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, 2003
[ ] 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
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(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 September 30, 2003, there were 16,273,867 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.
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PART I. Financial Information
Item 1. Financial Statements
Balance Sheets - September 30, 2003 and December 31, 2002....................................1
Statements of Operations - three and nine months ended September 30, 2003 and 2002...........2
Statements of Cash Flows -nine months ended September 30, 2003 and 2002......................3
Notes to Financial Statements................................................................5
Item 2. Management's Discussion and Analysis or Plan of Operation....................................9
Item 3. Controls and Procedures.....................................................................17
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds...................................................17
Item 6. Exhibits and Reports on Form 8-K............................................................18
Signatures..........................................................................................19
Certifications......................................................................................20
i
ITEM 1. FINANCIAL INFORMATION
Military Resale Group, Inc.
Condensed Balance Sheets
September 30, December 31,
2003 2002
(Unaudited) (Audited)
---------------- -----------------
Assets
Current Assets
Cash $ 631 $ 2,072
Accounts receivable - trade 598,929 428,037
Inventory 253,818 227,416
Prepaid consulting (Note 3) 406,947 116,417
Deposits 28,358 23,358
Prepaid interest (Note 4) 333,953 133,333
Other current assets 22 618
---------------- -----------------
Total Current Assets 1,622,658 931,251
Fixed Assets
Office equipment 12,372 10,607
Warehouse equipment 159,444 159,444
Software 16,324 16,324
---------------- -----------------
188,140 186,375
Less accumulated depreciation (98,823) (76,229)
Net Fixed Assets 89,317 110,146
---------------- -----------------
Total Assets 1,711,975 1,041,397
Liabilities and Stockholders' Equity (Impairment)
Current Liabilities
Accounts payable and accrued expenses 1,902,216 1,470,776
Bank overdraft 7,616 11,068
Due to related parties 40,944 -
Other current liabilities 126,864 81,726
Current maturities of capital lease obligations 44,273 37,271
Current portion of deferred rental obligation 682 21,584
Accrued interest payable 86,398 47,816
Related party notes payable (Note 5 & 6) - 230,000
Convertible notes payable - current (Note 6) 85,000 255,000
Promissory note payable (Note 8) 89,210 -
---------------- -----------------
Total Current Liabilities 2,383,203 2,155,241
Deferred rental obligation 83,917 57,557
Obligations under capital leases, excluding current maturities 45,878 51,735
Related party convertible notes payable, less current portion (Note 5&6) 350,000 -
Convertible notes payable - other, less current portion (Note 6) 170,000 -
---------------- -----------------
Total Liabilities 3,032,998 2,264,533
Commitment and Contingencies (Note 9) - -
Stockholders' Equity (Impairment)
Preferred stock, 10,000,000 shares authorized, 0 issued in 2003 and 2002 - -
Common stock, par value $.0001, 50,000,000 shares authorized,
16,273,867 and 11,383,390 shares issued and outstanding in 2003 and 1,627 1,138
2002, respectively
Additional paid-in capital 3,789,625 2,050,690
Accumulated deficit (5,112,275) (3,274,964)
---------------- -----------------
Total Stockholders' Equity (Impairment) (1,321,023) (1,223,136)
---------------- -----------------
Total Liabilities and Stockholders' Equity (Impairment) $ 1,711,975 $ 1,041,397
================ =================
See notes to the financial statements.
1
Military Resale Group, Inc.
Condensed Statements of Operations
Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Resale revenue $ 1,143,846 $ 1,548,384 $ 4,290,820 $ 4,561,198
Commission revenue 83,095 102,706 364,649 226,690
------------ ------------ ------------ ------------
Total Revenues 1,226,941 1,651,090 4,655,469 4,787,888
------------ ------------ ------------ ------------
Cost of goods sold 1,136,929 1,373,106 3,983,622 4,069,592
------------ ------------ ------------ ------------
Gross Profit 90,012 277,984 671,847 718,296
------------ ------------ ------------ ------------
Operating Expenses
Stock based compensation (Note 5 and 7) 465,313 324,872 1,028,166 606,266
Salary and payroll taxes 93,280 146,923 352,389 362,885
Professional fees 76,535 73,044 276,625 273,134
Occupancy 58,673 55,262 177,385 165,787
General and administrative 116,587 134,592 393,380 238,350
Amortization/depreciation 4,933 15,160 22,594 36,413
------------ ------------ ------------ ------------
Total Operating Expenses 815,321 749,853 2,250,539 1,682,835
------------ ------------ ------------ ------------
Net Loss From Operations (725,309) (471,869) (1,578,692) (964,539)
------------ ------------ ------------ ------------
Other Income (Expenses)
Interest expense (25,459) (115,563) (258,755) (355,826)
Interest income 136 367 136 409
------------ ------------ ------------ ------------
Total Other (Expense) (25,323) (115,196) (258,619) (355,417)
------------ ------------ ------------ ------------
Net Loss $ (750,632) $ (587,065) $ (1,837,311) $ (1,319,956)
============ ============ ============ ============
Loss Per Share
Net Loss Per Common Share - and diluted $ (0.05) $ (0.06) $ (0.14) $ (0.14)
============ ============ ============ ============
Weighted average number of shares
outstanding - basic and diluted 15,514,144 9,072,396 13,272,178 9,460,023
============ ============ ============ ============
See notes to the financial statements.
