UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to _________.
Commission File Number 000-26463
MILITARY RESALE GROUP, INC.
(Name of small business issuer as specified in its charter)
New York 52-2062187
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2180 Executive Circle
Colorado Springs, Colorado 80906
(Address of principal executive offices)
(719) 391-4564
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 2004, there were 37,076,712 shares of the issuer's common
stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
MILITARY RESALE GROUP, INC.
FORM 10-QSB
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - September 30, 2004 and December 31, 2003...... 1
Statements of Operations - three and nine months ended September
30, 2004 and 2003............................................ 3
Statements of Cash Flows - three and nine months ended September
30, 2004 and 2003............................................ 4
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis or Plan of Operation...... 9
Item 3. Controls and Procedures........................................15
PART II. Other Information
Item 2. Changes in Securities and Small Business Issuer Purchases
of Equity Securities........................................16
Item 6. Exhibits and Reports on Form 8-K...............................17
Signatures ..................................................................18
i
ITEM 1. FINANCIAL INFORMATION
WE DID NOT OBTAIN A REVIEW OF THE INTERIM FINANCIAL STATEMENTS BY AN INDEPENDENT
ACCOUNTANT USING PROFESSIONAL REVIEW STANDARDS AND PROCEDURES, ALTHOUGH THAT
REVIEW IS REQUIRED BY THE FORM
MILITARY RESALE GROUP, INC.
BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------------
CURRENT ASSETS: (UNAUDITED)
Cash $ -- $ 2,862
Accounts receivable - trade 654,698 765,851
Inventory 396,877 334,950
Prepaid consulting 54,428 484,506
Deposits 42,118 33,218
Prepaid interest 178,283 92,681
Prepaid expenses 57,382 --
------------------------
Total Current Assets
1,383,787 1,714,068
PREPAID INTEREST, NET OF CURRENT PORTION -- 132,038
EQUIPMENT
Office equipment 24,922 15,047
Warehouse equipment 159,444 159,444
Software 16,324 16,324
------------------------
200,689 190,815
Less accumulated depreciation (133,792) (106,103)
------------------------
Net equipment 66,897 84,712
OTHER ASSETS
Deferred offering costs 23,947 --
Investment Property 344,772 --
------------------------
Total Other Assets 368,719 --
Total Assets $ 1,819,402 $ 1,930,818
========================
1
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses 2,164,220 2,507,544
Accounts payable, related party 137,925 72,632
Current maturities of capital lease obligations 24,315 51,981
Deferred rent -- 2,729
Current portion of accrued interest payable 127,856 99,561
Current portion of notes payable 1,500 90,235
Current portion of convertible notes payable -- 85,000
Related party demand note payable 75,000 --
Bank Overdraft 22,166 --
Other Current Liabilities 22,163 --
------------------------
Total Current Liabilities
2,575,145 2,909,682
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT
MATURITIES 36,351 36,351
DEFERRED RENT, NET OF CURRENT PORTION 24,561 21,832
RELATED PARTIES CONVERTIBLE NOTES PAYABLE 360,000 370,000
NOTES PAYABLE, NET OF CURRENT PORTION 14,525 98,975
CONVERTIBLE NOTES PAYABLE, NET OF CURRENT PORTION 160,000 150,000
MORTGAGE PAYABLE 70,941 --
------------------------
Total Liabilities 3,241,524 3,586,840
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.0001, 10,000,000
shares authorized, -0- issued and outstanding -- --
Common stock, par value $.0001, 50,000,000
shares authorized, 12,923,288
and 37,076,712 issued and outstanding 3,329 2,144
Additional paid-in capital 5,647,772 4,248,547
Common Stock Reserved (11,750) --
Accumulated (deficit) (7,061,473) (5,906,713)
------------------------
Total Stockholders' Equity (Deficit)
(1,422,122) (1,656,022)
Total Liabilities and Stockholders' Equity
(Deficit) 1,819,402 1,930,818
========================
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
2
MILITARY RESALE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
UNAUDITED
Three Months Ended Nine Months Ended
-----------------------------------------------------------------------------------
September 30, 2004 September 30, 2003 September 30, 2004 September 30, 2003
-----------------------------------------------------------------------------------
REVENUES:
Resale revenue 1,659,713 $ 1,143,846 $ 5,481,042 $ 4,290,820
Commission revenue 156,317 83,095 490,705 364,649
-----------------------------------------------------------------------------------
