UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

**FORM 10-QSB/A**

**Amendment # 1**

 

(Mark one)

 

x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2006

 

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission file number 000-50048

 

**MOTIVNATION, INC.**

(Exact name of small business issuer as specified in its charter) 

 

| Nevada                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 82-6008492 |
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|  

(State or other jurisdiction of incorporation or organization)		

 

(I.R.S. Employer I.D. No.) 

 

18101 Von Karman Avenue, Suite 330

Irvine, California  92612

(Address of Principal Executive Offices)

(888) 258-6458

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

 

(1)Yes x No o  (2) Yes x No o  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  

No  

X  

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2006.

Common Stock, Par Value $0.001 

 

6,845,464

 

Title of Class 

 

Number of Shares Outstanding as of September 30, 2006

 

**EXPLANATORY NOTE**

 

MotivNation, Inc. ("MOVT" or the "Company") filed its Quarterly Report on Form 10-QSB for period ending September 30, 2006 (the "Quarter Report") with the Securities and Exchange Commission (the "Commission") on November 20, 2006. On December 20, 2006, the Commission issued comments to the Quarterly Report. This Quarterly Report on Form 10-QSB/A, Amendment No. 1 ("Amendment No. 1") amends the Quarterly Report to incorporate certain revisions that have been made to MOVT’s disclosures and the presentation of MOVT’s financial statements, in response to the Commission’s comments.

 

Accordingly, changes have been made to the following sections of the Quarterly Report:

 

 

**•**

Financial Statement

 

Although this Form 10-QSB/A contains all of the items required to be included in a Quarterly Report on Form 10-QSB, no other information in the original filing is amended hereby. In addition, in accordance with applicable SEC rules, this amended Quarterly Report on Form 10-QSB/A includes currently dated certifications from our Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2. This Form 10-QSB/A should be read in conjunction with the Company's filings made with the SEC subsequent to the Original Filing.

 

For the convenience of the reader, this amended Quarterly Report on Form 10-QSB/A sets forth the Original Filing in its entirety, as modified and superseded where necessary to reflect the restatement. The following items have been amended as a result of, and to reflect, the restatement described above and no other information in the Original Filing is amended hereby, as a result of the restatement:

 

**TABLE OF CONTENTS**

 

 

Part I 

 

 

1 

 

Financial Statement Item 

 

 

1 

 

Financial Statements 

 

 

1 

 

Balance Sheet 

 

 

1 

 

Income Statement 

 

 

2 

 

Cashflow Statement 

 

 

3 

 

Financial Footnotes 

 

 

4 

 

Management Discussion & Analysis or Plan of Operations

 

 

17

 

Controls and Procedures 

 

 

28

 

Part II 

 

 

28

 

Legal Proceedings 

 

 

28 

 

Changes in Securities 

 

 

29 

 

Defaults Upon Securities 

 

 

30

 

Submission to a Vote 

 

 

30 

 

Other Information 

 

 

30

 

Exhibits and Reports 

 

 

30 

 

Signatures

 

 

31 

 

 

 

Exhibits 

 

 

Index to Exhibits

 

 

32

 

Exhibits 

 

 

33 

 

 

 

Except as otherwise noted in this report, “MotivNation,” the “Company,” “we,” “us” and “our” collectively refer to MotivNation, Inc.

 

 

 

**MOTIVNATION, INC.**

**CONSOLIATED BALANCE SHEET (Unaudited)**

**June 30, 2006 **

 

 

**ASSETS**

 

Current Assets

(Restated) 

Cash

$             556,403 

Accounts receivable, net

87,843 

Prepaid expenses and other current assets

42,549 

Inventory

630,070 

Total Current Assets

1,316,865 

 

 

Property and equipment, net

174,207 

 

 

Goodwill

333,242 

Debt issuance cost, net

62,055 

Other assets

66,597 

 

 

**TOTAL ASSETS**

**$        1,952,966**

 

 

**LIABILITIES AND STOCKHOLDERS' DEFICIT**

 

Current Liabilities

 

Accounts payable

$             162,001 

Accrued liabilities

342,291 

Unearned revenue

82,885 

Short-term notes payable to related parties

236,107 

Current portion of long-term notes payable

4,541 

Current portion of capital lease obligations

25,368 

Total Current Liabilities

853,193 

 

 

Long-Term Debt

 

Long-term notes payable, excluding current portion

1,042 

Capital lease obligations, excluding current portion

5,410 

Convertible notes payable, net of unamortized discount of $1,876,945

79,080 

Derivative liabilities

3,929,547 

Total Long-Term Debt

4,015,079 

Total Liabilities

4,868,272 

 

 

Stockholders' Deficit

 

Preferred Stock, $0.001 par value; 100,000,000 shares authorized;

 

none issued and outstanding

- 

Common Stock, $0.001 par value; 300,000,000 shares authorized;

 

5,245,464 shares issued and outstanding

5,246 

Paid-in Capital

1,477,342 

Deferred compensation and expenses

(270,161)

Accumulated deficit

(4,127,733)

Total Stockholders' Deficit

(2,915,306)

 

 

**TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT**

**$        1,952,966**

 

1

See notes to interim unaudited consolidated financial statements

 

**MOTIVNATION, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)**

 

 

 

**For three months ended**

 

**For six months ended**

 

**June 30,** 

 

**June 30,** 

 

**2006**

2005

 

**2006**

2,005 

**NET SALES:**

**(Restated)**

 

 

**(Restated)**

 

Products

**$       223,056**

$         591,962 

 

**$       223,644**

$         726,515 

Services

**313,639**

694,157 

 

**804,954**

1,485,938 

Total net sales

**536,695**

1,286,119 

**#**

**1,028,598**

2,212,453 

**COST OF SALES:**

 

 

 

 

 

Products

**166,798**

549,721 

 

**170,980**

666,358 

Services

**326,642**

508,174 

 

**827,752**

1,125,048 

Total costs of sales

**493,440**

1,057,895 

**#**

**998,732**

1,791,406 

 

 

 

 

 

 

**GROSS PROFIT**

**43,255**

228,224 

**#**

**29,866**

421,047 

 

 

 

 

 

 

**OPERATING EXPENSES:**

 

 

 

 

 

Selling, general and administrative expenses

**323,962**

279,146 

 

**599,258**

576,057 

Loss on disposal of assets

**-**

95,756 

 

**2,459**

95,756 

Total operating expenses

**323,962**

374,902 

 

**601,717**

671,813 

 

 

 

 

 

 

**OPERATING LOSS**

**(280,707)**

(146,678)

 

**(571,851)**

(250,766)

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

Interest and other income

**18,902**

- 

 

**19,035**

2 

Change in derivative liabilities

**50,800**

- 

 

**1,949,913**

- 

Interest and other expense

**(55,236)**

(6,434)

 

**(119,266)**

(47,142)

Financing costs

**(53,942)**

- 

 

**(3,463,408)**

- 

Total other income (expenses)

**(39,476)**

(6,434)

 

**(1,613,726)**

(47,140)

 

 

 

 

 

 

**NET LOSS BEFORE INCOME TAXES**

**(320,183)**

(153,112)

 

**(2,185,577)**

(297,906)

 

 

 

 

 

 

Provision for income taxes

**-**

25 

 

**2,400**

1,625 

**NET LOSS**

**$     (320,183)**

$        (153,137)

**#**

**$  (2,187,977)**

$        (299,531)

 

 

 

 

 

 

**Net loss per share-basic and diluted**

**$            (0.07)**

$              (0.07)

 

***$            (0.61)***

$              (0.14)

 

 

 

 

 

 

**Weighted Average Number of Common Shares**

***4,451,840***

2,293,464 

 

***3,578,360***

2,108,464 

 

2

See notes to interim unaudited consolidated financial statements

 

**MOTIVNATION, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

 

 

**CASH FLOW FROM OPERATING ACTIVITIES**

**(Restated)**

 

Net loss

**$   (2,187,977)**

$       (299,531)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

Depreciation 

**21,045**

31,079 

Non-cash expenses

**23,320**

69,780 

Loss on disposal of assets

**2,459**

95,756 

Change in derivative liabilities

**(1,949,913)**

- 

Noncash interest expense and financing costs

**3,463,408**

- 

(Increase) Decrease in:

 

 

Accounts receivable

**4,562**

711,963 

Inventory

**(464,216)**

(75,249)

Prepaid and other assets

**(60,538)**

(46,798)

Increase (Decrease) in:

 

 

Accounts payable and accrued expenses

**41,326**

16,372 

Unearned revenue

**(66,482)**

(526,913)

**Net cash flows used in operating activities**

**(1,173,006)**

(23,541)

**CASH FLOW FROM INVESTING ACTIVITIES**

 

 

Proceeds received from sale of property and equipment

**200**

- 

Purchase of property and equipment

**-**

(9,894)

**Net cash flows provided by (used in) investing activities**

**200**

(9,894)

**CASH FLOW FROM FINANCING ACTIVITIES**

 

 

Payments on long-term debt

**(17,073)**

(22,275)

Net proceeds from (repayments to) related parties

**(28,804)**

63,022 

Net proceeds from convertible notes payable

**1,678,500**

- 

**Net cash flows provided by financing activities**

**1,632,623**

40,747 

 

 

 

**NET INCREASE IN CASH**

**459,817**

7,312 

 

 

 

CASH AT BEGINNING OF PERIOD

**96,586**

6,020 

**CASH AT END OF PERIOD**

**$        556,403**

$          13,332 

 

 

 

**Supplemental Disclosure of Cash Flow Information:**

 

 

Interest Paid

**$            2,415**

$          18,448 

Income Taxes Paid

**$            2,400**

$                    - 

**Schedule of Noncash Investing and Financing Activities:**

 

 

Equipment purchased under capital lease obligations

**$                     -**

$            4,700 

Issuance of common shares for:

 

 

Reduction of accrued liabilities

**$        150,000**

$          50,000 

Convertible notes payable

**43,975**

- 

Retirement of related party debt

**-**

125,000 

Deferred compensation

**-**

112,500 

 

**$        193,975**

$        287,500 

Issuance of warrants in connection with convertible debt

**$    1,678,507**

$                    - 

Recorded beneficial conversion features

**$    3,393,635**

$                    - 

Transfer unamortized discount to paid in capital due to debt conversion

**$          42,688**

$                    - 

Transfer derivative liabilities to paid in capital due to debt conversion

**$          87,777**

$                    - 

 

 

 

 

3

See notes to interim unaudited consolidated financial statements

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 – NATURE OF BUSINESS**

 

MotivNation, Inc. (“the Company”) provides a full range of services through its business divisions that cater to the automotive, motorcycle, and armor protecting market. These services include the sale, manufacture, converting, customization, restoration, painting, repair and installation of accessories and parts. The business divisions of MotivNation are comprised of Damon’s, TrixMotive, and MotivSource. Damon’s is in the business of customizing motorcycles and automobiles. TrixMotive is in the business of converting automobile chassis into stretched limousines and other specialized automotives. MotivSource is an automotive supplier delivering advanced systems and components to the motor vehicle industry.