2
Military Resale Group, Inc.
Condensed Statements of Cash Flows
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
----------- -----------
Cash Flows From Operating Activities
Net Loss $(1,837,311) $(1,319,956)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 22,594 36,244
Amortization of option based interest expense 164,780 --
Stock based compensation 972,582 606,266
Beneficial conversion feature 43,000 225,000
Stock issued in lieu of debt -- 150,000
Stock issued for interest -- 150,000
Loss on disposal of assets -- 6,380
Changes in Assets and Liabilities
Decrease (increase) in accounts receivable (170,892) (361,305)
Decrease (increase) in inventory (26,402) (29,646)
Decrease (increase) in other assets 596 2,994
(Increase) in deposits (5,000) (2,812)
Increase in accounts payable and accrued expenses 539,806 384,175
Increase in deferred rent obligation 5,458 --
Increase in due to related parties 40,944 --
Decrease in other liabilities (2,678) --
----------- -----------
Net Cash Used In Operating Activities (252,523) (152,660)
----------- -----------
Cash Flows From Investing Activities
Purchase of fixed assets (1,765) (4,493)
----------- -----------
Cash Flows Used In Investing Activities (1,765) (4,493)
----------- -----------
Cash Flows From Financing Activities
Bank overdraft (3,452) (1,349)
Payments on capital lease obligations (2,911) --
Proceeds from issuance of notes 220,000 176,050
Payments on notes payable (10,790) --
Stock purchases for cash 50,000 --
----------- -----------
Cash Flows Provided By Financing Activities 252,847 174,701
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (1,441) 17,548
Cash and Cash Equivalents at Beginning of Period 2,072 --
----------- -----------
Cash and Cash Equivalents at End of Period $ 631 $ 17,548
=========== ===========
SUPPLEMENTAL INFORMATION
Interest Paid $ 7,833 $ 6,170
=========== ===========
Income Taxes Paid $ -- $ --
=========== ===========
See notes to the financial statements.
3
Military Resale Group, Inc.
Condensed Statements of Cash Flows
Non-cash investing and financing activities:
2003 2002
-------- --------
Issuance of stock and options in exchange for services to be
rendered over six months to one year $960,839 $ --
======== ========
Issuance of common stock in payment of accrued compensation $121,171 $ --
======== ========
Issuance of stock in exchange for cancellation of
indebtedness of $150,000 and interest expense of $150,000
on convertible notes $ -- $300,000
======== ========
Issuance of stock options in exchange for note extensions $365,400 $ --
======== ========
See notes to the financial statements.
4
Military Resale Group, Inc.
Notes to Financial Statements
NOTE 1 - NATURE OF ORGANIZATION
We were organized under the laws of the State of New York and are a
regional distributor of grocery and household items specializing in
distribution to commissaries of the U. S. Military. Currently, we service
six military installations located in Colorado, Wyoming and South Dakota.
On October 15, 2001, we entered into a stock purchase agreement with
Military Resale Group, Inc., a Maryland corporation that was formed on
October 6, 1997 ("MRG"), pursuant to which 98.2% of MRG's stock was
effectively exchanged for a controlling interest in our publicly held
"shell" corporation. Concurrently with the closing of that transaction we
changed our name from Bactrol Technologies, Inc. to Military Resale Group,
Inc. This transaction is commonly referred to as a "reverse acquisition".
For financial accounting purposes, this transaction has been treated as the
issuance of stock for our net monetary assets, accompanied by a
recapitalization of MRG with no goodwill or other intangible assets
recorded.
For financial reporting purposes, MRG was considered the acquirer, and
therefore, the historical operating results of Bactrol Technologies, Inc.
are not presented.
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.
We have suffered recurring losses from operations, and are in a working
capital deficit position that raises substantial doubt about our ability to
continue as a going concern.