Total Revenues 1,816,030 1,226,941 5,971,747 4,655,469
COST OF GOODS SOLD 1,547,796 1,136,929 5,029,295 3,983,622
-----------------------------------------------------------------------------------
GROSS PROFIT 268,234 90,012 942,453 671,847
OPERATING EXPENSES:
Stock based compensation -- 465,313 789,320 1,028,166
Salary and payroll taxes 141,111 93,280 497,779 352,389
Professional fees (37,580) 76,535 64,019 276,625
Occupancy 59,356 58,673 178,067 177,385
General and administrative 346,132 116,587 682,928 393,380
Depreciation and amortization 9,442 4,933 27,689 22,594
-----------------------------------------------------------------------------------
Total Expenses 518,461 815,321 2,239,803 2,250,539
-----------------------------------------------------------------------------------
Net (Loss) From Operations (250,227) (725,309) (1,297,350) (1,578,692)
OTHER (EXPENSES):
Interest expense 3,006 (25,459) 98,341 (258,755)
Interest income -- 136 -- 136
-----------------------------------------------------------------------------------
Total Other (Expense) 3,006 (25,323) 98,341 (258,619)
-----------------------------------------------------------------------------------
NET (LOSS) (253,233) (750,632) $ (1,199,008) $ (1,837,311)
===================================================================================
NET (LOSS) PER COMMON SHARE BASIC AND DILUTED $ (0.10) $ (0.05) $ (0.04) $ (0.14)
===================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 2,554,524 15,514,144 27,081,184 13,272,178
===================================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
3
MILITARY RESALE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
UNAUDITED
2004 2003
----------------------------
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net (loss) $(1,154,759) $(1,837,311)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 27,689 14,911
Amortization of option based interest expense 46,436 100,000
Stock issued for services 1,679,810 153,924
Options issued for services 684,032 --
Deferred offering costs (23,947) --
Beneficial conversion feature -- 15,000
stock issued for liquidated damages 1,771,750 --
shares and warrents issued for purchase of Ohio Ptrs 274,560 --
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable 111,153 (69,768)
Decrease (Increase) in inventory (61,927) 9,220
(Increase) in deposits (8,900) --
(Increase) in prepaid expenses (57,382) --
Increase in accounts payable and accrued
expenses (343,324) 133,805
(Decrease) in related party accounts payable 65,293 --
Increase in accrued interest payable 44,085 --
Increase in deferred rent obligation -- 2,047
Increase in mortgage payable 70,941 --
Increase in other liabilities 22,163 25,007
----------------------------
Net Cash Used In Operating Activities
(18,581) (116,481)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (9,874) (1,683)
Purchase of investment property (344,772) --
----------------------------
Net Cash Used in Investing Activities
(354,646) (1,683)
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Payments on capital lease obligations (27,666) (6,762)
Payments on notes payable (183,185) --
Proceeds from issuance of notes 75,000 125,000
Proceeds from issuance of common stock 547,500 --
Payments of offering costs (63,450)
----------------------------
Cash Flows Provided by Financing Activities 348,199 118,238
NET INCREASE IN CASH AND CASH EQUIVALENTS 138,947 74
CASH AND CASH EQUIVALENTS, beginning of period 2,862 2,072
----------------------------
CASH AND CASH EQUIVALENTS, end of period $ (22,166) $ 2,146
============================
Supplementary information:
Cash paid for:
Interest paid $ -- $ 466
============================
Income taxes $ -- $ --
============================
4
2004 2003
----------------------------
Non-cash investing and financing activities:
Issuance of stock and options in exchange for services $ 2,363,842 $ 205,146
============================
Issuance of common stock and options as payment of notes
payable $ 50,000 $ --
============================
Issuance of common stock in payment of accrued
compensation $ -- $ 32,912
============================
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
5
MILITARY RESALE GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited financial
statements reflect all adjustments that, in the opinion of management, are
considered necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited financial
statements of Military Resale Group, Inc., included in Form 10-KSB for the
fiscal year ended December 31, 2003.
