining Momentum, Mr. Johnson served as Vice President of Operations for Stratasoft, Inc., President of IHS-Intermat Solutions, Vice President of Operations with MRO Software and Vice President and General Manager of Integration Systems, Inc. Mr. Johnson gained extensive experience in transition management through several mergers, acquisitions, joint ventures and MBO/LBO's while associated with these firms. Prior to these corporate positions, Mr. Johnson served in various capacities with several rapid growth emerging technologies based companies. Mr. Johnson attended the University of Houston.
DAVID M. FICK. Mr. Fick has served as a director of the Company since October 9, 2007. Mr. Fick has participated as an active investor and entrepreneur in numerous projects involving wind, biodiesel, ethanol, and farm related businesses. Mr. Fick is currently President of several investment funds working with value added ventures for farming. He owns and operates a farm implement business that sells over 50 manufacturer lines. He is a past board member of Badger State Ethanol. Mr. Fick and his family have been a part of the farming community in Minnesota and South Dakota for almost 40 years including interests in dairy, corn, beets, soybeans and alfalfa. He has served in the National Guard and has held multiple leadership roles with local farm organizations, civic organizations and his church.
JEFFREY PLOEN. Mr. Ploen was re-elected to the Board of Directors in October 2006. Mr. Ploen has served as a director of the Company since July 2004. He served as the acting Chief Executive Officer and acting Chief Financial Officer of the Company until June 2006. He has been a member of the investment banking industry for over 25 years specializing in small or micro cap firms. He is a founding partner and is currently the CEO and Chairman of the Board of Iofina Natural Gas PLC. He served as the former Chairman, President and CEO of Tonga Capital Corp. He was the former Chairman and CEO of Paradigm Holdings, Inc. He is the former hedge fund manager of the Olive Fund LLC. Mr. Ploen held positions with several small cap brokerage houses from 1972 through 1994 including Engler and Budd, Cohig and Associates, Neidiger, Tucker and Brunner and Institutional Securities, Inc. For the past ten years Mr. Ploen has been President of J. Paul Consulting Corp., a firm specializing in financing for small and micro cap firms.
RICHARD C. CILENTO. Mr. Cilento has served as a director of the Company from 2006 till February 2, 2009. He is currently the President, Chief Executive Officer and Founder of FuelQuest, Inc. FuelQuest provides on-demand supply chain management and tax automation software and services for suppliers, distributors, fuel buyers, and traders in Global Downstream Energy. Mr. Cilento brought a broad scope of experience in technology, operations and business development this role as President and Chief Executive Officer of FuelQuest. He is a co-founder of The Bollard Group, which provides investment banking services to petroleum distribution companies and other high-growth business ventures. Prior to co-founding The Bollard Group, he held senior-management positions with several technology firms, including Xerox Corp, where he served as Vice President of Strategic Services. Prior to that, he was the Vice President of Corporate Services for XLConnect Solutions, where he served as the lead technologist for advanced systems and managed the organization through its Initial Public Offering and its eventual merger with Xerox, forming Xerox Connect Solutions. Mr. Cilento began his career at NASA, where he and his team were responsible for redesigning NASA's Mission Control Center and implementing NASA's Software Management Plan. He holds a BS degree in Aeronautical and Astronomical Engineering from the University of Illinois, an MBA at the University of Houston and serves on the advisory boards for several internet-based companies.
RICHARD A. ROBERT. Mr. Robert resigned as a director of the Company on March 25, 2009. He is a financial executive with expertise in acquisitions, divestitures, economic analysis, capital formation via debt and equity markets, and financial risk management. Through the course of his career he has dealt extensively with Wall Street analysts, investment bankers, and commercial bankers. He is currently the Executive Vice-President and Chief Financial Officer of Vanguard Natural Resources, LLC which is a publicly traded natural gas and oil production company focused on the development and exploitation of mature long-lived natural gas and oil reserves in the Appalachian and Permian basins. He served as the Interim Chief Financial Officer of Massey Energy Company ("Massey") which is the fourth largest coal company in the United States. Mr. Robert was the Vice President of Finance of Enbridge US, Inc. ("Enbridge") after Enbridge's acquisition of Midcoast Energy Resources, Inc. (`Midcoast"). Enbridge is a multibillion-dollar energy company based in Calgary, Alberta. Mr. Robert served as the Chief Financial Officer and Treasurer of Midcoast. Midcoast was a growth-oriented energy company engaged in the transportation, gathering, processing, and marketing of natural gas and other petroleum products. He was hired as the first employee of the company and helped the company grow from infancy to approximately $1 billion in sales and 330 employees in Canada and the United States. Mr. Robert began his career with Arthur Andersen, LLP as an energy auditor. He holds a BBA from Southwest Texas State University with a Concentration in Accounting.