 

MotivNation, Inc. was incorporated on April 26, 1946, under the laws of the State of Idaho. The Company was organized to explore for, acquire and develop mineral properties in the State of Idaho. The initial and subsequent efforts in the acquisition, exploration and development of potentially viable and commercial mineral properties were unsuccessful. The Company has since ceased its mining business.

 

In 2003, the Company merged into its wholly-owned Nevada subsidiary, and changed its corporate domicile from the State of Idaho to the State of Nevada. The Company also changed its name from Aberdeen Idaho Mining Company to Aberdeen Mining Company.

 

On May 11, 2004, the Company completed a “reverse acquisition” transaction with Damon’s Motorcycle Creations, Inc. (“DAMON”), from which the Company acquired substantially all the assets and assumed substantially all the liabilities of DAMON, in consideration for the issuance of a majority of the Company’s shares of common stock. The reverse acquisition was completed pursuant to the Asset Purchase Agreement, dated as of May 11, 2004. Concurrent with the closing of the reverse acquisition, DAMON agreed to transfer 4,500,000 of the 88,879,850 shares it acquired from the Company to a creditor in exchange for the cancellation of the trade debt and as payment for ongoing consultant services by such creditor. For accounting purposes, DAMON is the acquirer in the reverse acquisition transaction, and consequently the assets and liabilities and the historicaloperations reflected in the financial statements are those of DAMON and are recorded at the historical cost basis of DAMON. All shares and per share data prior to the acquisition have been restated to reflect the stock issuance as a recapitalization of DAMON. Since the reverse acquisition transaction is in substance a recapitalization of the Company and is not a business combination, pro forma information is not presented. Such pro forma statements of operations would be substantially identical to the historical statements of operations of the Company, which are presented in the accompanying consolidated statements of operations.

 

Following the reverse acquisition, the Company changed its name to MotivNation, Inc.

 

On October 11, 2004, the Company and its wholly owned subsidiary, TrixMotive Inc., a Nevada corporation, entered into an Asset Purchase Agreement with Moonlight Industries, Inc., a California corporation (“Moonlight”), to acquire certain assets and liabilities of Moonlight in exchange for 14,000,000 shares of the Company’s common stock. The president of Moonlight became the Secretary of TrixMotive. The Company’s president and secretary agreed to return, in the aggregate, 14,000,000 shares of the Company’s common stock held by them to the Company prior to the closing of this acquisition. The company will continue under the Moonlight brand but will operate under the TrixMotive corporate entity. 

 

 

 

4

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 2 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Presentation of Interim Information: The financial information at June 30, 2006 and for the three and six months ended June 30, 2006 and 2005 are unaudited but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-QSB. Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information refer to the Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005.

 

The results for the three and six months ended June 30, 2006 may not be indicative of results for the year ending December 31, 2006 or any future periods. 

 

Principle of Consolidation and Presentation: The accompanying consolidated financial statements include the accounts of MotivNation, Inc. and its subsidiaries after elimination of all intercompany accounts and transactions.  Certain prior period balances have been reclassified to conform to the current period presentation. The accompanying consolidated financial statements have been retroactively adjusted to reflect the one-for-one hundred reverse stock split on September 9, 2005.

 

Use of Estimates: The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates.

 

Convertible Notes Payable and Derivative Liabilities: The Company accounts for convertible notes payable and warrants in accordance with Statement of Financial Accounting Standards (SFAS) No. 133, *"Accounting for Derivative Instruments and Hedging Activities."* This standard requires the conversion feature of convertible debt be separated from the host contract and presented as a derivative instrument if certain conditions are met. Emerging Issue Task Force (EITF) 00-19, *"Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company's Own Stock"* and EITF 05-2, *"The Meaning of "Conventional Convertible Debt Instrument" in Issue No. 00-19"* were also analyzed to determine whether the debt instrument is to beconsidered a conventional convertible debt instrument and classified in stockholders' equity. The convertible notes payable issued on November 30, 2005 and in January 2006 were evaluated and determined not conventional convertible and, therefore, because of certain terms and provisions including liquidating damages under the associated registration rights agreement the embedded conversion option was bifurcated and has been accounted for as a derivative liability instrument. The stock warrants issued in conjunction with the convertible notes payable were also evaluated and determined to be a derivative instrument and, therefore, classified as a liability on the balance sheet. The accounting guidance also requires that the conversion feature and warrants be recorded at fair value for each reporting period with changes in fair value recorded in the consolidated statements of operations.

 

A Black-Scholes valuation calculation was applied to both the conversion features and warrants at issuance dates and June 30, 2006. The issuance date valuation was used for the effective debt discount 

 

5

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

that these instruments represent. The debt discount is amortized over the three-year life of the debts using the effective interest method. The June 30, 2006 valuation was used to record the fair value of these instruments at the end of the reporting period with any difference from prior period calculations reflected in the consolidated statement of operations. 

 

Net Income (Loss) Per Share: Basic net income per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average number of common stock outstanding for the period. Diluted net income per share is computed by dividing net income by the weighted average number of common shares and the dilutive potential common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common shares and excludes dilutive potential common shares outstanding, as their effective is anti-dilutive. Dilutive potential common shares primarily consist of stock warrants, unvested common stocks and shares issuable under convertible debt. 

 

Stock-Based Compensation: The Company accounts for stock issued to non-employees in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 and the Emerging Issue Task Force (EITF) Issue No. 00-18, *“Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”* SFAS No. 123 states that equity instruments that are issued in exchange for the receipt of goods or services should be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Under the guidance in Issue 00-18, the measurement date occurs as of the earlier of (a) the date at which a performance commitment is reached or (b) absent a performance commitment, the dateat which the performance necessary to earn the equity instruments is complete (that is, the vesting date).

 

New Accounting Pronouncements: In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “*Accounting for Certain Hybrid Financial Instrument-an amendment of FASB Statements No. 133 and 140.”* SFAS No. 155 provides entities with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract in accordance with SFAS No. 133.  SFAS No. 155 allows an entity to make an irrevocable election to measure such a hybrid financial instrument at fair value in its entirety, with changes in fair value recognized in earnings. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Management isevaluating the financial statement impact of the adoption of SFAS No. 155.

 

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No.* *109,”* which clarifies the accounting of uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, *“Accounting of Income Taxes.”* FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of this Interpretation are effective for fiscal years beginning after December 15, 2006.  Management is currently evaluating the financial statement impact of the adoption of FIN 48.

 

The FASB has also issued SFAS No. 156, *“Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140”* but it will not have a relationship to the operations of the 

 

6

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

Company. Therefore a description and its impact on the Company’s operations and financial position have not been disclosed.

 

Restatement: The June 30, 2006 consolidated financial statements have been restated to record a beneficial conversion feature related to convertible notes payable issued by the Company in the amount of $3,393,635. The Company has also recorded an amount of $1,678,507 related to the fair value of warrants issued with the debt, which was recorded as a liability due to a registration rights agreement. The result is to record an aggregate discount on debt of $5,072,142 with any excess or $3,372,142 charged to operations. Also, the fair values of the warrants and conversion feature have been recorded at $3,929,547 at June 30, 2006, and an income for the three and six months ended June 30, 2006 of $50,800 and $1,899,133 has been recorded, respectively.  In addition, the weighed average number of common shares used to calculate the net loss per share was also revised to exclude allunvested shares.  As a result of these corrections, net loss for the three and six months ended June 30, 2006 has decreased by $3,831 to $320,183 and increased by $1,500,578 to $2,187,977, respectively, and net loss per share increased to $0.61 from $0.19 for six months ended June 30, 2006.

 

Changes to the balance sheet at June 30, 2006 resulting from these corrections are as follows:

 

 

 

As reported

 

Restated

Unamortized debt discount

 

$                  - 

 

$   1,876,945 

Derivative liabilities

 

$                  - 

 

$   3,929,547 

Paid-in Capital

 

$    1,432,233 

 

$   1,477,342 

Accumulated deficit

 

$    2,030,022 

 

$   4,127,733 

 

**NOTE 3 – GOING CONCERN**

 

The Company's consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred operating losses totaling $2,187,977 and $299,531 for six months ended June 30, 2006 and 2005, respectively. In addition, the Company has an accumulated deficit of $4,127,733 and its total liabilities exceed its total assets by $2,915,306 as of June 30, 2006.  In the near term, the Company expects operating costs to continue to exceed funds generated from operations. As a result, the Company expects to continue to incur operating losses and may not have enough money to grow its business in the future. The Company can give no assurance that it will achieve profitability or be capable of sustaining profitable operations.  As a result, operations in thenear future are expected to continue to use working capital.