Our management is currently pursuing equity and/or debt financing in an
effort to continue operations. The future success of our company is likely
dependent on our ability to attain additional capital to develop our
business and ultimately, upon our ability to attain future profitable
operations. There can be no assurance that we will be successful in
obtaining such financing, or that we 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 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to 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. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended September 30, 2003 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2003. For
further information, refer to the consolidated financial statements and
footnotes thereto included in our annual report on Form 10-KSB for the year
ended December 31, 2002.
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, 2003,
we incurred additional prepayments of $941,306 and stock-based compensation
expense of $650,776.
5
NOTE 4 - PREPAID INTEREST
Prepaid interest expense is recorded in connection with the issuance of
options for the extension of our notes payable. The interest expense is
being amortized over the extension period, with $164,780 charged to
interest expense in the current period.
NOTE 5 - RELATED PARTY TRANSACTIONS
In January 2003, we entered into a one-year business consulting agreement
with Edward Meyer, Jr. for marketing and managerial consulting services,
and an executive compensation agreement with Edward Whelan, our Chief
Executive Officer. In consideration of the services to be rendered by Mr.
Whelan and Mr. Meyer, we will issue in respect of each month the number of
shares determined by dividing $12,000 by the product of 80% and the average
closing low price for our common stock during each quarter. During the nine
months ended September 30, 2003, we issued 473,063 shares of common stock
under the terms of the agreement for the first and second quarters of 2003.
The aggregate cost of the shares issued, which were expensed as stock based
compensation, totaled $121,171.
During the nine months ended September 30, 2003, we issued 192,414, 218,519
and 254,545 shares of common stock as consideration under a January 2002
and 2003 consulting and compensation agreements for the fourth quarter of
2002 and the first and second quarters of 2003, respectively (332,738
shares each to Mr. Whelan and Mr. Meyer, or their respective designees).
The transactions were valued at $0.16, $0.24 and $0.27 per share,
respectively, the fair market value of our common stock on the date of
issuance.
On March 11, 2003, Edward Whelan loaned us $10,000. The corresponding note
bears interest at a rate of 8% per annum and is due on June 3, 2006.
On June 30, 2003, in connection with the conversion of $190,000 of demand
notes to convertible notes from Edward Whelan, our Chief Executive Officer
and our Chairman of the board of directors, and companies which he controls
and/or is shareholder, 1,130,000 stock options were issued. The demand
notes have been modified to allow the holder to convert their notes into
shares of our common stock at $0.25 per share. These convertible notes do
not have a beneficial conversion feature.
On June 30, 2003, in connection with the conversion of $25,000 of demand
notes to convertible notes from each of Ethan Hokit, our President and one
of our directors, and Atlantic Investment Trust, of which Richard
Tanenbaum, one of our directors, is the trustee, 25,000 stock options were
issued to each of such noteholders. The demand notes have been modified to
allow the holder to convert their notes into shares of our common stock at
$0.25 per share. Such notes do not have a beneficial conversion feature.
On July 11, 2003, we granted 100,000 shares of our common stock to an
employee, Robert Hefner, for compensation for past employment services.
These shares were valued at $0.26 per share or $26,000, the fair value at
date of issuance.
Also, during the quarter ended September 30, 2003, we received loans from
related parties; $9,000 from individuals related to
shareholders/management. These loans are non-interest bearing and are due
on demand.
Subsequent to September 30, 2003,we issued 227,569 shares of our common
stock to both Mr. Whelan and Mr. Meyer for services performed during the
third quarter of 2003. The aggregate cost of the shares issued, which was
expensed as accrued stock-based compensation at September 30, 2003, totaled
$29,584.
6
NOTE 6 - CONVERTIBLE NOTES
At September 30, 2003, we had an aggregate of $605,000 payable in
convertible notes. $20,000 of the convertible notes bear interest at 8% per
annum and were due on June 30, 2002, $35,000 of the convertible notes bear
interest at 8% per annum through June 30, 2002 and 9% thereafter and were
due on June 30, 2003, and a $10,000 convertible note bearing interest at 8%
per annum, which was due September 30, 2003. On June 30, 2003, $215,000 of
notes originally due on or before June 30, 2003, and $50,000 of notes
originally due September 30, 2003 were extended until June 3, 2006. Such
notes bear interest at 8%. Additionally, on June 30, 2003 $240,000 of
demand notes were converted to convertible notes due June 3, 2006. $100,000
of such notes are non-interest bearing, $60,000 of such notes bear interest
at 10% and $80,000 of such notes bear interest at 8%. In connection with
the extension of the due dates and conversion of the demand notes to
convertible notes 1,305,000 stock options were issued and prepaid interest
of $365,400 was recorded and will be amortized over the extension period.
