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 March 31, 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
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MILITARY RESALE GROUP, INC.
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(Name of small business issuer as specified in its charter)
New York 11-2665282
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2180 Executive Circle
Colorado Springs, Colorado 80906
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(Address of principal executive offices)
(719) 391-4564
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(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 March 31, 2004, there were 26,895,571 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 - March 31, 2004 and December 31, 2003.......... 1
Statements of Operations - three months ended March 31, 2004
and 2003..................................................... 2
Statements of Cash Flows - three months ended March 31, 2004
and 2003..................................................... 3
Notes to Financial Statements.................................. 5
Item 2. Management's Discussion and Analysis or Plan of Operation...... 9
Item 3. Controls and Procedures........................................13
PART II. Other Information
Item 2. Changes in Securities and Small Business Issuer Purchases
of Equity Securities........................................14
Item 6. Exhibits and Reports on Form 8-K...............................15
Signatures ..................................................................17
i
ITEM 1. FINANCIAL INFORMATION
MILITARY RESALE GROUP, INC.
BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
CURRENT ASSETS: (UNAUDITED)
Cash $ 113,889 $ 2,862
Accounts receivable - trade 980,402 765,851
Inventory 386,827 334,950
Prepaid consulting 205,679 484,506
Deposits 38,618 33,218
Prepaid interest 69,574 92,681
Prepaid expenses 9,341 --
----------- -----------
Total Current Assets 1,804,330 1,714,068
----------- -----------
PREPAID INTEREST, NET OF CURRENT PORTION 132,038 132,038
EQUIPMENT
Office equipment 22,379 15,047
Warehouse equipment 159,444 159,444
Software 16,324 16,324
----------- -----------
198,147 190,815
Less accumulated depreciation (115,545) (106,103)
----------- -----------
Net equipment 82,602 84,712
Total Assets $ 2,018,970 $ 1,930,818
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,510,556 $ 2,507,544
Accounts payable, related party 49,349 72,632
Current maturities of capital lease obligations 32,489 51,981
Deferred rent 2,729 2,729
Current portion of accrued interest payable 117,248 99,561
Current portion of notes payable 31,025 90,235
Current portion of convertible notes payable 85,000 85,000
----------- -----------
Total Current Liabilities 2,828,396 2,909,682
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT
MATURITIES 36,351 36,351
DEFERRED RENT, NET OF CURRENT PORTION 21,832 21,832
RELATED PARTIES CONVERTIBLE NOTES PAYABLE 370,000 370,000
NOTES PAYABLE, NET OF CURRENT PORTION 98,975 98,975
CONVERTIBLE NOTES PAYABLE, NET OF CURRENT PORTION 150,000 150,000
----------- -----------
Total Liabilities 3,505,554 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, 26,895,571
and 21,448,011 issued and outstanding 2,690 2,144
Additional paid-in capital 4,933,251 4,248,547
Accumulated (deficit) (6,422,525) (5,906,713)
----------- -----------
Total Stockholders' Equity (Deficit) (1,486,584) (1,656,022)
----------- -----------
Total Liabilities and Stockholders' Equity (Deficit) $ 2,018,970 $ 1,930,818
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
1
MILITARY RESALE GROUP, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
UNAUDITED
2004 2003
----------- -----------
REVENUES:
Resale revenue $ 1,961,544 $ 1,612,597
Commission revenue 173,432 146,366
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Total Revenues 2,134,976 1,758,963
COST OF GOODS SOLD 1,782,561 1,512,326
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GROSS PROFIT 352,415 246,637
OPERATING EXPENSES:
Stock based compensation 410,827 206,369
Salary and payroll taxes 162,789 117,138
Professional fees 29,092 64,034
Occupancy 59,356 59,356
General and administrative 139,614 150,059
Depreciation and amortization 9,442 14,991
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Total Expenses 811,120 611,947
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Net (Loss) From Operations (458,705) (365,310)
OTHER (EXPENSES):
Interest expense (57,107) (135,385)
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Total Other (Expense) (57,107) (135,385)
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NET (LOSS) $ (515,812) $ (500,695)
=========== ===========
NET (LOSS) PER COMMON SHARE BASIC AND DILUTED $ (0.02) $ (0.04)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 23,497,984 11,684,156
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
2
MILITARY RESALE GROUP, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
UNAUDITED
2004 2003
----------- -----------
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net (loss) $ (515,812) $ (500,695)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 9,442 14,911
Amortization of option based interest expense 23,107 100,000
Stock issued for services 374,827 153,924
Options issued for services 36,000 --
Beneficial conversion feature -- 15,000
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable (214,551) (69,768)
Decrease (Increase) in inventory (51,877) 9,220
Decrease in other assets -- 68
(Increase) in deposits (5,400) --
(Increase) in prepaid expenses (9,341) --
Increase in accounts payable and accrued
expenses 3,012 133,805
(Decrease) in related party accounts payable (23,283) --
Increase in accrued interest payable 33,477 --
Increase in deferred rent obligation -- 2,047
Increase in other liabilities -- 25,007
----------- -----------
Net Cash Used In Operating Activities (340,399) (116,481)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (7,332) (1,683)
----------- -----------
Net Cash Used in Investing Activities (7,332) (1,683)
----------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Payments on capital lease obligations (19,492) (6,762)
Payments on notes payable (25,000) --
Proceeds from issuance of notes -- 125,000
Proceeds from issuance of common stock, net 503,250 --
----------- -----------
Cash Flows Provided by Financing Activities 458,758 118,238
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 111,027 74
CASH AND CASH EQUIVALENTS, beginning of period 2,862 2,072
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 113,889 $ 2,146
=========== ===========
Supplementary information:
Cash paid for:
Interest paid $ -- $ 466
=========== ===========
Income taxes $ -- $ --
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
3
MILITARY RESALE GROUP, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
UNAUDITED
2004 2003
----------- -----------
Non-cash investing and financing activities:
Issuance of stock and options in exchange for services $ 132,000 $ 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
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SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
4
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 three months ended March 31, 2004, the Company
incurred prepayments of $20,000 and stock-based compensation expense of
$298,827.