The financial statements have been prepared on a going concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the normal course of business.
The Company has suffered recurring losses from operations, and is in a working
capital deficit position that raises substantial doubt about its ability to
continue as a going concern.
The Company's management is currently pursuing equity and/or debt financing in
an effort to continue operations. The future success of the Company is likely
dependent on its ability to attain additional capital to develop its proposed
products and ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be successful in
obtaining such financing, or that it will attain positive cash flow from
operations. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 2 - EARNINGS PER SHARE
The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS No. 128). This
Statement simplifies the standards for computing earnings per share (EPS)
previously found in Accounting Principles Board Opinion No. 15, Earnings Per
Share, and makes them more comparable to international EPS standards. SFAS No.
128 replaces the presentation of primary EPS with a presentation of basic EPS.
In addition, the Statement requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. However, such presentation is not required if the effect is
antidilutive. Accordingly, no such presentation has been made.
NOTE 3 - PREPAID CONSULTING
Prepaid consulting expenses are recorded in connection with common stock and
options issued to consultants for future services and are amortized over the
agreement term. During the nine months ended September 30, 2004, the Company
incurred prepayments of $ 54,428 and stock-based compensation expense of $
789,320.
6
MILITARY RESALE GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 4 - PREPAID INTEREST
Prepaid interest is recorded in connection with the issuances of options for the
extension of various notes payable. The prepaid interest is being amortized over
the extension period, with $ 98,341 charged to interest expense during the nine
months ended September 30, 2004.
NOTE 5 - RELATED PARTY TRANSACTIONS
On September 30, 2004 pursuant to a consulting agreement with the Company's
chief executive officer, the Company issued 553,232 shares of common stock and
granted options to purchase 553,232 shares of common stock at $.25 per share for
a period of five years for services rendered valued at $36,000. The value of the
stock and the value of the options was $12,000 each based on $12,000 each per
month.
NOTE 6 - SECURITIES ISSUED FOR SERVICES
During the three months ended March 31, 2004, the Company issued an aggregate
200,000 of the Company's common shares to a consultant for services provided and
expensed $40,000 (the value of the services) as stock based compensation.
During the three months ended March 31, 2004 the Company issued 100,000 shares
of the Company's common stock valued at $9,000 to a consultant for services to
be provided. The value of the stock is recorded as prepaid consulting and will
be amortized over the term of the agreement.
On January 29, 2004 the Company issued 50,000 shares of common stock valued at
$11,000 as a retainer fee for services to be performed in connection with
raising of capital (See Note 9). This amount is recorded as prepaid consulting
and is being amortized over the term of the agreement.
During the three months ended March 31, 2004 pursuant to a consulting agreement
with an unrelated party, the Company granted warrants to purchase 320,000 shares
of the Company's common stock at $.125 for a period of five years. These
warrants were valued at $52,870, the fair value using the Black-Scholes European
Pricing Model. The average risk free interest rate used was 3.39%, volatility
was estimated at 96% and the expected life was five years. The warrants were
granted as compensation to the Company's investment banker for raising $500,000
by selling 4,000,000 shares of common stock. This investment banker was also
paid $40,000 as commission for the sale of stock.
On April 1, 2004 the Company entered into a one-year business consulting
agreement with an unrelated party for management and financial consulting
services. Under the terms of the agreement the consultant will receive $5,000
per month for the term of the agreement and receive 250,000 shares of common
stock.
On May 10, 2004 the Company issued 100,000 shares of common stock to a
consultant for services to be rendered over a period of 180 days.
On May 11, 2004 the Company issued 200,000 shares of common stock and granted
200,000 options to purchase common stock at $.25 per share to a stockholder for
services rendered.
On June 16, 2004 the Company issued 500,000 shares of common stock to a
consultant for services.