Committees of the Board of Directors
Momentum is managed under the direction of its board of directors.
Executive Committee
Momentum does not have an executive committee, at this time.
Audit Committee
Momentum does not have an audit committee at this time.
Conflicts of Interest - General.
The Company's directors and officers are, or may become, in their individual capacities, officers, directors, controlling shareholder and/or partners of other entities engaged in a variety of businesses. Thus, there exist potential conflicts of interest including, among other things, time, efforts and corporation opportunity, involved in participation with such other business entities.
Conflicts of Interest - Corporate Opportunities
Presently no requirement contained in the Company's Articles of Incorporation, Bylaws, or minutes which requires officers and directors of the Company's business to disclose to Momentum business opportunities which come to their attention. The Company's officers and directors do, however, have a fiduciary duty of loyalty to Momentum to disclose to it any business opportunities which come to their attention, in their capacity as an officer and/or director or otherwise. Excluded from this duty would be opportunities which the person learns about through his involvement as an officer and director of another company. The Company has no intention of merging with or acquiring an affiliate, associate person or business opportunity from any affiliate or any client of any such person.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - -------------------------------
The following table sets forth the compensation paid to officers and board members during the fiscal years ended December 31, 2008, 2007 and 2006. The table sets forth this information for Garner Investments, Inc., including salary, bonus, and certain other compensation to the Board members and named executive officers for the past three fiscal years and includes all Board Members and Officers as of December 31, 2008.
(1) Mr. Enders was appointed the Chief Executive Officer on October 20, 2007. Mr. Enders received $122,170 in salary in 2008, regular salary payments under his employment agreement were discontinued by the Company in July 2007. Mr. Ender's employment agreement states he receives an annual salary of $216,000. In addition in 2007, he received an option exercisable for 5,000,000 shares which vests over a three year period and was valued using the Black-Scholes model at $3,313,565.
(2) Mr. Barent Cater served as our Chief Executive Officer from March 1, 2007 through October 9, 2007. During 2007, Mr. Cater worked without receiving a salary. He was awarded 5,000,000 options as part of his employment contract. Upon his separation he forfeited 3,500,000 options.
(3) Mr. Stuart Cater served as our Chief Financial Officer from March 1, 2007 through October 10, 2007. He was awarded 2,000,000 options as part of his employment contract. Upon his separation he forfeited 1,625,000 options. As part of a separation agreement Mr. Cater will receive $150,000, of which $60,000 was paid upon execution of the agreement, the balance paid in twelve monthly installments of $7,500, starting November 15, 2007. The Company was unable to continue payments and entered into a settlement agreement to be funded as cash allows.
(4) Mr. Phillips served as the President and Chief Executive Officer from June 2006 through February 2007. The $80,000 in other compensation includes $50,000 in consulting fees.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END --------------------------------------------
The following table sets forth certain information concerning outstanding equity awards held by the President and the Company's most highly compensated executive officers for the fiscal year ended December 31, 2008 (the "Named Executive Officers"):
(1) Mr. Enders was appointed the Chief Executive Officer on October 20, 2007. Mr. Ender's employment agreement states he receives 5,000,000 options vested over three years.
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
During the year ended December 31, 2008, Momentum created the Momentum 2008 Stock Option and Award Plan. There was no grant of stock options to the Chief Executive Officer and other named executive officers during the fiscal year ended December 31, 2008.
Employment Agreements and Termination of Employment and Change-In-Control Arrangements
Ender's Employment Agreement
On October 16, 2007, Momentum entered into an Employment Agreement with Mr. Gregory A. Enders, the Chef Executive Officer and President. The Employment Agreement has a term of 3 years and provides for an automatic renewal for 1 year terms. The Employment Agreement can be terminated by either party at an earlier date. As part of the Employment Agreement, Mr. Enders receives an annual base salary of $216,000 per year. If business objectives set by the Board of Directors and Mr. Enders are met after a period of six months, Mr. Enders is to receive an additional $2,000 per month. Mr. Ender's salary is subject to annual review by the Board of Directors. In July 2008, the Company discontinued regular salary payments under the Employment Agreement.
As part of his Employment Agreement, Mr. Enders was issued an option exercisable for 5,000,000 shares of common stock. The option has an exercise price of $1.00 per share and a term of 3 years. The option vests at a rate of 1,250,000 shares in six months from the date of issuance, 1,250,000 shares in twelve months from the date of issuance, 1,250,000 shares on the second anniversary of issuance and 1,250,000 shares on the third anniversary of issuance.