 

Management's plans include raising additional working capital through debt or equity financing and increasing marketing efforts to increase revenues. On January 30, 2006, the Company completed the sale of $2 million aggregate principal amount of 8% callable secured convertible notes due in 2009, and issued stock warrants purchasing up to 2.5 million shares of the Company’s common stock pursuant to a Security Purchase Agreement dated on November 30, 2005 (See Note 6 – Convertible Notes Payable and Derivative Liabilities).  The ability of the Company to continue as a going concern is dependent its ability to meet its financing arrangement and the success of its future operations. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

 

 

 

 

 

7

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 4 – BALANCE SHEET DETAILS**

 

The following tables provide details of selected balance sheet items at June 30, 2006:

 

Accounts Receivable, net

 

 

Billed -

 

 

Completed jobs

 

$     61,067 

Unbilled -

 

 

Completed jobs

 

25,601 

Jobs in progress

 

1,175 

Accounts receivable, net

 

$     87,843 

Inventory

 

 

Painted materials

 

$     82,194 

Mechanical materials

 

30,066 

Body shop materials

 

17,336 

Vehicles

 

351,936 

Work-in Process

 

148,538 

Total inventory

 

$   630,070 

Property and Equipment, net

 

 

Automobiles

 

$     19,026 

Furniture and fixtures

 

1,839 

Machinery and equipment

 

224,389 

Office equipment

 

700 

 

 

245,954 

Less: accumulated depreciation

 

(71,747)

Property and Equipment, net

 

$   174,207 

Accrued Liabilities

 

 

Accrued payroll and related taxes

 

$     90,717 

Credit cards payable

 

9,911 

Accrued insurance

 

12,828 

Accrued interest

 

168,734 

Others

 

60,101 

Total accrued liabilities

 

$   342,291 

 

 

**NOTE 5 – GOODWILL**

 

As of June 30, 2006, the Company had goodwill of $333,242 as a result of the acquisition of Moonlight Industries, Inc. in October 2004. 

 

During the three and six months ended June 30, 2006, the Company recorded no impairment charges under Statement of Financial Accounting Standard No. 142 “*Goodwill and Other Intangible Assets*” (“SFAS 142”). 

 

 

 

 

8

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 6 – CONVERTIBLE NOTES PAYABLE AND DERIVATIVE LIABILITIES**

 

On January 30, 2006, the Company completed the sale of $2 million aggregate principal amount of 8% callable secured convertible notes due in 2009, and issued stock warrants purchasing up to 2.5 million shares of the Company’s common stock.  Proceeds from the notes amounted to $1,903,500 after issuance costs, of which the first traunch of $300,000 (less issuance costs of $55,000 and $20,000 for prepaid officers’ life insurance) was received on November 30, 2005, the second traunch of $500,000 (less issuance costs of $6,000) was received on January 5, 2006, and the third and final traunch of $1,200,000 (less issuance costs of $15,500) was received on January 30, 2006. During the first six months of 2006, the Company has converted $43,975 principal amount into 2,300,000 shares of the Company’s common stock at the request of the note holders.

 

The Company filed a registration statement with the SEC on December 15, 2005 and amended the registration statement on December 30, 2005, with respect to the sale of the notes and common stock issuable upon the conversion of the notes. The issuance costs incurred in connection with the convertible notes are deferred and being amortized to interest expense over the life of each debenture traunch. 

 

The Company is accounting for the conversion option in the debentures and the associated warrants as derivative liabilities in accordance with SFAS 133, “*Accounting for Derivative Instruments and Hedging Activities,”* EITF 00-19, “*Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock”* and EITF No. 05-2, “*The Meaning of “Conventional Convertible Debt Instrument” in Issue No. 00-19*.”  The Company attributed beneficial conversion features to the convertible debt using the Black-Scholes Option Pricing Model. The fair value of the conversion feature has been included as a discount to debt in the accompanying balance sheet up to the proceeds receivedfrom each traunch, with any excess charged to operations. The discount is being amortized over the life of each debenture traunch using the interest method.

 

The following tables describe the valuation of the conversion feature of each traunch of the convertible debenture, using the Black Scholes pricing model:

 

 

11/30/05

Traunch

1/4/06

Traunch

1/30/06

Traunch

Approximate risk free rate

4.41%

4.28%

4.47%

Average expected life

3 years

3 years

3 years

Dividend yield

0%

0%

0%

Volatility

356.33%

348.92%

342.77%

Estimated fair value of conversion feature

$599,200

$998,346

$2,395,289

 

The Company recorded the fair value of the conversion feature, aggregate of $3,992,835, as a discount to the convertible debt in the accompanying balance sheet up to the proceeds received from each traunch, with any excess or $1,992,835 charged to expense. Amortization expense related to the conversion feature discount for the three and six months ended June 30, 2006 was $46,969 and $31,380, respectively. Remaining unamortized discount as of that date was $1,876,945.

 

9

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

The Company also granted warrants to purchase 2,500,000 shares of common stock in connection with the financing. The warrants are exercisable at $1.50 per share for a period of five years, and were fully vested. The warrants have been valued at $1,978,482 using the Black-Scholes Option Pricing Model with the following weighted-average assumptions used.

 

 

11/30/05

Traunch

1/4/06

Traunch

1/30/06

Traunch

Approximate risk free rate

4.42%

4.28%

4.46%

Average expected life

5 years

5 years

5 years

Dividend yield

0%

0%

0%

Volatility

356.33%

348.92%

342.77%

Number of warrants granted

375,000

625,000

1,500,000

Estimated fair value of total warrants granted

$299,975

$493,692

$1,184,815

 

In accordance with the EITF 00-19, the conversion feature of each convertible debenture and the stock warrants issued in conjunction with convertible debentures have been included as long-term liabilities and were originally valued at fair value at the date of issuance. As a liability, the convertible features and the stock warrants are revalued each period until and unless the debt is converted. As of June 30, 2006, the fair values of the conversion feature and the stock warrants aggregated to $3,929,547.  The Company recorded a gain of $1,949,913 related to the change in fair value from the date of issuance of the convertible debt (or December 31, 2005 for the traunch received on November 30, 2005) to June 30, 2006. This amount is recorded as “Change in Derivative Liabilities” a component of other income in the accompanying consolidated statement of operations.  If the debt isconverted prior to maturity, the carrying value will be transferred to equity. 

 

**NOTE 7 – STOCKHOLDERS’ EQUITY**

 

Shares for Debt Agreement

 

On February 2, 2006 the Board of Directors approved the issuance of 217,000 unregistered shares of common stock to the Chief Financial Officer and Secretary of the Company, and the Company entered into Shares for Debt Agreement with the CFO on the same date. The consideration received by the Company consisted of $50,000 in services rendered by the CFO during the period from January 1, 2005 through December 31, 2005, and a full release from any other claims for compensation relating to such period. The services had been accrued in prior year.

The Board has also approved the issuance of 435,000 unregistered shares of common stock to the Chief Executive Officer and Chairman of the Board of the Company, and the Company entered into Shares for Debt Agreement with the CEO on the same date. The consideration received by the Registrant consisted of $100,000 in services rendered by the CEO during the period from January 1, 2005 through December 31, 2005, and a full release from any other claims for compensation relating to such period.  The services had been accrued in prior year.

value of the shares was based on the lowest price of the last trading day from February 2, 2006 (date of grant) which was $0.23 per share as there was limited trading volume. Therefore, no gain or loss on debt settlement was recorded.

 

10

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

Restricted Stock Agreements

 

On February 15, 2005, the Board of Directors approved the issuance of 50,000 unregistered shares of the Company’s common stock to each of the three directors and the issuance of 150,000 unregistered shares to each of the two consultants, and entered into a Restricted Stock Agreement with each of these directors and consultants. Each Restricted Stock Agreement provides for certain vesting conditions, a lock-up agreement, a first refusal right of the Company with respect to certain proposed transfers, a drag-along right of the Company in connection with certain corporate transactions, and a 5-year market stand-off agreement prohibiting transfers for up to 180 days following the effective date of any registration statement of the Company. If the director or the consultant does not meet the vesting conditions pursuant to the Agreement by December 31, 2005 (amended to December 31, 2006),then a pro rata portion of the restricted shares shall be vested based on the formula provided by the Agreement. All restricted shares that do not vest as of December 31, 2006 shall be automatically rescinded and cancelled. Each director or consultant may vote the stock received to the extent any unvested shares are rescinded and cancelled. The consideration received by the Company consisted of services rendered to the Company and the continuing dedication

 

of these directors and consultants to the Company’s business. The shares were valued at a discount price of $0.25 per share, or $112,500 of total. The value of the shares were discounted at approximately 75% of the closing market price on the date of issuance based on the management’s anticipation about the drop in stock price resulting from the impending reverse stock split. Compensation expense is recognized over the vesting period based on the formula provided by the Agreements.

 

During the six months ended June 30, 2006 and 2005, 92,574 shares and 199,121 shares were vested, respectively. The Company recognized, respectively, $23,320 and $49,780 in compensation during those periods.  As of June 30, 2006, the remaining unvested shares under the Agreements amounted to 61,445 shares or $15,361.

 

**NOTE 8 – NET LOSS PER SHARE**

 

The following table sets forth the computation of basic and diluted net loss per share: 

 

 

 

For three months

 

For six months

 

 

ended June 30,

 

 

ended June 30,

 

 

 

2006

2005

 

2006

2005

Numerator:

 

 

 

 

 

 

Net loss

 

$        (320,183)

$     (153,137)

 

*$ (2,187,977)*

$     (299,531)

Denominator:

 

 

 

 

 

 

Weighted Average Number of Shares

 

*4,451,840*

2,293,464 

 

*3,578,360*

2,108,464 

 

 

 

 

 

 

 

Net loss  per share-Basic and Diluted

 

$              (0.07)

$           (0.07)

 

*$           (0.61)*

$           (0.14)

 

As the Company incurred net losses for the three and six months ended June 30, 2006, potential dilutive securities from stock warrants and unvested common stocks totaling 93,624 and 116,438 equivalent shares, respectively, have been excluded from diluted net loss per share computations as their effect was deemed anti-dilutive. In accordance with SFAS No. 128, *“Earnings Per Share”,*the Company also has excluded from the calculation of diluted net loss per share approximately 3,664 and 3,626 shares, 

 

11

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

respectively, relating to its 10% related party convertible debt that are anti-dilutive.  As of June 30, 2006, depending on the stock price on the conversion date, up to maximum of 405,642,910 shares, subject to certain adjustments, may be issued upon conversion of the 8% Callable Secured Convertible Notes. For additional information, see “Note 6 – Convertible Notes Payable and Derivative Liabilities.” 