7
MILITARY RESALE GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK
During the three months ended March 31, 2004 the Company sold 4,000,000 shares
of common stock to several individuals at $.125 per share for total
consideration of $460,000, net of offering costs paid of $40,000. These
individuals were also given warrants to purchase 2,000,000 shares of common
stock (50% of shares issued) at $.25 per share for a period of five years. The
terms of the stock subscription agreements provide that in the event the average
closing bid price of the common stock for the ten days preceding the effective
date of the Registration Statement (to be filed) is $.17 or below, then the
purchase price for the shares shall be reset to a purchase price equal to the
average price minus $.05, provided that the purchase price is not less than
$.065 per share. Upon the occurrence of the price adjustment, the Company will
issue to each subscriber the additional shares they are entitled to based upon
the adjusted price. In addition, if the Registration Statement (to be filed) is
not declared effective on or before June 30, 2004, then commencing on the first
day of each month thereafter until December 1, 2004 or the declared effective
date of the Registration Statement, the Company will issue each subscriber, as
liquidated damages, additional shares of common stock equal to 10% of the number
of shares purchased by each subscriber.
During the three months ended March 31, 2004 the Company sold 450,000 shares of
common stock to several individuals for $.10 to $.125 per share for total
consideration of $43,250, net of offering costs of $4,250. In accordance with
the terms of the stock subscription agreements, if the Company's Registration
Statement (to be filed) is not declared effective on or before June 30, 2004,
then commencing on the first day of each month thereafter until December 1, 2004
or the declared effective date of the Registration Statement, the Company will
issue each subscriber, as liquidated damages and not as a penalty, additional
shares of common stock equal to 10% of the number of shares purchased by each
subscriber.
During the six months ended June 30, 2004, the Company issued 396,000 shares of
commons stock to several individuals for $.14 per share for total consideration
of $55.440 for liquidated damages.
During the six months ended June 30, 2004 the Company sold 1,920,000 shares of
common stock to an individual at $.125 per share for total consideration of
$240,000. This individual was also given warrants to purchase 960,000 shares of
common stock at $.25 per share for a period of five years. The terms of the
stock subscription agreements provide that in the event the average closing bid
price of the common stock for the ten days preceding the effective date of the
Registration Statement (to be filed) is $.17 or below, then the purchase price
for the shares shall be reset to a purchase price equal to the average price
minus $.05, provided that the purchase price is not less than $.065 per share.
Upon the occurrence of the price adjustment, the Company will issue to each
subscriber the additional shares they are entitled to based upon the adjusted
price. In addition, if the Registration Statement (to be filed) is not declared
effective on or before June 30, 2004, then commencing on the first day of each
month thereafter until December 1, 2004 or the declared effective date of the
Registration Statement, the Company will issue each subscriber, as liquidated
damages, additional shares of common stock equal to 10% of the number of shares
purchased by each subscriber.
NOTE 8 - PROMISSORY NOTE PAYABLE
On March 27, 2003, the Company issued a promissory note for $100,000 to Romano,
Ltd. The note bears interest at 15% per annum and was due on March 26, 2004,
subject to the following contingent payment terms upon the Company's raising or
securing additional funding from any third party source:
Additional Funding Terms Modification
--------------------- ---------------------------------------------
$250,000 Payment of 10% of outstanding principal and accrued interest
$500,000 Payment of 15% of outstanding principal and accrued interest
$1,000,000 or more Payment of 100% of outstanding principal and accrued interest
When the Company failed to secure any of the above-referenced additional
funding, nor another significant event, such as a merger or acquisition of
another company, the Company was required to pay $8,000 per month commencing on
July 1, 2003 until the full obligation was paid
8
MILITARY RESALE GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 9 - COMMITMENTS AND CONTINGENCIES
On January 29, 2004 the Company entered into a business consulting agreement
with an unrelated party for financial advisory and investment banking services
and issued the consultant 50,000 shares of its common stock valued at $11,000.
The consultant will advise the Company as to issues of capital formation, assist
the Company on the market awareness of its stock by setting up road shows and
will assist the Company in raising $300,000 through the issuance of common stock
at $.125 and warrants to purchase 1,200,000 shares of common stock exercisable
at $.25 per share for five years. Upon successful closing of the above raising
of capital, the Company will pay the consultant a cash fee commission of 10% of
the capital raised plus a cash non-accountable expense allowance of 2.5% of the
capital raised. In addition, upon raising the capital, the consultant will be
entitled to 300,000 warrants with similar terms as those issued in the capital
raise.