During the three months ended September 30, 2003, we issued $20,000 in
convertible notes bearing interest at 8% per annum due January 30, 2004 and
$15,000 in convertible notes bearing interest at 8% per annum due June 3,
2006. The terms of our convertible notes provide generally that, if the
convertible notes are not in default, the holders may convert, at any time
and from time to time, all or a portion of the outstanding balance under
each convertible note into a number of shares (subject to certain
anti-dilution adjustments) of our common stock that will allow the note
holder to receive common stock having a market value equal to 150% of the
converted balance of the note. For notes issued prior to May 30, 2003, if
an event of default has occurred in respect of such convertible notes, the
holder may convert the outstanding balance into a number of shares (subject
to certain anti-dilution adjustments) of our common stock equal to twice
the number of shares the holder would have otherwise received if the
convertible notes were not in default. Among other events of default, the
terms of the convertible notes require us to register under the Securities
Act of 1933 the shares our common stock issuable upon conversion of the
convertible notes. The demand notes have been modified to allow the holder
to convert their notes into common stock at $0.25 per share. These
convertible notes do not have a beneficial conversion feature.
We follow EITF 98-5 in accounting for convertible notes with "beneficial
conversion features" (i.e., the notes may be converted into common stock at
the lower of a fixed rate at the commitment date or a fixed discount to the
market price of the underlying common stock at the conversion date).
Because our convertible notes contained a beneficial conversion feature on
the date of issuance, we measured and recognized the intrinsic value of the
beneficial conversion feature of the convertible notes when the convertible
notes were issued. During the nine months ended September 30, 2003 and
2002, interest expense of $43,000 and $225,000, respectively (representing
the aggregate proceeds to us from convertible notes issued during such
periods), was recognized as the intrinsic value of the beneficial
conversion feature of the convertible notes that were issued during such
periods.
NOTE 7 - SECURITIES ISSUED FOR SERVICES
During the nine months ended September 30, 2003, we issued an aggregate of
4,225,000 shares of our common stock and 3,350,000 common stock options to
various consultants for services provided or to be provided. Consulting
expense of $972,582 was recognized in 2003 and a prepaid consulting expense
of $405,837 was recorded in 2003. These amounts were based on the fair
market value of the shares on the date of issuance.
7
NOTE 8 - PROMISSORY NOTE PAYABLE
On March 27, 2003, we issued a promissory note for $100,000 to Romano, Ltd.
The note bears interest at 15% per annum and is due on March 26, 2004,
subject to the following contingent payment terms upon our 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
If we fail to secure any of the above-referenced additional funding, nor
another significant event such as a merger or acquisition of another
company, we will be required to pay $8,000 per month commencing on July 1,
2003 until the full obligation is paid or by March 26, 2004. We are
currently in default of the terms of the note and are negotiating with the
holder to avoid remedies upon default, including acceleration of the
principal amount and interest at 30% on the unpaid balance.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
In February 2003, a capital lease obligation, secured by equipment with a
net book value of $25,363, was accelerated due to non-payment. This
obligation is reflected in the current portion of obligations under capital
leases in the accompanying financial statements.
In February 2003, we entered into a Lease Modification Agreement for a
capital lease for equipment with a net book value of $57,183. The term of
the lease was extended through April 2007, with no required payment for the
months between November 2002 and February 2003. Minimum lease payments have
increased to $2,100 through October 2003 and $1,980 for the remaining 40
months.
We are a defendant in pending litigation regarding our former premises. The
plaintiff is the former landlord, who is seeking damages for an alleged
breach of the terms of several operating lease agreements for office and
warehouse space located in Colorado Springs, Colorado. We intend to
vigorously defend against such claim and also intend to pursue our
counterclaims for damages caused by the landlord's constructive eviction
from the premises.
The pending litigation is in its preliminary stages, with a trial date
anticipated in November 2003. The estimated contingent liability for this
litigation is not expected to exceed $75,000, including the costs of
defense.
NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 provides accounting and reporting
guidance for legal obligations associated with the retirement of long-lived
assets that result from the acquisition, construction or normal operation
of a long-lived asset. SFAS No. 143 requires the recording of an asset and
a liability equal to the present value of the estimated costs associated
with the retirement of long-lived assets where a legal or contractual
obligation exists. The asset is required to be accreted each year based on
a present value interest rate. We implemented this standard on January 1,
2003. The adoption of this standard did not have a material effect on our
financial statements.