Director Compensation
The Company does not pay any Directors fees for meeting attendance.
The following table sets forth certain information concerning compensation paid to the Company's directors during the year ended December 31, 2008:
All of the Company's officers and/or directors will continue to be active in other companies. All officers and directors have retained the right to conduct their own independent business interests.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Momentum's officers and directors are indemnified as provided by the Colorado Revised Statutes and the bylaws.
Under the Colorado Revised Statutes, director immunity from liability to a company or its shareholders for monetary liabilities applies automatically unless it is specifically limited by a company's Articles of Incorporation. The Company's Articles of Incorporation do not specifically limit the directors' immunity. Excepted from that immunity are: (a) a willful failure to deal fairly with Momentum's or its shareholders in connection with a matter in which the director has a material conflict of interest; (b) a violation of criminal law, unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful; (c) a transaction from which the director derived an improper personal profit; and (d) willful misconduct.
The Company's bylaws provide that it will indemnify the directors to the fullest extent not prohibited by Colorado law; provided, however, that it may modify the extent of such indemnification by individual contracts with the directors and officers; and, provided, further, that the Company shall not be required to indemnify any director or officer in connection with any proceeding, or part thereof, initiated by such person unless such indemnification: (a) is expressly required to be made by law, (b) the proceeding was authorized by the board of directors, (c) is provided by the Company, in sole discretion, pursuant to the powers vested under Colorado law or (d) is required to be made pursuant to the bylaws.
The Company's bylaws provide that it will advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Company, or is or was serving at the request of Garner Investments as a director or executive officer of another company, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefore, all expenses incurred by any director or officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under the bylaws or otherwise.
EQUITY COMPENSATION PLAN INFORMATION
The Company has not established an equity compensation plan or Incentive Stock Option Plan.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND - -------------------------------------------------------------------------------- RELATED STOCKHOLDER MATTERS. - ---------------------------
The following table sets forth information with respect to the beneficial ownership of Garner Investments, Inc. outstanding common stock by:
o each person who is known by Momentum to be the beneficial owner of five percent (5%) or more of Momentum's common stock;
o Momentum's chief executive officer, its other executive officers, and each director as identified in the "Management -- Executive Compensation" section; and
o all of the Company's directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock and options, warrants and convertible securities that are currently exercisable or convertible within 60 days of the date of this document into shares of the Company's common stock are deemed to be outstanding and to be beneficially owned by the person holding the options, warrants or convertible securities for the purpose of computing the percentage ownership of the person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
The information below is based on the number of shares of Momentum BioFuels, Inc.'s common stock that Momentum believes was beneficially owned by each person or entity as of December 31, 2008.
(1) Based upon 47,724,444 shares of common stock issued and outstanding, options exercisable for 9,250,000 shares of common stock and warrants exercisable for 3,532,000 shares of common stock for 60,506,444 shares on a fully diluted basis on December 31, 2008.
(2) Mr. Enders owns 1,000,000 shares of restricted common stock and an option to purchase 5,000,000 shares from the Company over the next three years.
(3) Mr. Cilento owns 300,000 shares of restricted common stock. Mr. Cilento resigned as a director of the Company on February 2, 2009.
(4) Jeff Ploen, Director, beneficially owns J. Paul Consulting Corp. which owns 2,000,000 shares of common stock. Mr. Ploen directly owns 1,000,000 common shares. His direct ownership and beneficially ownership are shown combined in this table.
(5) Mr. Robert owns 300,000 shares of restricted common stock. Mr. Roberts resigned as a director of the Company on March 25, 2009.
(6) David Fick, a director of the Company, is President of TES Energy Partners and substantially owns shares through the partnership. Mr. Fick votes the TES Energy Partner shares.
Rule 13d-3 under the Securities Exchange Act of 1934 governs the determination of beneficial ownership of securities. That rule provides that a beneficial owner of a security includes any person who directly or indirectly has or shares voting power and/or investment power with respect to such security. Rule 13d-3 also provides that a beneficial owner of a security includes any person who has the right to acquire beneficial ownership of such security within sixty days, including through the exercise of any option, warrant or conversion of a security. Any securities not outstanding which are subject to such options, warrants or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person. Those securities are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person. Included in this table are only those derivative securities with exercise prices that Garner Investments believes have a reasonable likelihood of being "in the money" within the next sixty days.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------
Other than the stock transactions discussed below, the Company has not entered into any transaction nor is there any proposed transactions in which any of the founders, directors, executive officers, shareholders or any members of the immediate family of any of the foregoing had or is to have a direct or indirect material interest.