The Company was the plaintiff in litigation with one of its vendors. During the
six months ended June 30, 2004 the Company entered into a judgment in which they
were ordered to pay the vendor $5,356 with the amount due accruing interest at
8% per annum. As of June 30, 2004 the Company had not paid any amount to this
vendor. Subsequent to March 31, 2004, the Company received a Writ of Garnishment
and are expecting to have the original judgment amount of $5,356 plus interest
and other charges of $181 garnished from one of their bank accounts.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Certain statements in this Report constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. The words "believe",
"expect", "anticipate", "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made. Because our common stock is considered a "penny stock," as defined by
the regulations of the Securities and Exchange Commission, the safe harbor for
forward-looking statements does not apply to statements by our company.
Our business and results of operations are affected by a wide variety of factors
that could materially and adversely affect us and our actual results, including,
but not limited to: (1) the availability of additional funds to enable us to
successfully pursue our business plan; (2) the uncertainties related to the
addition of new products and suppliers; (3) our ability to maintain, attract and
integrate management personnel; (4) our ability to complete the development of
our proposed product line in a timely manner; (5) our ability to effectively
market and sell our products and services to current and new customers; (6) our
ability to negotiate and maintain suitable strategic partnerships and corporate
relationships with suppliers and manufacturers; (7) the intensity of
competition; and (8) general economic conditions. As a result of these and other
factors, we may experience material fluctuations in future operating results on
a quarterly or annual basis, which could materially and adversely affect our
business, financial condition, operating results and stock price.
Any forward-looking statements herein speak only as of the date hereof. We
undertake no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The following discussion should be read in conjunction
with the financial statements and related notes appearing elsewhere in this
Report.
10
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2003
Revenues. Total revenue for the three months ended September 30, 2004 of
$1,816,030 reflected an increase of $589,089, or approximately 32%, compared to
total revenue of $1,226,941 for the three months ended September 30, 2003. Our
revenues are derived in either one of two ways. In the majority of instances, we
purchase products from manufacturers and suppliers for resale to the
commissaries we service. In such cases, we resell the manufacturer's or
supplier's products to the commissaries at generally the same prices we pay for
such products, which prices generally are negotiated between the manufacturer or
supplier and the Defense Commissary Agency ("DeCA"). Revenue is recognized as
the gross sales amount received by us from such sales ("resale revenues"), which
include (i) the purchase price paid by the commissary plus (ii) a negotiated
storage and delivery fee paid by the manufacturer or supplier. In the remaining
instances, we act as an agent for the manufacturer or supplier of the products
we sell, and earn a commission paid by the manufacturer or supplier, generally
in an amount equal to a percentage of the manufacturer's or supplier's gross
sales amount ("commission revenues"). In such cases, revenue is recognized as
the commission we receive on the gross sales amount. The increase in our total
revenues was primarily due to the addition of the frozen chicken line of Tyson
Foods, Inc. in December 2003, a line of health and beauty aids manufactured by
Alberto Culver, Inc. in January 2004 and a frozen vegetable line produced by VIP
Sales Company Inc. in January 2004, all of which we sell to commissaries on a
resale basis.
Resale revenue for the three months ended September 30, 2004 of $1,659,713
reflected an increase of $515,867, or approximately 31%, compared to resale
revenue of $1,143,846 for the three months ended September 30, 2003. For the
three months ended September 30, 2004, approximately 10.9% of our gross profit
was derived from sales involving resale revenue compared to approximately 7.7%
for the three months ended September 30, 2003. These increases were attributable
primarily to addition of the suppliers discussed above. We cannot be certain as
to whether this trend will continue. However, in the long term, we are seeking
to increase the ratio of our sales of products sold on a resale basis, rather
than a commission basis, because we believe we can increase our profitability on
such sales by taking advantage of payment discounts frequently offered by the
manufacturers and suppliers of such products. Provided we can generate
sufficient cash from operations or financing activities, we intend to do so by
seeking to add new products that we can offer to commissaries on a resale basis
from our existing manufactures and suppliers and from others with whom we do not
currently have a working relationship.