NOTE 11 - SEGMENT INFORMATION
We operate primarily in a single operating segment, distributing and
marketing resale grocery products to military commissaries.
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.
Prior to November 15, 2001, we did not generate any significant
revenue, and accumulated no significant assets, as we explored various business
opportunities. On November 15, 2001, we acquired 98.2% of the issued and
outstanding capital stock of Military Resale Group, Inc., a Maryland corporation
("MRG-Maryland"), in exchange for a controlling interest in our publicly-held
"shell" corporation. For financial reporting purposes, MRG-Maryland was
considered the acquirer in such transaction. As a result, our historical
financial statements for any period prior to November 15, 2001 are those of
MRG-Maryland.
9
Results of Operations - Three months ended September 30, 2003 compared to three
months ended September 30, 2002
Revenues. Total revenue for the three months ended September 30, 2003
of $1,226,941 reflected a decrease of $424,149, or approximately 25.7%, compared
to total revenue of $1,651,090 for the three months ended September 30, 2002.
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
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 decrease in our total
revenues was primarily due 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. To a lesser extent, the decrease in our total revenues was due to lower
sales to the commissary located at Ft. Carson, Colorado caused by the overseas
deployment of military personnel stationed at Ft. Carson, which has historically
been our largest customer.
Resale revenue for the three months ended September 30, 2003 of
$1,143,846 reflected a decrease of $404,538, or approximately 26.1%, compared to
resale revenue of $1,548,384 for the three months ended September 30, 2002. This
decrease was attributable primarily to the change in our supplier of fresh
chicken products and the recent military deployment as discussed above. For the
three months ended September 30, 2003, approximately 7.7% of our gross profit
was derived from sales involving resale revenue compared to approximately 63.1%
for the three months ended September 30, 2002.
Commission revenues for the three months ended September 30, 2003 of
$83,095 reflected a decrease of $19,611, or approximately 19.1%, compared to
commission revenues of $102,706 for the three months ended September 30, 2002.
For the three months ended September 30, 2003, approximately 92.3% of our gross
profit was derived from sales involving commission revenues as compared to
approximately 36.9% for the three months ended September 30, 2002. This decrease
in commission revenues was attributable primarily to lower sales at Fort Carson,
Colorado, offset by an increase in commission revenues from the change in our
supplier of fresh chicken products as discussed above. This increase in
commission revenues as a percentage of total revenues was primarily attributable
to the cash shortage described 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.
10
As indicated above, in the three months ended September 30, 2003, we
added to our supplier network the Country Pride brand of fresh chicken products
made by ConAgra Foods, Inc. The Country Pride lines replaced a majority of the
lines of fresh chicken products that were previously supplied to us by Tyson
Foods, Inc. On August 1, 2003, the Country Pride lines became available in the
commissaries we currently serve. Our agreement with ConAgra is a one-year
agreement that is cancelable by ConAgra upon 30 days' written notice. Subsequent
to September 30, 2003, we added to our supplier network the frozen food line of
Tyson Foods, Inc., one our existing suppliers.
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.
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, 2003, cost
of goods sold decreased by $236,177, or approximately 17.2%, to $1,136,929 from
$1,373,106 for the three months ended September 30, 2002. This decrease was
attributable primarily to the decrease in total revenues discussed above,
particularly, the decrease in revenue from products that we sold on a resale
basis during the three months ended September 30, 2003 as compared to the three
months ended September 30, 2002.
Gross Profit. Gross profit for the three months ended September 30,
2003 decreased by approximately $187,972, or approximately 67.6%, compared to
the three months ended September 30, 2002, from $277,984 for the three months
ended September 30, 2002 to $90,012 for the three months ended September 30,
2003. This decrease was attributable primarily to the decrease in total revenues
discussed above and, particularly, the decrease in revenue from the sale of
products on a commission basis that have no associated cost of good sold.
Operating Expenses. Total operating expenses aggregated $815,321 for
the three months ended September 30, 2003 as compared to $749,853 for the three
months ended September 30, 2002, representing an increase of $65,468, or
11
approximately 8.7%. The increase in total operating expenses was attributable
primarily to an increase in stock-based compensation expense of $140,441
resulting primarily from the issuance of shares of our common stock and options
to purchase shares of our common stock to our consultants, which was offset, in
part, by decreased salary and payroll expenses of $53,643 and decreased general
and administrative expenses of $18,005 resulting from our efforts to reduce
overhead.