 

As the Company incurred net losses for the three and six months ended June 30, 2005, potential dilutive securities from stock warrants and unvested common stocks totaling 328,046 and 300,128 equivalent shares, respectively, have been excluded from diluted net loss per share computations as their effect was deemed anti-dilutive. In accordance with SFAS No. 128, *“Earnings Per Share”,*the Company also has excluded from the calculation of diluted net loss per share approximately 3,356 and 3,318 shares, respectively, relating to its 10% related party convertible debt that are anti-dilutive. 

 

**NOTE 9 – ELECTION OF DIRECTORS AND CHAIRMAN OF THE BOARD**

 

On January 6, 2006, the Board of Directors of the Company elected George Lefevre, the Chief Executive Officer to the MotivNation Board of Directors as well as the Chairman of the Board.

 

**NOTE 10 – BUSINESS AND CREDIT CONCENTRATIONS**

 

Three major customers accounted for approximately $267,942 or 50.6% of the Customized Automotive segment revenues for the three months ended June 30, 2006. Two major customers accounted for approximately $230,942 or 22.5% of the Customized Automotive segment revenues for the six months ended June 30, 2006.

 

One major customer accounted for approximately $525,932 and $766,750 or 43.3% and 38.4% of the Customized Automotive segment revenues for the three and six months ended June 30, 2005, respectively.

 

The Company maintains its cash deposit accounts at commercial banks. At times, account balances may exceed federally insured limits.  The Company has not experienced any losses on these accounts, and management believes the Company is not exposed to any significant risk on cash accounts.

 

**NOTE 11 – GUARANTEES AND PRODUCT WARRANTIES**

 

The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company's officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship. 

 

The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its consolidated balance sheet as of June 30, 2006. 

 

In general, Damon’s offers a five-year warranty on workmanship to original purchaser and a manufacturer’s warranty from 90 days to one year for most of its products sold.  TrixMotive warrants to the first registered owner for a period of one year or twelve thousand miles from the date of original purchase, whichever comes first, that this conversion shall be free from defects in materials and 

 

12

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

workmanship, under normal use and service. The Company’s liability under this warranty is limited solely to the repair or replacement of defective parts and/or workmanship.

 

The following table summarizes the activity related to the product warranty liability during the first six months of 2006 and 2005:

 

As of June 30,

 

2006

 

2005

Beginning Balance

 

$      12,350 

 

$      14,173 

Provision of warranties

 

6,000 

 

6,000 

Utilization of reserve

 

(2,147)

 

(8,873)

Ending Balance

 

$      16,203 

 

$      11,300 

 

 

**NOTE 12 – COMMITMENTS AND CONTINGENT LIABILITIES**

 

Deferred Consulting Expense

 

The Company did not achieve certain benchmarks pursuant to the Business Consulting Agreement dated April 20, 2004 and has deferred consulting expense of $254,800 as of June 30, 2006. 

 

Legal Proceedings

 

A former employee of Moonlight Industries filed a workers compensation claim against the Company. The former employee is alleging that he was injured during the course of his employment with Moonlight Industries. The damages claimed by the former employee do not appear to be covered by insurance. Management is responding to the case vigorously defending it as they believe the claim is frivolous and potentially fraudulent. In the opinion of the Company’s legal counsel, the likelihood of an unfavourable outcome is low. 

 

Damon’s historically leased four (4) units space in city of Brea, California under four separate non-cancelable operating lease agreements, which expires through November 30, 2007. Damon’s currently does not occupy the spaces. In July, the landlord filed claims against Damon’s for the past due rent and charges of all units, aggregate of $19,657, and the additional amounts due pursuant to the remaining terms of the lease agreements. The obligations under the remaining terms of the lease agreements are estimated at a total of $89,086. Subsequently, Damon’s and the landlord entered into a Surrender Agreement for one unit, providing that Damon’s agreed to forfeit a security deposit of $1,568 and to pay a sum of $3,822, representing the unpaid charges and rent through the date of agreement. In return, the landlord agreed to discharge and release Damon’s from allobligations under the lease agreement of that unit.

 

No provision for any contingent liabilities has been made in the accompanying consolidated financial statements since management cannot predict the outcome of the claims or estimate the amount of any loss that may result. In addition, the Company has received an outside legal opinion from an attorney that states the outstanding liability is not the Company’s as the original lease was signed by the previous owners of Damon’s. However, the Company will continue to accrue the past due rent of $19,657 in the accompanying financial statements until this matter is resolved.

 

On December 7, 2005, a customer of TrixMotive filed a lawsuit in the Superior Court of Santa Clara County of California against TrixMotive claiming for breach of contract and warranty, intentional and negligence misrepresentation for a customized vehicle. The plaintiff seeks $98,827 in compensatory 

 

13

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

damages and other unspecified damages plus interest, attorneys’ fees and costs. Management believe they have meritorious defenses against the lawsuit, and will continue to vigorously defending it. 

 

The Company may be party to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, management do not believe that the outcome of any of these claims or any of the above mentioned legal matters will have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

While the outcome of these matters is not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

**NOTE 13 – RELATED PARTY TRANSACTIONS**

 

The Company has a Revolving Line of Credit with a related party to finance the Company’s vehicle inventory chassis up to $250,000. Interest is payable at 9% for every inventory chassis financed below $48,000 and at 7% for every inventory chassis financed above $48,000. Principal and interest is due, no longer than ten weeks, upon the delivery and/or final payment made to the Company for the finished goods. As of June 30, 2006, the amount drawn against the line and the related accrued interest was $46,348 and $76,971, respectively. The line of credit is secured by the inventory chassis vehicle title.

 

The Company also has short-term notes payable to the officers and a related party, aggregate of $189,758 plus related accrued interest of $19,470 as of June 30, 2006. The notes carry interest at 10% per annum and are unsecured. 

 

**NOTE 14 – SEGMENT INFORMATION**

 

The Company evaluates its reporting segments in accordance with SFAS No. 131, *“Disclosures about Segments of an Enterprise and Related Information.”* The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by SFAS No. 131. The Chief Executive Officer allocates resources to each segment based on their business prospects, competitive factors, net sales and operating results. 

 

The Company currently reported two principal operating segments: (i) custom motorcycle, and (ii) custom automotive. The custom motorcycle segment provides a full range of services that cater to motorcycle enthusiast, including the sale, manufacture and installation of custom-built parts and accessories, the restoration, repair and servicing and the custom painting work. The custom automotive segment specializes in creating customized limousines to suit the tastes and needs of each individual customer. 

 

The Company does not track its assets by operating segments. Consequently, it is not practical to show assets by operating segments. 

 

 

 

 

14

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

Summarized financial information of the Company’s results by operating segment is as follows:

 

 

 

For Three Months ended

 

For Six Months ended

 

 

June 30,

 

 

June 30,

 

 

 

2006

2005

 

2006

2005

Custom Motorcycle:

 

 

 

 

 

 

Net revenue to external customers

 

$          10,987 

$          72,549 

 

$          19,146 

$        216,055 

Cost of revenue

 

35,156 

35,589 

 

46,694 

117,238 

Margin

 

$         (24,169)

$          36,960 

 

$         (27,548)

$          98,817 

 

 

 

 

 

 

 

Custom Automotive:

 

 

 

 

 

 

Net revenue to external customers

 

$        525,708 

$     1,213,570 

 

$     1,009,452 

$     1,996,398 

Cost of revenue

 

458,284 

1,022,306 

 

952,038 

1,674,168 

Margin

 

$          67,424 

$        191,264 

 

$          57,414 

$        322,230 

 

 

 

 

 

 

 

Total Net Revenue to External Customers

 

$        536,695 

$     1,286,119 

 

$     1,028,598 

$     2,212,453 

Total Cost of Revenue

 

493,440 

1,057,895 

 

998,732 

1,791,406 

Total Margin

 

43,255 

228,224 

 

29,866 

421,047 

 

 

 

 

 

 

 

Intersegment Revenues:

 

 

 

 

 

 

Custom Motorcycles

 

$                    - 

$            2,150 

 

$                    - 

$            2,150 

Custom Automotive

 

- 

- 

 

- 

- 

Total Intersegment Revenues

 

$                    - 

$            2,150 

 

$                    - 

$            2,150 

 

 

Intersegment transactions are recorded at cost. The margins reported reflect only the direct controllable expenses of each line of business and do no represent the actual margins for each operating segment because they do not contain corporate and general and administrative expenses as well as stock-based compensation incurred in support of the lines of business.

 

**NOTE 14 – SEGMENT INFORMATION (CONTINUED)**

 

Reconciliation of operating segment margin to net loss before income taxes

 

 

 

For Three Months ended

 

For Six Months ended

 

 

June 30,

 

 

June 30,

 

 

 

2006

2005

 

2006

2005

Total margin for reportable segments

 

$          43,255 

$        228,224 

#

$            29,866 

$        421,047 

Corporate and general and administrative expenses

(323,962)

(279,146)

 

(599,258)

(576,057)

Loss on disposal of assets

 

- 

(95,756)

 

(2,459)

(95,756)

Interest and Other Expense

 

(55,236)

(6,434)

 

(119,266)

(47,142)

Financing costs

 

(53,942)

- 

 

(3,463,408)

- 

Change in derivative liabilities

 

50,800 

- 

 

1,949,913 

- 

Interest and Other Income

 

18,902 

- 

 

19,035 

2 

Net loss before income taxes

 

$       (320,183)

$       (153,112)

 

$      (2,185,577)

$       (297,906)

 

 

 

15

 

 

**MOTIVNATION, INC.**

 

**NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 15 – SUBSEQUENT EVENT**

 

The Company is currently negotiating to renew the lease for TrixMotive’s facilities which will expire in August 2006.  The Company also considers relocating. 