Year Ended December 31, 2008 - ----------------------------
During the year ended December 31, 2008, there were no related party transactions.
Year Ended December 31, 2007 - ----------------------------
Ender's Employment Agreement
On October 16, 2007, Momentum entered into an Employment Agreement with Mr. Gregory A. Enders, the Chef Executive Officer and President. The Employment Agreement has a term of 3 years and provides for an automatic renewal for 1 year terms. The Employment Agreement can be terminated by either party at an earlier date. As part of the Employment Agreement, Mr. Enders receives an annual base salary of $216,000 per year. If business objectives set by the Board of Directors and Mr. Enders are met after a period of six months, Mr. Enders is to receive an additional $2,000 per month. Mr. Ender's salary is subject to annual review by the Board of Directors. In July 2008, the Company discontinued regular salary payments under the Employment Agreement.
As part of his Employment Agreement, Mr. Enders was issued an option exercisable for 5,000,000 shares of common stock. The option has an exercise price of $1.00 per share and a term of 3 years. The option vests at a rate of 1,250,000 shares in six months from the date of issuance, 1,250,000 shares in twelve months from the date of issuance, 1,250,000 shares on the second anniversary of issuance and 1,250,000 shares on the third anniversary of issuance.
Separation Agreements
Mr. Barent Cater, served as a the Chief Executive Office and a director of Momentum. In May 2007, he signed an Employment Agreement with the Momentum. On October 9, 2007, he resigned his positions with the Momentum and on October 16, 2007 he entered into a Separation Agreement with Momentum. The Separation Agreement provided that Mr. Barent Cater received cash of $72,095 as payment in full of a promissory note held by him. In addition he received a reimbursement of $15,000 for legal expenses that he incurred in connection with his employment agreement.
Mr. Barent Cater was issued an option exercisable for 1,500,000 shares of the Company.
Mr. Stuart Cater, served as Chief Financial Officer of Momentum. In May 2007, he signed an Employment Agreement with Momentum and on October 19, 2007 he resigned his position. He entered into a Separation Agreement with Momentum that provides for him to receive a severance payment of $60,000 and a monthly payment of $7,500 for 12 months. In addition, the 2,00,000 options granted for shares of the Company, 1,625,000 were cancelled. The remaining 375,000 were fully vested and exercisable immediately.
Mr. Gary Johnson, an officer of the Company, has an option to purchase 1,000,000 shares from the Company over the next three years, in connection with his employment agreement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES - -----------------------------------------------
GENERAL. Larry O'Donnell, CPA, P.C. ("O'Donnell") is the Company's principal auditing accountant firm. The Company's Board of Directors has considered whether the provisions of audit services is compatible with maintaining O'Donnell's independence. Prior to November 10, 2008, Malone and Bailey served as our principal auditing accountant firm.
The following table represents aggregate fees billed to the Company for the years ended December 31, 2008 and December 31, 2007..
All audit work was performed by the auditors' full time employees.
* During the year ended December 31, 2008, audit fees of $49,775 were paid to Malone and Bailey and fees of $0_ were paid to Larry O'Donnell, CPA, PC.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following is a complete list of exhibits filed as part of this Form 10K. Exhibit number corresponds to the numbers in the Exhibit table of Item 601 of Regulation S-K.
(a) Audited financial statements for years ended December 31, 2008 and 2007
(b) Exhibit No. Description ----------- ----------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
32.1 Certification of Principal Executive Officer pursuant to Section 906 of the
*Filed herewith.
Larry O'Donnell, CPA, P.C. Telephone (303) 745-4545 Street Fax (303)369-9384 2228 South Fraser Unit I Email larryodonnellcpa@msn.com Aurora, Colorado 80014 www.larryodonnellcpa.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors Momentum Biofuels, Inc.
I have audited the accompanying balance sheet of Momentum Biofuels, Inc. as of December 31, 2008, and the related statements of operations, changes in stockholders' deficit and cash flows for each year then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Momentum Biofuels, Inc. as of December 31, 2008, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles in the United States of America.