Interest Expense. Interest expense of $25,459 for the three months
ended September 30, 2003 reflected a decrease of $90,104 as compared to interest
expense of $115,563 for the three months ended September 30, 2002. This decrease
in interest expense was attributable primarily to the decrease in convertible
notes issued having a 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). During the three months ended September 30, 2003, one convertible
note having a beneficial conversion feature was issued and we recognized
interest expense of $1,000 relating to a beneficial conversion feature
associated with such note.
Net Loss. Primarily as a result of the decreased revenue and increased
operating expenses discussed above, we incurred a net loss of $750,632 for the
three months ended September 30, 2003 as compared to a net loss of $587,065 for
the three months ended September 30, 2002.
Nine months ended September 30, 2003 compared to nine months ended September 30,
2002
Revenues. Total revenue for the nine months ended September 30, 2003 of
$4,655,469 reflected a decrease of $132,419, or approximately 2.8%, compared to
total revenue of $4,787,888 for the nine months ended September 30, 2002. This
decrease in total revenues was primarily due to the change in our supplier of
fresh chicken products and, to a lesser extent, the deployment of military
personnel as discussed above.
Resale revenue for the nine months ended September 30, 2003 of
$4,290,820 reflected a decrease of $270,378, or approximately 5.9%, compared to
resale revenue of $4,561,198 for the nine months ended September 30, 2002. This
decrease was attributable primarily to the decreases in total revenues and
resale revenues in the third quarter of 2003 as discussed above and to a
short-term cash shortage during the first and second quarters of 2003 which
prevented us from adding new products on a resale basis due the significant cash
expenditure required. For the nine months ended September 30, 2003,
approximately 45.7% of our gross profit was derived from sales involving resale
revenue compared to approximately 68.4% for the nine months ended September 30,
2002. During the year ended December 31, 2002, we began implementing our
long-term strategy to increase the ratio of our sales of products we sell on a
resale basis, rather than a commission basis, due to the payment discounts we
often receive from the manufacturers and suppliers of the goods we purchase for
resale. However, due to our short-term cash shortage during the first and second
quarters of 2003, we were required to lower this ratio by increasing the amount
of our of sales on a commission basis, which do not require a significant cash
expenditure.
12
Commission revenues for the nine months ended September 30, 2003 of
$364,649 reflected an increase of $137,959, or approximately 60.9%, compared to
commission revenues of $226,690 for the nine months ended September 30, 2002.
For the nine months ended September 30, 2003, approximately 54.3% of our gross
profit was derived from sales involving commission revenues as compared to
approximately 31.6% for the nine months ended September 30, 2002. These
increases were attributable primarily to the change in our supplier of fresh
chicken products discussed above and the addition of the new products we began
supplying to commissaries on a commission basis during the first and second
quarters of 2003 due to our short-term cash shortage discussed above.
Cost of Goods Sold. During the nine months ended September 30, 2003,
cost of goods sold decreased by $85,970, or approximately 2.1%, to $3,983,622
from $4,069,592 for the nine months ended September 30, 2002. This decrease was
attributable primarily to the decreased sales of products we sell on a resale
basis 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 on a resale basis.
Gross Profit. Gross profit for the nine months ended September 30, 2003
decreased by approximately $46,449, or approximately 6.5%, compared to the nine
months ended September 30, 2002, from $718,296 for the nine months ended
September 30, 2002 to $671,847 for the nine months ended September 30, 2003.
This decrease was attributable primarily to the decrease in total revenues
offset by the increase in commission revenues for this period as discussed
above.
Operating Expenses. Total operating expenses aggregated $2,250,539 for
the nine months ended September 30, 2003 as compared to $1,682,835 for the nine
months ended September 30, 2002, representing an increase of $567,704, or
approximately 33.7%. The increase in total operating expenses was attributable
primarily to an increase in stock-based compensation expense of $421,900
resulting primarily from the issuance of shares of our common stock and options
to purchase shares of our common stock to our consultants; and increased general
and administrative expenses of $155,030 resulting primarily from increased truck
rental expense and increased premiums on health workers' compensation insurance.
Interest Expense. Interest expense of $258,755 for the nine months
ended September 30, 2003 reflected a decrease of $97,071 as compared to interest
expense of $355,826 for the nine months ended September 30, 2002. The decrease
in interest expense was attributable primarily to the decrease in convertible
notes issued having a beneficial conversion feature. During the nine months
ended September 30, 2003, we recognized interest expense of $43,000 relating to
the beneficial conversion feature associated with convertible notes issued
during such period as compared to interest expense of $225,000 recognized during
the nine months ended September 30, 2002.