Commission revenues for the three months ended September 30, 2004 of $156,317
reflected an increase of $73,222, or approximately 47%, compared to commission
revenues of $83,095 for the three months ended September 30, 2003. For the three
months ended September 30, 2004, approximately 89.1% of our gross profit was
derived from sales involving commission revenues as compared to approximately
92.3% for the three months ended September 30, 2003. The increase in commission
revenues was attributable primarily to a change in our supplier of fresh chicken
products in the third quarter of 2003 from Tyson Foods, Inc., whose products we
sold on a resale basis, to ConAgra Foods, Inc., whose products we sell on a
commission basis.
Management believes our long-term success will be dependent in large part on our
ability to add additional product offerings to enable us to increase our sales
and revenues. However, we believe our ability to add additional product
offerings, are dependent on our ability to obtain additional capital to fund new
business development and increased sales and marketing efforts. We are currently
in discussions with a number of other manufacturers and suppliers in an effort
to reach an agreement under which we can distribute their products to the
military market. While there can be no assurance that we will do so, we believe
we will be successful in negotiating agreements with a number of such suppliers
and manufacturers.
To date, all of our sales revenue has been generated from customers located in
the United States.
Cost of Goods Sold. Cost of goods sold consists of our cost to acquire products
from manufacturers and suppliers for resale to commissaries. In instances when
we sell products on a commission basis, there is no cost of goods sold because
we act as an agent for the manufacturer or supplier and earn only a commission
on such sales. During the three months ended September 30, 2004, cost of goods
sold increased by $410,867, or approximately 27%, to $1,547,796 from $1,136,929
for the three months ended September 30, 2003. This increase was attributable
primarily to increased sales of products that we sold on a resale basis as
discussed above. We cannot be certain as to whether or not this trend will
continue; however, in the long term we are seeking to increase the ratio of our
sales on a resale basis, as discussed above.
Gross Profit. Gross profit for the three months ended September 30, 2004
increased by $178,222, or approximately 66%, compared to the three months ended
September 30, 2003, from $90,012 for the three months ended September 30, 2003
to $268,234 for the three months ended September 30, 2004.
11
Operating Expenses. Total operating expenses aggregated $518,461 for the three
months ended September 30, 2004 as compared to $815,321 for the three months
ended September 30, 2003, representing a decrease of $296,860, or approximately
36%.
Interest Expense. Interest expense of $ 3,006 for the three months ended
September 30, 2004 reflected a decrease of $22,317 as compared to interest
expense of $25,323 for the three months ended September 30, 2003. The decrease
in interest expense was attributable primarily to decreased interest expense
resulting from the recognition of the beneficial conversion feature (the right
to convert debt into shares of our common stock at a discount to the fair market
value of our common stock) of convertible promissory notes.
Net Loss. Primarily as a result of the decreased operating expenses discussed
above, we incurred a net loss of $253,233 for the three months ended September
30, 2004 as compared to a net loss of $750,632 for the three months ended
September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
Revenues. Total revenue for the nine months ended September 30, 2004 of
$5,971,747 reflected an increase of $1,680,927, or approximately 28.1%, compared
to total revenue of $4,655,469 for the nine months ended September 30, 2003.
Resale revenue for the nine months ended September 30, 2004 of 5,481,042
reflected an increase of $1,190,222, or approximately 21.7%, compared to resale
revenue of $4,290,820 for the nine months ended September 30, 2003. For the nine
months ended September 30, 2004, approximately 52% of our gross profit was
derived from sales involving resale revenue compared to approximately 45.7% for
the nine months ended September 30, 2003. These increases were attributable
primarily to addition of the suppliers discussed above. We cannot be certain as
to whether this trend will continue. However, in the long term, we are seeking
to increase the ratio of our sales of products sold on a resale basis, rather
than a commission basis, because we believe we can increase our profitability on
such sales by taking advantage of payment discounts frequently offered by the
manufacturers and suppliers of such products. Provided we can generate
sufficient cash from operations or financing activities, we intend to do so by
seeking to add new products that we can offer to commissaries on a resale basis
from our existing manufactures and suppliers and from others with whom we do not
currently have a working relationship.