 

16

 

 

 

 

**ITEM 2**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION**

 

**Disclaimer Regarding Forward Looking Statements**

Certain statements contained in the following description of the business of MotivNation which are not statements of historical fact are what are known as "forward-looking statements," which are basically statements about the future, and which for that reason involve risk and uncertainty, since no one can accurately predict the future. Words such as "plans," "intends," "seeks," "anticipates," "expects," "goal, "hopes" and "objective" often identify such forward-looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements of the plans and objectives of the Company’s management with respect to its present and future operations, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. Numerous factors and future events could causethe Company to change such plans and objectives, or to fail to successfully implement such plans or achieve such objectives, or to cause such present and future operations to fail to produce revenues, income or profits. 

 

**Plan of Operation**

 

General

MotivNation, Inc. provides a full range of services through our business divisions that cater to the automotive, motorcycle, and armor protecting market. These services include the sale, manufacture, converting, customization, restoration, painting, repair and installation of accessories and parts. The business divisions of MotivNation are comprised of Damon’s, TrixMotive, and MotivSouce. Damon's is in the business of customizing motorcycles and automobiles. TrixMotive is in the business of converting automobile chassis into stretched limousines and other specialized automotives. MotivSource is an automotive supplier delivering advanced systems and components to the motor vehicle industry.

Our target clients fall into two categories: the individual custom automotive enthusiast or collectors of the “one of a kind” custom motorcycle and auto creations, and those of local fabricators, custom shops, and Original Equipment Manufacturers.  Our primary market is the latter of two listed and these customers buy materials, supplies, and finished parts for their work in serving the growing market of custom or modified automobile and motorcycle creations.  In addition to distributing several lines of materials and equipment, we plan to provide training through independent dealers and our own distribution infrastructure to our primary market clientele.      

The services we provide vary based on the client type. 

 

**•**

Products and services provided to individual retail clients are sold directly to our retail clients and include restoration work, finish and paint for motorcycles and automobiles as well as signature paint and design applied to non automotive personal property.  

 

**•**

Products and services for independent dealers are sold directly to dealers and include custom and signature finish and design work on a dealer’s own restoration or manufactured work.  Dealer products and services also include consultative work in the preparation of signature paint blends, techniques and design advice related to the dealer’s own project.  

 

**•**

Products and services for original equipment manufacturers include signature design and fabrication for manufactured parts and accessories which are part of a “designer” or “signature” series of products or design themes.  These products and services are sold directly to the original equipment manufacturer.   

 

17

 

 

 

 

Our manufacturing operations consist of in-house production of components and parts, assembly and finishing of components, painting, conversion and assembly of motorcycles and automobiles, and quality control, which includes performance testing of finished products under running conditions.  The custom design, fabrication, finish and paint processes are moved into and out of each aspect of the manufacturing process.

We offer various products and services depending on which client we are catering to.  For our individual retail clients we offer products and services direct and include restoration work, finish and paint for motorcycles and automobiles as well as signature paint and design applied to non automotive personal property.  For our independent dealers we offer products and services direct to the dealers which include custom and signature finish and design work on a dealer’s own restoration or manufactured work.  We also offer consultative work in the preparation of signature paints blends, techniques, and design advice related to the dealer’s own project.  For our original equipment manufacturers we offer services and products that include signature design and fabrication for manufactured parts and accessories, which are a party of a “designer” or “signature” seriesof products or design themes.  These products and services are also sold direct to the original equipment manufacturers.  

 

**Results of Operations**

**Three Months Ended September 30, 2006 compared to the Three Months Ended September 30, 2005**

 

*Revenues and Loss from Operations*

 

Our revenue, cost of revenue, selling, general and administrative expenses, and operating loss for the three months ended September 30, 2006, as compared to the three months ended September 30, 2005 are as follows:

 

 

 

3 Months Ended

September 30,

2006

 

 

3 Months Ended

September 30,

2005

 

Percentage

Change

Increase

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

718,774

 

 

673,310

 

6.8

%

Cost of revenue

 

743,629

 

 

557,309

 

33.4

%

Operating expenses

 

370,964

 

 

234,599

 

58.1

%

 

 

 

 

 

 

 

 

 

Operating (loss)

$

(395,819)

 

 

(118,598)

 

233.7

%

 

*Revenues*

 

We had total revenues of $718,774 and $673,310 for the three month period ended September 30, 2006, and 2005 respectively. The marginal increase in the Company’s revenue of 6.8% can be attributed to the change in our business model for our TrixMotive subsidiary.  In the second quarter of 2006, Trixmotive launched a production run on the 2007 Escalade. This change caused limited sales of our custom conversions, and decreases in our profit margins. We anticipate this to continue until our production line is fully operational. In addition at the end of the third quarter we had fully converted limousines in our inventory ready for sale.

*Cost* *of* *Revenues*

 

We incurred total costs of $743,629 and $557,309 for the three month period ended September 30, 2006, and 2005, respectively. The increase in our cost of sales of 33.4% is primarily due to the launch of production run and the effective labor costs. Also cost of revenues increased disproportionately to revenue due to the increase of fully converted limousines in our inventory.

 

18

 

 

*Operating* *Expenses*

 

Our selling, general and administrative expenses consist primarily of sales, marketing, production and other administrative personnel, cost of facilities and related spending, salaries, and related costs for executive.  These major expenses increased by 74.8% for the third quarter of 2006 versus 2005, primarily from Salary and Wages increase of 225.4%. In addition increases in insurance, consulting and bad debt expense of approximately 43.8%, 112.8%, and 700.7% respectively. The increase was offset by decreases in accounting expense of 30.7% for the third quarter of 2006 compared to 2005.  Also there was decrease in shipping/delivery and depreciation expense of 16% and 10.8% respectively for the same time period.  Total expenses were $370,964 for the third quarter of 2006. A 58.1% increase compared to the third quarterof 2005.  The major expenses incurred during the three months ended September 30, 2006 and 2005 were:

 

 

 

 

3 Months Ended

September 30, 2006

 

 

 

3 Months

Ended

September 30, 2005

 

Percentage

Change

Increase

(Decrease)

 

 

 

 

 

 

 

 

 

 

Major Expenses:

 

 

 

 

 

 

 

 

Rent 

$

58,956

 

$

52,397

 

12.5

%

Salary & Wages

 

102,347

 

 

31,450

 

225.4

%

Insurance

 

54,344

 

 

37,803

 

43.8

%

Accounting Fees

 

11,450

 

 

16,533

 

(30.7)

%

Consulting

 

21,491

 

 

10,100

 

112.8

%

Advertising

 

10,545

 

 

9680

 

8.9

%

Shipping and Delivery

 

4,031

 

 

4,799

 

(16)

%

Depreciation

 

10,781

 

 

12,091

 

(10.8)

%

Bad debt expense

 

39,180

 

 

4,893

 

700.7

%

 

 

 

 

 

 

 

 

 

Total Major Expenses

 

314,240

 

 

179,745

 

74.8

%

 

 

 

 

 

 

 

 

 

Total Expenses

 

370,964

 

 

234,599

 

58.1

%

 

 

 

 

 

 

 

 

 

 

*Other Income and Expenses and Net Loss*

 

 

Our other income and expenses and net loss for the three months ended September 30, 2006 and 2005 are as follows:

 

 

 

3 Months Ended September 30, 2006

 

 

3 Months Ended September 30, 2005

 

Percentage

Change

Increase

(Decrease)

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

7,967

 

 

0

 

100

%

Change in derivative liabilities

 

4,778

 

 

0

 

100

%

Interest and other expenses

 

(59,312)

 

 

(16,868)

 

(251.6)

%

Financing costs

 

(64,557)

 

 

0

 

100

%

Total other income (expenses)

 

(111,124)

 

 

(16,868)

 

(558.8)

%

 

 

 

 

 

 

 

 

 

Net (loss)

$

(506,943)

 

 

(135,441)

 

274.3

%

 

 

19

 

 

 

 

During the three months ended September 30, 2006, our total other expenses increased by 558.8% compared to the three months ended September 30, 2005. This was due to increases in financing costs and interest/other expenses of approximately 100% and 251.6% respectively. Financing costs are expenses associated with the Stock Purchase agreements signed in the 4th Quarter of 2005, and 1st Quarter of 2006. Interest/other expenses is a primarily a result from the interest due on the long term debt, as well as debt owed to related parties. This increase in other expenses was offset by increases in changes in derivative liabilities and interest/other income of $4,778 and $7,967 respectively. Interest/other income is primarily composed of interest income from institutions holding our cash reserve. Net loss increased 274.3% due to the 558.8% increase in operating loss. Theprimary reason for net loss was an increase in cost of revenues and total expenses 

 

**Results of Operations**

 

**Nine Months Ended September 30, 2006 compared to the Nine Months Ended September 30, 2005**

 

*Revenues and Loss from Operations*

 

Our revenue, cost of revenue, selling, general and administrative expenses, and operating loss for the nine months ended September 30, 2006, as compared to the nine months ended September 30, 2005 are as follows:

 

 

 

9 Months Ended

September 30,

2006

 

 

9 Months Ended

September 30,

2005

 

Percentage

Change

Increase

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

1,747,372

 

 

2,885,763

 

(39.4)

%

Cost of revenue

 

1,742,361

 

 

2,348,715

 

(25.8)

%

Operating  Expenses

 

972,681

 

 

906,412

 

7.3

%

 

 

 

 

 

 

 

 

 

Operating (loss)

$

(967,670)

 

 

(369,364)

 

162

%

 

*Revenues*

 

We had total revenues of $1,747,372 and $2,885,763 for the nine month period ended September 30, 2006, and 2005 respectively. The decrease in revenue of 39.4% is primarily due to due to changes in our business model for our Trixmotive subsidiary.  In the second quarter of 2006, Trixmotive launched a production run of the 2007 Escalade. This change caused limited sales of our custom conversions. . In addition at the end of the third quarter we had fully converted limousines in our inventory ready for sale.

*Cost* *of* *Revenues*

 

We incurred total costs of $1,742,361 and $2,348,715 for the nine month period ended September 30, 2006, and 2005, respectively. The decrease in our cost of revenues of 25.8% is primarily due to the decrease in revenues as well as the launch of production run and the effective labor costs. Also cost of revenues increased disproportionately to revenue due to the increase of fully converted limousines in our inventory.