The accompanying financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has an accumulated deficit of $13,185,236 at December 31, 2008. Additionally, for the year ended December 31, 2008, the Company had a net loss of $4,232,980. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/Larry O'Donnell, CPA, PC - --------------------------- Larry O'Donnell, CPA, PC March 25, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Momentum Biofuels, Inc. (formerly Tonga Capital Corporation) Houston, Texas
We have audited the accompanying consolidated balance sheets of Momentum Biofuels, Inc. (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year ended December 31, 2007 and period from inception (May 8, 2006) to December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Momentum Biofuels, Inc. as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the periods described in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding these matters also are described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Malone & Bailey, PC - ----------------------- Malone & Bailey, PC www.malone-bailey.com Houston, Texas
April 11, 2008
Momentum Biofuels, Inc. Notes to Consolidated Financial Statements December 31, 2008
Note 1 - Organization and Nature of Operations
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. Momentum Biofuels, Inc. was incorporated in Texas on May 8, 2006, and was to engage in the business of the production of biodiesel fuel. 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.
On October 10, 2007, at the Annual Shareholders' Meeting, the majority of the shareholders approved a resolution to change Tonga's name to Momentum Biofuels, Inc. (Momentum).
Our business purpose is to manufacture high quality biodiesel fuel for sale to local distributors, jobbers, and state and local government fleets.
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. Management believes all receivables will be collected and therefore the allowance has been established to be zero at December 31, 2008.
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.
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.
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 years ended December 31, 2008 and 2007, 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.
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 - 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 year ended December 31, 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 currently has an accumulated deficit of $13,185,236 through December 31, 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 financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Note 4 - 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 2008, three customers accounted for 100% of Momentum's revenue. Momentum performs ongoing credit evaluations of its customers' financial condition. Momentum's accounts receivable are unsecured. At December 31, 2008, two customers account for 100% of accounts receivable.
Note 5 - Inventories
As of December 31, 2008 and 2007, inventory consisted of the following:
Description 2008 2007 - ----------- ---- ---- Finished Goods $ 1,980 $ 20,662 Raw Materials 71,572 36,097 ------------- ----------- Total $ 73,552 $ 56,759 ===============================
Note 6 - Property and Equipment
Property, plant and equipment as of December 31, 2008 and 2007 consisted of the following:
Note 7 - 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 years ended December 31, 2008 and 2007, depreciation and amortization expense was $121,161 and $277,896, respectively.
Note 8 - Loans Payable
Notes payable as of December 31, 2008 and 2007, consisted of the following:
The note payable to Ultimate Investments Corporation was issued as consideration for the purchase and cancellation of stock as a condition of the acquisition of Momentum by Momentum and the associated cost is being treated as an expense of the acquisition in these financial statements. The note matured on September 28, 2006. Since the note was not paid at maturity, interest began to accrue at 12% on that date. Interest has been imputed on this note from the date of issuance, June 30, 2006, until it matured on September 30, 2006, when it began to accrue interest according to its terms. During the year ended December 31, 2008, this note was paid in full.
Note 10 - Convertible Notes Payable
Convertible notes payable as of December 31, 2008 and 2007 consisted of the following:
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 15.
Note 11 - 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 $ 365,416 2010 $ 317,074 2011 $ 303,343 2012 $ 117,619
Rental expense for the year ended December 31, 2008 was 287,592. Rental expense for the year ended December 31, 2007 was $258,592.
Note 12 - 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 December 31, 2008 and 2007 are as follows:
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.
Note 13 - Equity Transactions
During the year ended December 31, 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.
During the year ended December 31, 2007, as a result of a private placement, Momentum raised $5,020, 636, net of offering costs of $90,864, in exchange for the issuance of 5,111,500 shares of restricted common stock. The shares were sold at a price of $1.00 per share.
Note 14 - Options
Options were originally issued in conjunction with employment agreements for key employees and consultants.
Option activity for the period from January 1, 2008 through December 31, 2008 is as follows:
The weighted average exercise price for all options outstanding as of December 31, 2008 was $1.
Note 15 - Warrant Activity
Warrants activity for the period from January 1, 2008 through December 31, 2008 is as follows:
The weighted average exercise price for all warrants outstanding as of December 31, 2008 was $1.
(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.
(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 9, 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.
Note 16 - Subsequent Events
Director Resignations
Richard Cilento has resigned as Director of the Company effective February 2, 2009.
Richard A. Robert resigned as Director of the Company on March 25, 2009.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Momentum BioFuels, Inc.
Dated: April 14, 2009 By: /s/Gregory A. Enders --------------------------------- Gregory A. Enders, Chief Executive Officer, Chief Accounting Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Dated: April 14, 2009 Momentum BioFuels, Inc.
/s/Gregory A. Enders -------------------------------------- Gregory A. Enders, Director
/s/Jeffrey A. Ploen -------------------------------------- Jeffrey A. Ploen, Director
/s/David Fick -------------------------------------- David Fick, Director