Net Loss. Primarily as a result of the decreased revenues and increased
operating expenses discussed above, we incurred a net loss of $1,837,311 for the
nine months ended September 30, 2003 as compared to a net loss of $1,319,956 for
the nine months ended September 30, 2002.
13
Liquidity and Capital Resources
At September 30, 2003, we had a cash balance of $631. Our principal
source of liquidity has been borrowings. Since November 2001, we have funded our
operations primarily from borrowings of approximately $855,000. Such borrowings
consisted of $340,000 aggregate principal amount of demand note indebtedness, of
which $240,000 was borrowed from our affiliates, and $515,000 aggregate
principal amount of convertible note indebtedness, of which $120,000 was
borrowed from our affiliates, pursuant to the issuance of convertible notes
bearing interest at either 8% ("8% convertible notes") or 9% ("9% convertible
notes") per annum and having original maturity dates between three to five
months following the date of issuance of such convertible notes.
In April 2002, $150,000 aggregate principal amount of 9% convertible
notes (and $2,380 accrued interest thereon) was converted by the holders into an
aggregate of 1,793,573 shares of our common stock. The remaining $80,000
aggregate principal amount of 9% convertible notes are convertible at any time
and from time to time by the noteholders into a maximum of 1,320,000 shares of
our common stock (subject to certain anti-dilution adjustments) if the 9%
convertible notes are not in default, or a maximum of 2,640,000 shares of our
common stock (subject to certain anti-dilution adjustments) if an event of
default has occurred in respect of such notes. The $285,000 aggregate principal
amount of 8% convertible notes outstanding are convertible at any time and from
time to time by the noteholders into a maximum of 3,982,500 shares of our common
stock (subject to certain anti-dilution adjustments). In nearly all instances,
the terms of the 8% and 9% convertible notes require us to register under the
Securities Act of 1933 the shares our common stock issuable upon conversion of
the 9% convertible notes not later than September 3, 2006. In July 2002, the
holders of $20,000 aggregate principal amount of 8% convertible notes maturing
on September 30, 2002 denied our request to extend the maturity of their notes.
In September 2003, the holders of $35,000 aggregate principal amount of 9%
convertible notes maturing on September 30, 2003 and $10,000 aggregate principal
amount of 8% convertible notes maturing on September 30, 2003 denied our request
to extend the maturity of their notes until September 3, 2006. The outstanding
principal and interest on such convertible notes maturing on September 30, 2002
and September 30, 2003 have not yet been paid and such convertible notes are
currently in default.
In June 2003, $240,000 aggregate principal amount of our demand notes
with various maturity dates and $265,000 aggregate principal amount of our 8%
convertible notes due June 30, 2003 or September 30, 2003, were extended to June
3, 2006. At the time of extension, this debt represented approximately 78% of
our short-term liabilities. As a result of the extension, our remaining
short-term liabilities are approximately $174,000, of which $85,000 is
convertible to equity. In consideration of their willingness to extend the
maturity dates of such notes, we issued such noteholders five-year options to
purchase approximately 1,305,000 shares of our common stock at an exercise price
of $0.25 per share. As additional consideration, we granted the holders of our
demand notes who agreed to extend the maturity dates, the right to convert, at
any time and from time to time, all or a portion of the outstanding balance
under such notes (including accrued interest thereon) into shares of our common
stock at a conversion price of $0.25. Such notes do not have a beneficial
conversion feature.
14
The terms of $35,000 aggregate principal amount of our 9% convertible
notes and $10,000 aggregate principal amount of our 8% convertible notes provide
generally that, if the convertible notes are not in default, the holders may
convert, at any time and from time to time, all or a portion of the outstanding
balance under each convertible note into a number of shares (subject to certain
anti-dilution adjustments) of our common stock that will allow the noteholder to
receive common stock having a market value equal to 150% of the converted
balance of the note. To achieve this result, the conversion price of such notes
has been initially set at $0.50; provided, that the closing price per share of
our common stock as reported on the OTC Bulletin Board on the date of conversion
is at least $0.75 per share. If such closing price is less than $0.75 per share,
the conversion price shall be proportionately reduced, but in no event to a
conversion price that is less than $0.10 per share in the case of 9% convertible
notes or $0.25 per share in the case of 8% convertible notes, to permit the
noteholder to receive the number of shares discussed above. If an event of
default has occurred in respect of a 9% convertible note, the holder may convert
the outstanding balance into a number of shares (subject to certain
anti-dilution adjustments) of our common stock equal to twice the number of
shares the holder would have otherwise received if such 9% convertible note was
not in default.