*Operating* *Expenses*

Our selling, general and administrative expenses consist primarily of sales, marketing, production and other administrative personnel, cost of facilities and related spending, salaries, and related costs for executive.  Major expenses increased by 27% for the same period in 2006 versus 2005, primarily as a result of increases in salary and wages expense of approximately 183.5%. In addition there was an increase in bad debt expense of 130.9%. These increases were offset by decreases in rent expense of 15.3%.  In addition there were decreases advertising, shipping/delivery, and depreciation expense 

 

20

 

 

 

 

of 25.3%, 13%, and 26.3% respectively for the same time period. There were also slight decreases during this period in insurance, consulting, and advertising expense of 1.2%, 2.8%, and 1.4% respectively. Total expenses were $972,681 for the nine month period ended September 30, 2006. A 7.3% increase compared to the same period of 2005.  The major expenses incurred during the nine months ended September 30, 2006 and 2005 were:

 

 

 

 

 

9 Months Ended

September 30, 2006

 

 

 

9 Months

Ended

September 30, 2005

 

Percentage

Change

Increase

(Decrease)

 

 

 

 

 

 

 

 

 

 

Major Expenses:

 

 

 

 

 

 

 

 

Rent 

$

163,285

 

$

192,688

 

(15.3)

%

Salary & Wages

 

305,726

 

 

107,836

 

183.5

%

Insurance

 

113,947

 

 

115,291

 

(1.2)

%

Accounting Fees

 

37,207

 

 

38,283

 

(2.8)

%

Consulting

 

42,697

 

 

43,287

 

(1.4)

%

Advertising

 

23,854

 

 

31,924

 

(25.3)

%

Shipping and Delivery

 

20,549

 

 

23,622

 

(13.0)

%

Depreciation

 

31,825

 

 

43,169

 

(26.3)

%

Bad debt expense

 

40,166

 

 

17,393

 

130.9

%

 

 

 

 

 

 

 

 

 

Total Major Expenses

 

779,255

 

 

613,491

 

27.0

%

 

 

 

 

 

 

 

 

 

Total Expenses

 

972,681

 

 

906,412

 

7.3

%

 

 

 

 

 

 

 

 

 

 

Other Income and Expenses and Net Loss

 

 

Our other income and expenses and net loss for the nine months ended September 30, 2006 and 2005 are as follows:

 

 

 

9 Months Ended September 30, 2006

 

 

9 Months Ended September 30, 2005

 

Percentage

Change

Increase

(Decrease)

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

27,002

 

 

2

 

13,500

%

Change in derivative liabilities

 

1,954,691

 

 

0

 

100

%

Interest and other expenses

 

(178,578)

 

 

(64,010)

 

179

%

Financing costs

 

(3,527,965)

 

 

0

 

100

%

Total other income (expenses)

 

(1,724,850)

 

 

(64,008)

 

2594.7

%

 

 

 

 

 

 

 

 

 

Net (loss)

$

(2,694,920)

 

 

(434,972)

 

519.6

%

 

During the nine months ended September 30, 2006, our total other expenses increased by 2594.7% compared to the nine months ended September 30, 2005 as a result of increases in interest expense and financing costs of $114,568 and $3,527,965 respectively. This increase in expense was offset by increases in change in derivative liabilities of $1,954,691, and interest/other income of $27,000. Net loss increased 519.6% primarily due to the large increase in financing costs of $3,463,408.

 

 

21

 

 

 

 

**Liquidity and Capital Resources**

 

Historically, we have financed our operations through cash generated from the sale of equity securities and debt financing, as well as increased in timing of payments for accounts payable.  At September 30, 2006, we had working capital of $10,483. 

 

Net cash provided by operating activities was a negative $1,460.644 for the nine months ended September 30, 2006. This resulted primarily from the increase in inventory of $384,936 and an increase in prepaid/other assets of $105,402. In addition a decrease unearned revenue of $125,632 contributed to the negative cash flow from operating activities. An offset to this was an increase in Accounts Payable/Accrued expenses of $158,695. Other offsets were adjustments to depreciation, non-cash expenses, loss on disposal of assets, amortization of debt issuance cost, and change in derivative liabilities of $31,825, $38,681, $2,808, $3,527,965, and ($1,954,691) respectively. 

 

Net cash provided in investing activities was a negative $8,955which was primarily due to the purchase of property and equipment of $9,155, which was offset by proceeds from the sale of property and equipment of $200.

 

Net cash from financing activities was $1,624,567 for the nine months ended September 30, 2006, and resulted primarily from proceeds from a convertible note of $1,678,500. This was offset by repayments to related parties and payments on long-term debt of $28,804 and $25,129 respectively.

 

Our liquidity is dependent on our ability to continue to meet our obligations, to obtain additional financing as may be required and to obtain and maintain profitability.  Our management continues to look for ways to reduce operating expenses and secure an infusion of capital through either public or private investment in order to maintain our liquidity.  These steps include increasing operating revenues over last year through the growth of the business by expanding our product line to offer complete customized vehicles by financing our own chassis through our credit line and equity financing. In addition the company has been looking into, reducing costs by bringing certain projects in-house through possible acquisitions, and constantly testing the market for better pricing on our costs of goods sold. As well as making timely payments of our obligations, building our stock and debt sourcesto provide additional working capital, and continuing to review our business plan to assure we are moving the business forward in a cost-effective manner. The company will and continuing continue to examine the segments of our business that offer the most profitable opportunity for success and eliminating operations and practices which detract from our profitability. During the third quarter of 2006 the company has continued to focus on a production line of in-house custom vehicles to be sold as an end product, as well as continuing to do just automotive conversions. 

 

There can be no assurance that we will be successful in executing our plans to improve operations or obtain additional debt or equity financing. If the company is unable to have adequate cash from operations and is unsuccessful in obtaining financing, the company would have to cut back on operations. In addition there would be substantial doubt as mentioned in our financial footnotes about our ability to continue due to a decrease in our working capital and inability to obtain financing.

 

**Critical Accounting Policies and Estimates**

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. The following represents a summary of our critical accounting policies, defined as those policies that we believe are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to makeestimates about the effects of matters that are inherently uncertain.

*Impairment or Disposal of Long-Lived Assets.*The Company reviews long-lived assets for impairment annually, and whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. At September 30, 2006, the Company believes that there has been no major impairment of its long-lived assets. 

 

22

 

 

 

 

*Use of estimates*:  The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires our management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses.  Actual results may differ from these estimates.

 

*Revenue Recognition:* The Company’s primary source of revenue comes from the sales of customized automotive conversions. We recognize revenue based on the completed-contact method, whereas customer deposits and partial payments of the conversion are deferred and treated as current liabilities, until the vehicle is completed and recognized as revenue. Other services such as repairs minor alterations are recorded when the service is performed.

 

*Allowance for Doubtful Accounts*:   We provide an allowance for doubtful accounts that is based upon our review of outstanding receivables, historical collection information, and existing economic conditions.

 

*Cash Equivalents*:   For purposes of the statements of cash flows, we consider all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.

 

*Fair Value of Financial Instruments:*   The carrying amounts of the financial instruments have been estimated by our management to approximate fair value.

 

*Inventories:*   Inventory includes parts and materials related to the vehicles in the process of being modified and converted. In addition the company will include the cost of the unmodified vehicle chassis if purchased in house. Shipping and handling costs are included in inventory. All inventories are valued at the lower of cost or market.

 

The Company performs periodic inventory procedures and at times identifies supply inventory that is considered excess inventory or obsolete. The Company writes the obsolete and excessive inventory down to the lower of cost or market and the amount is included in general and administrative expenses for the period.

 

*Property and Equipment*: Property and Equipment are valued at cost.   Maintenance and repair costs are charged to expenses as incurred. Depreciation is computed on the straight-line method based on the following estimated useful lives of the assets: 3 to 7 years for office equipment, and 7 years for furniture and fixtures, and 10 years for machinery and tools.  

 

*Income Taxes.* The Company’s income tax expense involves using the deferred  tax assets and liabilities included on the balance sheet. These tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Management judgment is required in determining the Company’s provision for income taxes, deferred tax assets and liabilities.

 

*Net Loss Per Common Share*:   The Company accounts for income (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS No. 128 requires that presentation of basic and diluted earnings per share for entities with complex capital structures. Basic earnings per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common stock outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. Diluted net loss per common share does not differ from basic net loss per common share due to the lack of dilutive items in the Company.

 

**Risks and Uncertainties**

Our business, and the value of our common stock, is affected by certain risks and uncertainties, some of which include the following:

***We Have Historically Lost Money And Losses May Continue In The Future, Which May Cause Us To Curtail Operations.***

 

Since our inception, we have not been profitable and we may not be profitable in the future. We may continue to incur losses on a quarterly or annual basis for a number of reasons, some within and others outside our control. (See “*Our Limited Operating History Makes It Difficult To Forecast Our Future Results”*and “*We Are Subject to Price Volatility Due to Our Operations Materially Fluctuating*.”)   No assurances can be given that we will be successful in reaching or maintaining profitable operations. Accordingly, we may experience liquidity and cash flow problems. If our losses continue, our ability to operate may be severely impacted.

 

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* *

***If We Are Unable To Secure Future Capital, We Will Be Unable To Continue Our Operations.  ***

 

The growth of our business will require the commitment of substantial capital resources.  We have not been profitable in our operations.  If funds are not available from operations, we will need additional funds. We may seek such additional funding through public and private financing, including debt or equity financing.  Adequate funds for these purposes, whether through financial markets or from other sources, may not be available when we need them. Even if funds are available, the terms under which the funds are available to us may not be acceptable to us.  Insufficient funds may require us to delay, reduce or eliminate some or all of our planned activities.