5
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 $23,107 charged to interest expense during the three
months ended March 31, 2004.
NOTE 5 - RELATED PARTY TRANSACTIONS
On March 31, 2004 pursuant to a consulting agreement with the Company's chief
executive officer, the Company issued 247,560 shares of common stock and granted
options to purchase 247,560 shares of common stock at $.25 per share for a
period of five years for services rendered valued at $72,000. The value of the
stock and the value of the options was $36,000 each based on $12,000 each per
month. The number of shares and options issued was determined by dividing
$36,000 by 80% of the average low price of the common stock in each quarter.
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.
6
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.
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.
7
MILITARY RESALE GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 8 - PROMISSORY NOTE PAYABLE (CONTINUED)
During the three months ended March 31, 2004 the Company reached an agreement
with Romano, Ltd. Since March 31, 2003 $50,000 cash was paid towards the
original $100,000 note, of which $25,000 was paid during the three months ended
March 31, 2004. The Company signed a $30,000 note with Romano, Ltd., for the
accrued interest on the original $100,000 loan with interest at 15% per annum,
payable beginning on April 1, 2004 with equal consecutive installments payable
on the fifteenth of every month in the amount of $5,000 until paid in full or
March 26, 2005. In addition, the Company issued 400,000 shares of common stock
and granted warrants to purchase 250,000 shares of common stock at $.25 per
share for three years as full satisfaction of the remaining $50,000 balance of
the loan.
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 a litigation with one of its vendors. During
the three months ended March 31, 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 March 31, 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.
NOTE 10 - SUBSEQUENT EVENTS
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.
8
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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2003
Revenues. Total revenue for the three months ended March 31, 2004 of
$2,134,976 reflected a increase of $376,013, or approximately 21.4%, compared to
total revenue of $1,758,963 for the three months ended March 31, 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
9
supplier and the Defense Commissary Agency ("DeCA"). Revenue is recognized as
the gross sales amount received by us from such sales ("resale revenues"), which
includes (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 March 31, 2004 of
$1,961,544 reflected an increase of $348,947, or approximately 21.6%, compared
to resale revenue of $1,612,597 for the three months ended March 31, 2003. For
the three months ended March 31, 2004, approximately 50.8% of our gross profit
was derived from sales involving resale revenue compared to approximately 40.7%
for the three months ended March 31, 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 March 31, 2004 of
$173,432 reflected an increase of $27,066, or approximately 18.5%, compared to
commission revenues of $146,366 for the three months ended March 31, 2003. For
the three months ended March 31, 2004, approximately 49.2% of our gross profit
was derived from sales involving commission revenues as compared to
approximately 59.3% for the three months ended March 31, 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 is 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.
10
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 March 31, 2004, cost of
goods sold increased by $270,235, or approximately 17.9%, to $1,782,561 from
$1,512,326 for the three months ended March 31, 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 March 31, 2004
increased by $105,778, or approximately 42.9%, compared to the three months
ended March 31, 2003, from $246,637 for the three months ended March 31, 2003 to
$352,415 for the three months ended March 31, 2004. This increase was
attributable primarily to slightly higher storage and delivery fees that we
began charging to new customers in December 2003.
Operating Expenses. Total operating expenses aggregated $811,120 for
the three months ended March 31, 2004 as compared to $611,947 for the three
months ended March 31, 2003, representing an increase of $199,173, or
approximately 32.5%. The increase in total operating expenses was attributable
primarily to an increase of $204,458 in stock-based compensation expense
resulting primarily from the issuance of shares of our common stock and options
to purchase shares of our common stock to our consultants. In addition, salary
and payroll taxes increased by $45,651 resulting primarily from the addition of
new employees.