Commission revenues for the nine months ended September, 2004 of $490,705
reflected an increase of $126,056, or approximately 26%, compared to commission
revenues of $364,649 for the nine months ended September 30, 2003. For the nine
months ended September 30, 2004, approximately 49% of our gross profit was
derived from sales involving commission revenues as compared to approximately
54.3% for the nine months ended September 30, 2003. The increase in commission
revenues was attributable primarily to a change in our supplier of fresh chicken
products in the third quarter of 2003 from Tyson Foods, Inc., whose products we
sold on a resale basis, to ConAgra Foods, Inc., whose products we sell on a
commission basis.
Cost of Goods Sold. Cost of goods sold for the nine months ended September 30,
2004, cost of goods sold increased by $1,045,673, or approximately 20.8%, to
$5,029,295 from $3,983,622 for the nine months ended September 30, 2003. This
increase was attributable primarily to increased sales of products that we sold
on a resale basis as discussed above. We cannot be certain as to whether or not
this trend will continue; however, in the long term we are seeking to increase
the ratio of our sales on a resale basis, as discussed above.
Gross Profit. Gross profit for the nine months ended September 30, 2004
increased by $270,606, or approximately 28.7%, compared to the nine months ended
September 30, 2003, from $671,847 for the nine months ended September 30, 2003
to $942,453 for the nine months ended September 30, 2004.
12
Operating Expenses. Total operating expenses aggregated $ 2,239,803 for the nine
months ended September 30, 2004 as compared to $ 2,250,539 for the nine months
ended September 30, 2003, representing an decrease of $ 10,736, or approximately
.47%.
Interest Expense. Interest expense of $98,341 for the nine months ended
September 30, 2004 reflected a decrease of $160,278 as compared to interest
expense of $258,619 for the nine months ended September 30, 2003.
Net Loss. Primarily as a result of the decreased operating expenses discussed
above, we incurred a net loss of $1,199,008 for the nine months ended September
30, 2004 as compared to a net loss of $1,837,311 for the nine months ended
September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had a cash balance of approximately $22,166. Since
2001, we have funded our operations primarily from borrowings of approximately
$850,000 through the issuance of demand notes and convertible
Notes bearing interest at either 8% or 9% per annum and having original maturity
dates of three to five months following the date of issuance of such convertible
notes. At September 30, 2004, none of such demand notes was outstanding and
$98,975 aggregate principal amount of convertible notes were outstanding Such
convertible notes require us to register under the Securities Act of 1933 the
shares our common stock issuable upon conversion of such convertible notes not
later than June 3, 2006.
Our current cash levels, together with the cash flows we generate from operating
activities, are not sufficient to enable us to execute our business strategy. As
a result, we intend to seek additional capital through the sale of shares of our
common stock. In December 2001, we filed with the Securities and Exchange
Commission a registration statement relating to such shares for gross sales
proceeds of up to $5,000,000. Such registration statement has not yet been
declared effective, and there can be no assurance that the Securities and
Exchange Commission will declare such registration statement effective in the
near future, if at all. In the interim, we intend to fund our operations based
on our cash position and the near term cash flow generated from operations, as
well as additional borrowings and the sale of unregistered shares of our common
stock in private placements to accredited investors.
In the event we are able to generate sales proceeds of at least $750,000 in our
proposed public offering, we believe that the net proceeds of such sale,
together with anticipated revenues from sales of our products, will satisfy our
capital requirements for at least the next 12 months. However, we would require
additional capital to realize our strategic plan to expand distribution
capabilities and product offerings. These conditions raise substantial doubt
about our ability to continue as a going concern. Our actual financial results
may differ materially from the stated plan of operations. Our independent
auditors have indicated in its report on our 2003 financial statements that our
recurring losses from operations and our difficulties in generating sufficient
cash flow to meet our obligations and sustain our operations raise substantial
doubt about our ability to continue as a going concern. Such qualification may
hinder our ability to raise or obtain the capital we require or have an adverse
impact on the terms upon which we are able to attract or obtain such capital. In
addition, such qualification may adversely impact our ability to attract and
maintain new customer accounts.