 

***Our Independent Auditors Have Noted In Their Opinion That We Have Suffered Recurring Losses, Which Raises Substantial Doubt About Our Ability To Continue As A Going Concern.***

 

To successfully execute our current strategy, we will need to improve our working capital position.  The report of our independent auditors accompanying our financial statements for the year ended December 31, 2005 and the notes to our unaudited financial statements for the three and nine months ended September 30, 2006, however, includes an explanatory paragraph indicating there is a substantial doubt about the Company’s ability to continue as a going concern due to recurring losses.  We plan to overcome the circumstances that impact our ability to remain a going concern through a combination of increased revenues and decreased costs, with interim cash flow deficiencies being addressed through additional debt and/or equity financing.  There can be no assurances that these plans will be successful.

 

***Our Limited Operating History Renders Makes It Difficult To Forecast Our Future Results.***

 

We had been a non-operating company for many years prior to the acquisition of Damon’s and Moonlight Industries.   Therefore, we have a limited operating history and our business and prospects must be considered in light of the risks and uncertainties inherent in a development-stage venture, many of which are beyond our control, including:   

 

**•**

our ability to distribute, sell and market our services and products;

 

**•**

our ability to develop and offer new services and products;

 

**•**

the performance of our motorcycle and automotive products and accessories;

 

**•**

the significant and ongoing funds needed to achieve our production, marketing and sales objectives;

 

**•**

the appeal of our services and products to consumers;

 

**•**

our ability to generate adequate revenue to support our operations;

 

**•**

our ability to maintain positive cash flow resulting from extended periods of monetary responsibility in the form of labor for extensive custom works in progress; 

 

**•**

the loss or injury of our principal design or technical staff; and 

 

**•**

changes in environmental regulation and enforcement relating to our operations, including those governing VOC emissions.

 

We cannot provide assurances that our business strategy will be successful or that we will successfully address those risks and the risks described herein.

 

In addition, as a result of our limited operating history, our historical financial and operating information is of limited value in predicting our future operating results. We may not accurately forecast customer behavior and recognize or respond to emerging trends, changing preferences or competitive factors facing us, and, therefore, we may fail to make accurate financial forecasts. Our current and future expense levels are based largely on our investment plans and estimates of future revenue. As a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall, which could force us to curtail or cease our business operations.

 

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***We Are Subject to Price Volatility Due to Our Operations Materially Fluctuating***

 

As a result of the evolving nature of the markets in which we compete, as well as the current nature of the public markets and our current financial condition, we believe that our operating results may fluctuate materially, as a result of which quarter-to-quarter comparisons of our results of operations may not be meaningful. If in some future quarter, whether as a result of such a fluctuation or otherwise, our results of operations fall below the expectations of investors, the trading price of our common stock would likely be materially and adversely affected. You should not rely on our results of any interim period as an indication of our future performance. Additionally, our quarterly results of operations may fluctuate significantly in the future as a result of a variety of factors, many of which are outside our control. Factors that may cause our quarterly results to fluctuate include,among others: 

 

 

**•**

our ability to retain existing customers;

 

**•**

our ability to attract new customers at a steady rate;

 

**•**

our ability to maintain customer satisfaction;

 

**•**

the extent to which our products and services gain market acceptance;

 

**•**

introductions of products and services by competitors;

 

**•**

price competition in the markets in which we compete;

 

**•**

our ability to attract, train, and retain skilled management,

 

**•**

the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations, and infrastructure; and

 

**•**

general economic conditions and economic conditions specific to the aftermarket motorcycle and automotive parts, service and accessories industry.

 

***We May Not Be Able To Compete Effectively In Markets Where Our Competitors Have More Resources***

 

The motorcycle and automobile customization and accessories market is competitive and there are no substantial barriers to entry.  We expect that competition will intensify and that new competitors may enter the market in the future.  Increased competition may result in reduce profit margins on our products and services.  In addition, many of our competitors have longer operating histories, larger customer bases, longer relationships with clients, and significantly greater financial, technical, marketing, and public relations resources than us.  We may not successfully compete in any market in which we conduct currently or in the future. The fact that we compete with established competitors who have substantially greater financial resources and longer operating histories than us, enables them to engage in substantial advertising and promotion and attract a greater number of customers andbusiness than we currently attract. While this competition is already intense, if it increases, it could have an even greater adverse impact on our revenues and profitability.

 

***We Could Fail To Attract Or Retain Key Personnel, Which Could Be Detrimental To Our Operations***

 

Our success is heavily dependent on the efforts, abilities and continued active participation of George Lefevre, Jay Isco, and Leslie McPhail, our CEO, CFO, and Chief Operating Officer respectively. In addition we are dependent on Richard Perez the co-founder of Damon’s Motorcycle Creation.  The loss of the services of these individuals, and other principal design or technical staff, would diminish our ability to deliver signature work that our clients desire and otherwise severely harm our business because of their irreplaceable skills and experience.  We do not maintain “key person” life insurance on Mr. Lefevre, Mr. Isco, Mrs. McPhail, or Mr. Perez.  We also have other key employees who manage our operations and if we were to lose 

 

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their services, senior management would be required to expend time and energy to replace and train their replacements. To the extent that we are smaller than our competitors and have fewer resources we may not be able to attract the sufficient number and quality of staff.  There can be no assurance that we will be able to recruit    or retain other qualified personnel, should it be necessary to do so.

 

***We are subject to federal, state and local government regulations affecting motorcycle and automotive customization and restoration that may affect our operations.***

 

Our business is subject to certain federal, state and local government regulations, including those of the Environmental Protection Agency (“EPA”) and comparable state agencies that regulate emissions of Volatile Organic Compounds (“VOC”) and other air contaminants, the Occupational Safety and Health Administration (“OSHA”), and regulations governing the disposal of oil, grease, tires, batteries and the prevention of pollution.  Any changes in the laws or regulations imposed on us by these agencies could significantly increase our costs of doing business and could have a very negative effect on our business.

 

In particular, our business operations and facilities are subject to a number of federal, state and local environmental laws and regulations. These laws, regulations or the nature of our operations may require us to make significant additional capital expenditures to ensure compliance in the future. Our failure to comply with environmental laws could result in the termination of our operations, impositions of fines, or liabilities in excess of our capital resources.  

 

* *

***Product liability claims could severely damage our business and we may have insufficient insurance coverage.***

 

Given the nature of our products and services, we expect that we will be subject to potential product liability claims that could, in the absence of sufficient insurance coverage, have a material adverse impact on our business.  There can be no assurance that our liability insurance coverage is adequate to cover all product liability claims.  If such coverage is found to be insufficient, our business operations could be adversely affected.    

 

* *

***Our Success Is Dependent Upon The Popularity Of Harley-Davidson Motorcycles and Customized Automotives.***

 

Although our products and services are not limited to Harley-Davidson motorcycles, the success of our business is depended upon the popularity of Harley-Davidson motorcycles, and custom automotives. There can be no assurance, however, that the current popularity of Harley-Davidson motorcycles and custom automotives will continue. If such popularity declines, our business operations may be adversely affected.

 

***We do not own any patents or registered trademarks or trade names. Protecting our proprietary technology and other intellectual property may be costly and ineffective, and if we are unable to protect our intellectual property, we may not be able to compete effectively in our market.***

Our business success will depend materially on our ability to protect our trademarks and trade names, to preserve our trade secrets, and to avoid infringing the proprietary rights of third parties. In general, our proprietary rights will be protected only to the extent that protection is available and to the extent we have the financial and other resources to enforce any rights we hold. 

We do not own any patents or registered trademarks or trade names.  We may apply for federal and other governmental trademark registrations in the future, but we cannot assure you that any of our trademark applications will result in a registered and protectable trademark.  Any registered or unregistered trademarks held or asserted by us may be canceled, infringed, circumvented or declared generic, or determined to be infringing on other marks owned by third parties. We intend to rely upon trade secrets, proprietary know-how and continuing technological innovation to become competitive in our market. We cannot assure you that others may not independently develop the same or similar technologies or otherwise obtain access to our technology and trade secrets. 

Costly litigation might be necessary to protect our intellectual property or to determine the scope and validity of third-party proprietary rights. If an adverse outcome in litigation finds that we have infringed on proprietary rights of others, we may be required to pay substantial damages and may have to discontinue use of our products or re-design our products. Any claim of infringement may involve substantial expenditures and divert the time and effort of management.

 

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***We Have Never Paid Dividends on Our Common Stock and You May Never Receive Dividends.***

 

We have not paid any cash dividends on our common stock to date and we do not anticipate paying cash dividends in the foreseeable future.  We intend to retain earnings, if any, to finance the development and expansion of our business.  Future dividend policy will be at the discretion of our Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions and other factors.  There can be no assurance that cash dividends of any kind will ever be paid.  

 

***Our Common Stock May Be Affected By Limited Trading Volume And May Fluctuate Significantly, Which May Affect Our Shareholders’ Ability To Sell Shares Of Our Common Stock***

 

There has been a limited public market for our common stock and there can be no assurance that a more active trading market for our common stock will develop. An absence of an active trading market could adversely affect our shareholders’ ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations, which could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially. These fluctuations may also cause short sellers to enter the market from time to time in the belief that we willhave poor results in the future. We cannot predict the actions of market participants and, therefore, can offer no assurances that the market for our stock will be stable or appreciate over time. These factors may negatively impact shareholders’ ability to sell shares of our common stock.

 

***Because Our Stock Is Considered A Penny Stock, Any Investment In Our Stock Is Considered To Be A High-Risk Investment And Is Subject To Restrictions On Marketability.***

 

Trading of our common stock is conducted over-the-counter through the NASD Electronic Bulletin Board and covered by Rule 15g-9 under the Securities Exchange Act of 1934.  Under  this  rule,  broker/dealers who recommend these securities  to persons other than established customers and accredited investors must  make  a  special  written  suitability determination for the purchaser and receive  the  purchaser’s  written  agreement  to  a  transaction prior to sale. Securities are exempt from this rule if the market price is at least $5.00 per share.