The terms of our remaining 8% convertible notes are convertible into
shares of our common stock at a price of $0.25 per share (subject to certain
anti-dilution adjustments). The terms of our remaining 9% convertible notes
provide generally that, if the convertible notes are not in default, the holders
may convert, at any time and from time to time, all or a portion of the
outstanding balance under each convertible note into a number of shares (subject
to certain anti-dilution adjustments) of our common stock that will allow the
noteholder to receive common stock having a market value equal to 150% of the
converted balance of the note. To achieve this result, the conversion price of
such notes has been initially set at $0.25; provided, that the closing price per
share of our common stock as reported on the OTC Bulletin Board on the date of
conversion is at least $0.375 per share. If such closing price is less than
$0.375 per share, the conversion price shall be proportionately reduced, but in
no event to a conversion price that is less than $0.10 per share. If an event of
default has occurred in respect of a 9% convertible note, the holder may convert
the outstanding balance into a number of shares (subject to certain
anti-dilution adjustments) of our common stock equal to twice the number of
shares the holder would have otherwise received if such 9% convertible note was
not in default.
In February 2003, one of our capital lease obligations in the
approximate amount of $35,000, which is secured by equipment with a net book
value of $25,363, was accelerated by the lessor due to non-payment. Management
has contacted such lessor to negotiate alternative payment arrangements for this
obligation. If unsuccessful, the lessor could bring suit to collect payment or
foreclose upon the collateral. Any such litigation 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.
15
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
up to 5,000,000 shares of our common stock. In December 2001, we filed with the
Securities and Exchange Commission a registration statement relating to such
shares. 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 other sales of equity
securities or additional borrowings. In the event we are able to generate
aggregate net proceeds of at least $1,000,000 from such sources, we believe that
such net proceeds, 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 2002 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 aggregate net proceeds of at least $1,000,000
from our proposed securities offerings or additional borrowings, we expect
capital expenditures to be approximately $100,000 during the next 12 months,
primarily for the acquisition of an inventory control system. 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 offering of common stock.
At September 30, 2003, we had liquid assets of $599,560, consisting of
cash and accounts receivable derived from operations, and other current assets
of $1,023,098, consisting primarily of inventory of products for sale and/or
distribution and prepaid expenses. Long term assets of $188,140 consisted
primarily of warehouse equipment used in operations.
Current liabilities of $2,383,203 at September 30, 2003 consisted
primarily of $1,902,216 of accounts payable and accrued expenses.
Our working capital deficit was $760,545 as of September 30, 2003 for
the reasons described above.
During the nine months ended September 30, 2003, we used cash of
$252,523 in operating activities primarily as a result of the net loss we
incurred during this period.
16
During the nine months ended September 30, 2003, we used net cash of
$1,765 in investing activities, all of which was used for capital expenditures.
Financing activities, consisting primarily of proceeds from the
issuance of notes payable, provided net cash of $252,847 during the nine months
ended September 30, 2003.
ITEM 3. CONTROLS AND PROCEDURES
(a) Based upon an evaluation performed as of September 30, 2003, our
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have each
concluded that our disclosure controls and procedures are effective to ensure
that material information relating to our Company is made known to management,
including the CEO and CFO, particularly during the period when our periodic
reports are being prepared, and that our internal controls are effective to
provide reasonable assurances that our financial condition, results of
operations and cash flows are fairly presented in all material respects.
(b) During the third quarter of 2003, there were no changes in our
internal controls over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal controls over
financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) In July 2003, we issued 127,272 shares of our common stock to one
of our consultants for services rendered during the second quarter of 2003. Such
shares were issued by us 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 by us 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.
In July 2003, we issued 127,273 shares of our common stock to our Chief
Executive Officer as compensation for services rendered during the second
quarter of 2003. Such shares were issued by us 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 by us 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.
17
In August 2003, we issued an aggregate of 250,000 shares of our common
stock to two investors in a private sale for aggregate net proceeds to us of
$50,000. Such shares were issued by us 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 by us in connection with such issuance
and such persons were `accredited investors' as defined in Regulation D under
the Securities Act of 1933, as amended.
(d) None.
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
----------- -----------
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.
None.
18
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 November 25, 2003.
MILITARY RESALE GROUP, INC.
By: /s/ Ethan D. Hokit
--------------------------------------
Name: Ethan D. Hokit
Title: President (Principal Accounting
Officer and Principal Financial
Officer)
19
Exhibit Index
Exhibit No. Description
----------- -----------
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.
20