Assuming that we receive net proceeds of at least $750,000 from our proposed
offering (of which there can be no assurance), we expect capital expenditures to
be approximately $100,000 during the next 12 months, primarily for the
acquisition of an inventory control system and a web-based marketing software
program. It is expected that our principal uses of cash during that period will
be to provide working capital, to finance capital expenditures, to repay
indebtedness and for other general corporate purposes, including sales and
marketing and new business development. The amount of spending for any
particular purpose is dependent upon the total cash available to us and the
success of our public offering of common stock.
At September 30, 2004, we had liquid assets of $632,532, consisting of cash and
accounts receivable derived from operations, and other current assets of
$729,089, consisting primarily of inventory of products for sale and/or
distribution and prepaid expenses. Long term assets of $435,616 consisted
primarily of warehouse equipment used in operations and the long-term portion of
prepaid interest.
Current liabilities of $2,552,979 at September 30, 2004 consisted primarily of
$2,302,145 of accounts payable and accrued expenses, including related party
amounts.
Our working capital deficit was $1,422,122 as of September 30, 2004 for the
reasons described above.
During the three months ended September 30, 2004, we used cash of $18,581 in
operating activities, primarily as a result of the net loss we incurred during
this period.
During the three months ended September 30, 2004, we used net cash of $354,646
in investing activities, all of which was used for capital expenditures.
Financing activities, consisting primarily of proceeds from the sale and
issuance of shares of our common stock, provided net cash of $348,199 during the
three months ended September 30, 2004.
OFF BALANCE SHEET ARRANGEMENTS
At September 30, 2004, we had no off-balance sheet arrangements that had or were
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to our
stockholders.
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ITEM 3. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Our management, with the participation
of our chief executive officer and chief financial officer, has evaluated the
effectiveness of our company's disclosure controls and procedures (as much term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on such evaluation, our chief executive officer and chief
financial officer have concluded that, as of the end of such period, our
company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act.
(b) Internal Control Over Financial Reporting. There have been not been any
changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
(c) Recent Sales of Unregistered Securities.
(i) In the three months ended June 30, 2004, we issued to investors in a private
placement investment units consisting of an aggregate of 1,920,000 shares of our
common stock and five-year warrants to purchase an aggregate of 960,000 shares
of our common stock at $0.125 per share for gross proceeds to us of $360,000. In
connection with such issuances, we granted registration rights to such
investors. Such shares and warrants were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public offering and
such persons were "accredited investors" as defined in Regulation D under the
Securities Act of 1933, as amended.
(ii) In the three months ended June 30, 2004, we issued an aggregate of 200,000
shares of our common stock and five year warrants to purchase an aggregate of
200,000 shares of our common stock at $0.125 to a consultant for business
consulting services to be rendered to the Company, which services were valued at
$49,000 in the aggregate. Such shares were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were "accredited investors" as defined in Regulation D under the
Securities Act of 1933, as amended.
(iii) In the three months ended June 30, 2004, we issued 247,560 shares of our
common stock and five-year options to purchase 247,560 shares of our common
stock at $0.25 per share to our Chief Executive Officer for services rendered
during the three months ended June 30, 2004 pursuant to the terms of his
employment arrangement. The services were valued at $72,000. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an "accredited investor" as
defined in Regulation D under the Securities Act of 1933, as amended.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed herewith or are incorporated by
reference to Exhibits previously filed.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Form of Warrant issued to certain investors during the three
months ended September 30, 2004.
10.2 Description of Registration Rights granted to certain investors
during the three months ended September 30, 2004.
31.1 Certification of our Principal Executive Officer, Lee Brukman,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of our Principal Financial Officer, Ethan D. Hokit,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of our Principal Executive Officer, Lee Brukman,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of our Principal Financial Officer, Ethan D. Hokit,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in Colorado Springs,
Colorado on December 17, 2004.
MILITARY RESALE GROUP, INC.
By: /s/ Ethan D. Hokit
--------------------------------------
Name: Ethan D. Hokit
Title: President (Principal Accounting
Officer, Principal Financial
Officer, and Principal
Executive Officer)
17