 

The Securities and Exchange Commission adopted regulations that generally define a “penny stock” as any equity security that has a market price of less than $5.00 per share. Additionally, if the equity security is not registered or authorized on a national securities exchange or the NASDAQ and the issuer has net tangible assets under $2,000,000, the equity security also would constitute a “penny stock.”  Our common stock does constitute a penny stock because our common stock has a market price less than $5.00 per share and our common stock is not quoted on NASDAQ.  As our common stock falls within the definition of penny stock, these regulations require the delivery, prior to any transaction involving our common stock, of a disclosure schedule explaining the penny stock market and the risks associated with it. Furthermore, the ability of broker/dealers to sell our commonstock and the ability of shareholders to sell our common stock in the secondary market may be limited.  As a result, the market liquidity for our common stock is adversely affected.  We  can  provide  no  assurance  that trading in our common stock will not be subject to these or other regulations in the future,  which  may  negatively  affect  the  market for our common stock. Furthermore,  this  lack  of  liquidity  also may make it more difficult for us  to  raise  capital  in  the  future.

 

***Future Acquisitions May Disrupt Our Business And Deplete Our Financial Resources***

 

Any future acquisitions we make could disrupt our business and seriously harm our financial condition.  While we have no current agreements to do so, we may consider investments in complementary companies and products.  In the event of any future acquisitions, we may:

 

**•**

issue stock that would dilute our current stockholders’ percentage ownership;

 

27

 

 

 

 

 

**•**

incur debt;

 

**•**

assume liabilities;

 

**•**

incur amortization expenses related to goodwill and other intangible assets; or

 

**•**

incur large and immediate write-offs.

 

The use of debt or leverage to finance our future acquisitions should allow us to make acquisitions with an amount of cash in excess of what may be currently available to us. If we use debt to leverage up our assets, we may not be able to meet our debt obligations if our internal projections are incorrect or if there is a market downturn. This may result in a default and the loss in foreclosure proceedings of the acquired business or the possible bankruptcy of our business.

 

Our operation of any acquired business will also involve numerous risks, including:

 

**•**

integration of the operations of the acquired business and its products;

 

**•**

unanticipated costs; 

 

**•**

diversion of management’s attention from our core business; 

 

**•**

adverse effects on existing business relationships with suppliers and customers; 

 

**•**

risks associated with entering markets in which we have limited prior experience; and 

 

**•**

potential loss of key employees, particularly those of the purchased organizations.

 

**ITEM 3. CONTROLS AND PROCEDURES**

 

(a)           Evaluation of Disclosure Controls and Procedures.  Our Chief Executive Officer and Interim Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this quarterly report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to our Company (including our consolidated subsidiaries) required to be included in our reports filed or submitted under the Exchange Act. 

 

(b)           Changes in Internal Controls over Financial Reporting.  During the most recent fiscal quarter, there have not been any significant changes in our internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 

 

**PART II**

 

**ITEM 1.**

**LEGAL PROCEEDINGS**

 

Damon’s historically leased four (4) units space in city of Brea, California under four separate non-cancelable operating lease agreements, which expires through November 30, 2007. Damon’s currently does not occupy the spaces. In July, the landlord filed claims against Damon’s for the past due rent and charges of all units, aggregate of $19,657, and the 

 

28

 

 

 

 

additional amounts due pursuant to the remaining terms of the lease agreements. The obligations under the remaining terms of the lease agreements are estimated at a total of $89,086. Subsequently, Damon’s and the landlord entered into a Surrender Agreement for one unit, providing that Damon’s agreed to forfeit a security deposit of $1,568 and to pay a sum of $3,822, representing the unpaid charges and rent through the date of agreement. In return, the landlord agreed to discharge and release Damon’s from all obligations under the lease agreement of that unit.

 

No provision for any contingent liabilities has been made in the accompanying consolidated financial statements since management cannot predict the outcome of the claims or estimate the amount of any loss that may result. In addition, the Company has received an outside legal opinion from an attorney that states the outstanding liability is not the Company’s as the original lease was signed by the previous owners of Damon’s. However, the Company will continue to accrue the past due rent of $19,657 in the accompanying financial statements until this matter is resolved.  

On December 7, 2005, a customer of TrixMotive filed a lawsuit in the Superior Court of Santa Clara County of California against TrixMotive claiming for breach of contract and warranty, intentional and negligence misrepresentation for a customized vehicle. The plaintiff seeks $98,827 in compensatory damages and other unspecified damages plus interest, attorneys’ fees and costs. The arbitrator after a hearing held on September 22, 2006 awarded that the plaintiff shall recover from the Company the price of the refrigerator and microwave which were ordered and paid for by the plaintiff but not installed in the vehicle, and that all other claims of plaintiff are denied as to the Company. The Plaintiff rejected the arbitration award on October 19, 2006. A trial date has not been set. The Company did not accrue the cost of the refrigerator and microwave as their amounts are considered insignificant. 

 

**ITEM 2.**

**CHANGES IN SECURITIES**

On January 4, 2006 and January 30, 2006, MotivNation issued both $500,000 and $1,200,000 in Convertible Debentures respectively, at an 8% annual interest rate, pursuant to a Securities Purchase Agreement (the “Agreement”). The convertible debentures can be converted into shares of common stock under the following calculation: the Applicable Percentage (as defined herein) multiplied by the Market Price (as defined herein). “Market Price” means the average of the lowest three (3) Trading Prices (as defined below) for the Common Stock during the twenty (20) Trading Day period ending one Trading Day prior to the date the Conversion Notice is sent by the Holder to the Borrower via facsimile (the “Conversion Date”). “Trading Price” means, for any security as of any date, the intraday trading price on the Over-the-Counter Bulletin Board (the“OTCBB”) as reported by a reliable reporting service (“Reporting Service”) mutually acceptable to Borrower and Holder and hereafter designated by Holders of a majority in interest of the Notes and the Borrower or, if the OTCBB is not the principal trading market for such security, the intraday trading price of such security on the principal securities exchange or trading market where such security is listed or traded or, if no intraday trading price of such security is available in any of the foregoing manners, the average of the intraday trading prices of any market makers for such security that are listed in the “pink sheets” by the National Quotation Bureau, Inc. If the Trading Price cannot be calculated for such security on such date in the manner provided above, the Trading Price shall be the fair market value as mutually determined by the Borrower and the holders of a majority in interest of the Notes being converted for which the calculation of theTrading Price is required in order to determine the Conversion Price of such Notes. “Trading Day” shall mean any day on which the Common Stock is traded for any period on the OTCBB, or on the principal securities exchange or other securities market on which the Common Stock is then being traded. “Applicable Percentage” shall mean 50.0%.

The above notes were issued to the following on January 4, 2006: AJW Partners, LLC a $59,500 secured convertible debenture, AJW Qualified Partners, LLC a $163,000 secured convertible debenture, New Millennium Capital Partners II, LLC a $7,500 secured convertible debenture, and AJW Offshore, LTD a $270,000 secured convertible debenture.

The above notes were issued to the following on January 30, 2006: AJW Partners, LLC a $142,800 secured convertible debenture, AJW Qualified Partners, LLC a $391,200 secured convertible debenture, New Millennium Capital Partners II, LLC a $18,000 secured convertible debenture, and AJW Offshore, LTD a $648,000 secured convertible debenture.

 

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In connection with the convertible notes issued on January 4, 2006, the following common stock issuable upon the exercise of warrants at $1.50: 74,375 shares of common stock issuable to AJW Partners, LLC, 203,750 shares of common stock issuable to AJW Qualified Partners, LLC, 9,375 shares of common stock issuable to New Millennium Capital Partners II, LLC and 337,500 to AJW Offshore, LTD

In connection with the convertible notes issued on January 30, 2006, the following common stock issuable upon the exercise of warrants at $1.50: 178,500 shares of common stock issuable to AJW Partners, LLC, 489,000 shares of common stock issuable to AJW Qualified Partners, LLC, 22,500 shares of common stock issuable to New Millennium Capital Partners II, LLC and 810,000 to AJW Offshore, LTD

The holders of the 8% convertible debentures may not convert its securities into shares of MotivNation’s common stock if after the conversion such holder would beneficially own over 4.99% of the outstanding shares of MotivNation’s common stock. Since the number of shares of MotivNation’s common stock issuable upon conversion of the debentures will change based upon fluctuations of the market price of MotivNation’s common stock prior to a conversion, the actual number of shares of MotivNation’s common stock that will be issued under the debentures owned by the holders is based on a reasonable good faith estimate of the maximum amount needed.

On January 10, 2006, the Company entered into Shares for Debt Agreement with each George Lefevre, the CEO and director of Motivnation, and Jay Isco, the CFO, and Secretary of MotivNation, The company issued 435,000 and 217,000 restricted shares to George Lefevre and Jay Isco respectively, pursuant to the terms described in the Shares for Debt Agreements.

 

**TEM 3.**

**DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.**

**SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

**ITEM 5.**

**OTHER INFORMATION**

 

 

None.

 

 

**ITEM 6.**

**EXHIBITS AND REPORTS ON FORM 8-K**

 

*(a)* *Exhibits*

 

Exhibit 31.1 – Certification by our President required by Rule 13a-14(a) or Rule 15d-14(a).

 

Exhibit 31.2 – Certification by our Interim Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a).

 

Exhibit 32.1 – Certification by our President required by Rule 13a-14(b) or Rule 15d-14(b) and section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

 

Exhibit 32.2 – Certification by our Interim Chief Financial Officer required by Rule 13a-14(b) or Rule 15d-14(b) and section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

 

*(b)* *Reports on Form 8K.*

 

On January 10, 2006, we filed a Form 8-K with the Commission announcing the election of George Lefevre, the CEO of Motivnation to the board of Directors and subsequently was elected Chairman of the Board. (Item 5.02)

 

On February 7, 2006, we filed a Form 8-K with the Securities and Exchange Commission, or the Commission announcing that the board of Directors entered into material definitive agreements with Officers and a Director issuing unregistered shares.  (Items 1.01, 3.02, and 9.01)

 

On October 10, 2006, we filed a Form 8-K with the Commission announcing the resignation of Dick Holt from the board of Directors of the Company . (Item 5.02)

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**SIGNATURES**

 

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

 

Dated: February 13, 2007

MotivNation, Inc.

 

 

By:/s/			George Lefevre                                			

 

George Lefevre CEO

 

 

 

 

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