Interest Expense. Interest expense of $57,107 for the three months
ended March 31, 2004 reflected a decrease of $78,278 as compared to interest
expense of $135,385 for the three months ended March 31, 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. We issued $50,000
aggregate principal amount of convertible promissory notes in the three months
ended March 31, 2003, but did not issue any convertible notes in the three
months ended March 31, 2004.
Net Loss. Primarily as a result of the increased operating expenses
discussed above, we incurred a net loss of $515,812 for the three months ended
March 31, 2004 as compared to a net loss of $500,695 for the three months ended
March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had a cash balance of approximately $113,889.
Since 2001, we have funded our operations primarily from borrowings of
approximately $850,000 through the issuance of demand notes and convertible
11
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 March 31, 2004, none of such demand notes was outstanding and $605,000
aggregate principal amount of convertible notes were outstanding, of which
$540,000 mature on or about June 3, 2006 and $65,000 aggregate principal amount
have matured but have not yet been paid. 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 three
months ended March 31, 2004, we sold and issued shares of our common stock to
accredited investors for aggregate gross proceeds of $547,500. Such proceeds
were used for the repayment of current liabilities and for working capital
purposes.
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.
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At March 31, 2004, we had liquid assets of $1,094,291, consisting of
cash and accounts receivable derived from operations, and other current assets
of $710,039, consisting primarily of inventory of products for sale and/or
distribution and prepaid expenses. Long term assets of $330,185 consisted
primarily of warehouse equipment used in operations and the long-term portion of
prepaid interest.
Current liabilities of $2,828,396 at March 31, 2004 consisted
primarily of $2,559,905 of accounts payable and accrued expenses, including
related party amounts.
Our working capital deficit was $1,024,066 as of March 31, 2004 for
the reasons described above.
During the three months ended March 31, 2004, we used cash of
$340,399 in operating activities, primarily as a result of the net loss we
incurred during this period.
During the three months ended March 31, 2004, we used net cash of
$7,332 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 $458,758 during
the three months ended March 31, 2004.
OFF BALANCE SHEET ARRANGEMENTS
At March 31, 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.
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
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period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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 March 31, 2004, we issued to investors
in a private placement investment units consisting of an aggregate of 4,000,000
shares of our common stock and five-year warrants to purchase an aggregate of
2,000,000 shares of our common stock at $0.25 per share for gross proceeds to us
of $500,000, less sales commissions of $40,000. 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 March 31, 2004, we issued 450,000
shares of our common stock to investors in a private placement for gross
proceeds to us of $47,500, less sales commissions of $4,250. In connection with
such issuances, we granted registration rights to such investors. 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 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 March 31, 2004, we issued 400,000
shares of our common stock and three-year warrants to purchase an aggregate of
250,000 shares of our common stock at $0.25 per share to one of our lenders in
full satisfaction of $50,000 of our indebtedness to such lender. Such shares and
warrants were issued in reliance upon the exemption from registration provided
by Section 3(a)(9) of the Securities Act of 1933, as amended.
(iv) In the three months ended March 31, 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 March 31, 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.
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(v) In the three months ended March 31, 2004, we issued an aggregate
of 300,000 shares of our common stock to two consultants for services rendered
or 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.
(vi) In the three months ended March 31, 2004, we issued five-year
warrants to purchase an aggregate of 320,000 shares of our common stock at
$0.125 per share to a consultant for services rendered to the Company. Such
warrants were valued at $52,870 and 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.
(vii) In the three months ended March 31, 2004, we issued 50,000
shares of our common stock to a consultant for business consulting services to
be rendered. Such shares were valued at $11,000 and 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.
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 NO. DESCRIPTION
----------- -----------
10.1 Form of Warrant issued to certain investors during the three months
ended March 31, 2004.
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10.2 Description of Registration Rights granted to certain investors
during the three months ended March 31, 2004.
31.1 Certification of our Principal Executive Officer, Edward T. Whelan,
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, Edward T. Whelan,
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.
(b) Reports on Form 8-K.
(i) On January 6, 2004, we filed a Current Report on Form 8-K
providing a press release dated January 6, 2004 announcing
certain financial projections.
(ii) On March 30, 2004, we filed a Current Report on Form 8-K to
report the change in our certifying accountants on March 29,
2004.
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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 June 2, 2004.
MILITARY RESALE GROUP, INC.
By: /s/ Ethan D. Hokit
----------------------------
Name: Ethan D. Hokit
Title: President (Principal Accounting
Officer and Principal Financial
Officer)
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Form of Warrant issued to certain investors during the three
months ended March 31, 2004.
10.2 Description of Registration Rights granted to certain investors
during the three months ended March 31, 2004.
31.1 Certification of our Principal Executive Officer, Edward T.
Whelan, 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, Edward T.
Whelan, 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.
18