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, 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 incorporation or (I.R.S. Employer Identification No.)
organization)
2180 Executive Circle
Colorado Springs, Colorado 80906
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(Address of principal executive offices)
(719) 391-4564
----------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of March 31, 2003, there were 11,975,804 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, 2003 and December 31, 2002...................... 1
Statements of Operations - Three months ended March 31, 2003 and 2002...... 2
Statements of Cash Flows - Three months ended March 31, 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.................................................... 15
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds.................................. 15
Item 6. Exhibits and Reports on Form 8-K........................................... 16
Signatures ........................................................................... 17
Certifications ........................................................................... 18
i
ITEM 1. FINANCIAL INFORMATION
MILITARY RESALE GROUP, INC.
CONDENSED BALANCE SHEETS
March 31, December 31,
2003 2002
----------- ----------
Assets (Unaudited) (Audited)
----------- -----------
Current Assets
Cash $ 2,146 $ 2,072
Accounts receivable - trade 497,805 428,037
Inventory 218,196 227,416
Prepaid consulting (Note 3) 167,639 116,417
Deposits 23,358 23,358
Prepaid interest (Note 4) 33,333 133,333
Other current assets 550 618
----------- -----------
Total Current Assets 943,027 931,251
Fixed Assets
Office equipment 12,371 10,607
Warehouse equipment 159,444 159,444
Software 16,324 16,324
----------- -----------
188,139 186,375
Less accumulated depreciation (91,221) (76,229)
----------- -----------
Net Fixed Assets 96,918 110,146
----------- -----------
Total Assets 1,039,945 1,041,397
=========== ===========
Liabilities and Stockholders' Equity (Impairment)
Current Liabilities
Accounts payable and accrued expenses 1,582,737 1,470,776
Bank overdraft -- 11,068
Other current liabilities 86,814 81,726
Current maturities of capital lease obligations 37,271 37,271
Current portion of deferred rental obligation 11,598 21,584
Accrued interest payable 67,735 47,816
Related party notes payable (Note 5) 240,000 230,000
Convertible notes payable (Note 6) 270,000 255,000
Promissory note payable (Note 8) 100,000 --
----------- -----------
Total Current Liabilities 2,396,155 2,155,241
Deferred rental obligation 69,590 57,557
Obligations under capital leases, excluding current maturities 44,973 51,735
----------- -----------
Total Liabilities 2,510,718 2,264,533
Commitments 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, 11,975,804 and 1,197 1,138
11,383,390 shares issued and outstanding in 2003 and 2002, respectively
Additional paid-in capital 2,303,689 2,050,690
Accumulated deficit (3,775,659) (3,274,964)
----------- -----------
Total Stockholders' Equity (Impairment) (1,470,773) (1,223,136)
----------- -----------
Total Liabilities and Stockholders' Equity (Impairment) $ 1,039,945 $ 1,041,397
=========== ===========
See notes to the financial statements
1
3
MILITARY RESALE GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
------------- ------------
Revenues
Resale revenue $ 1,612,597 $ 1,357,584
Commission revenue 146,366 59,674
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Total Revenues 1,758,963 1,417,258
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Cost of goods sold 1,512,326 1,238,921
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Gross Profit 246,637 178,337
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Operating Expenses
Stock based compensation (Note 5 and 7) 206,369 115,065
Salary and payroll taxes 117,138 90,165
Professional fees 64,034 --
Occupancy 59,356 55,262
General and administrative 150,059 112,053
Amortization/depreciation 14,991 10,627
------------ ------------
Total Operating Expenses 611,947 383,172
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Net Loss From Operations (365,310) (204,835)
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Other (Expenses)
Interest expense (135,385) (211,170)
Loss on disposal of fixed assets -- --
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Total Other (Expense) (135,385) (211,170)
------------ ------------
Net Loss $ (500,695) $ (416,005)
------------ ------------
Loss Per Share (Note 2)
Net Loss Per Common Share - basic and diluted $ (0.04) $ (0.05)
============ ============
Weighted average number of common shares outstanding - basic
and diluted - basic 11,684,156 7,705,004
============ ============
See notes to the financial statements.
2
MILITARY RESALE GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
2003 2002
--------- -----------
Cash Flows From Operating Activities
Net Loss $(500,695) $(416,005)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 14,911 10,626
Amortization of option based interest expense 100,000 --
Stock based compensation 153,924 115,065
Beneficial conversion feature 15,000 --
Loss on disposal of assets -- 6,380
Changes in Assets and Liabilities
Decrease (increase) in accounts receivable (69,768) 56,825
Decrease (increase) in inventory 9,220 (63,404)
Decrease in other assets 68 3,479
(Increase) in deposits -- (2,812)
Increase in accounts payable and accrued expenses 144,873 228,336
Increase in deferred rent obligation 2,047 --
Increase in other liabilities 25,007 --
--------- ---------
Net Cash Used In Operating Activities (105,413) (61,510)
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Cash Flows From Investing Activities
Purchase of fixed assets (1,683) (1,912)
--------- ---------
Cash Flows Used In Investing Activities (1,683) (1,912)
--------- ---------
Cash Flows From Financing Activities
Bank overdraft (11,068) (1,349)
Payments on capital lease obligations (6,762) --
Proceeds from issuance of notes 125,000 119,352
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Cash Flows Provided By Financing Activities 107,170 118,003
--------- ---------
Net Increase in Cash and Cash Equivalents 74 54,581
Cash and Cash Equivalents at Beginning of Period 2,072 --
--------- ---------
Cash and Cash Equivalents at End of Period $ 2,146 $ 54,581
========= =========
SUPPLEMENTAL INFORMATION
Interest Paid $ 466 $ 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
$ 205,146 $ --
----------- -----------
Issuance of common stock in payment of accrued compensation $ 32,912 $ --
---------- -----------
See notes to the financial statements.
4
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF ORGANIZATION
Military Resale Group, Inc. (the Company), organized under the laws of the
State of New York, is a regional distributor of grocery and household items
specializing in distribution to commissaries of the U. S. Military.
Currently, the Company services six military installations located in
Colorado, Wyoming and South Dakota.
On October 15, 2001, the Company, formerly Bactrol Technologies, Inc. and
Military Resale Group, Inc. ("MRG"), which was formed on October 6, 1997
executed a Stock Purchase Agreement pursuant to which 98.2% of MRG's stock
was effectively exchanged for a controlling interest in a publicly held
"shell" corporation that concurrently changed its name 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 the net monetary assets of the
Company, accompanied by a recapitalization of MRG with no goodwill or other
intangible assets recorded.
For financial reporting purposes, MRG is 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.
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 - 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-month
period ended March 31, 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 the Registrant Company's 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 six-month agreement term. During the three months ended March 31,
2003, the Company incurred additional prepayments of $122,222 and
stock-based compensation expense of $71,000.
5
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - PREPAID INTEREST
Prepaid interest expense is recorded in connection with the issuances of
options for the extension of one of the Company's notes payable. The
interest expense is being amortized over the extension period of six
months, with $100,000 charged to interest expense in the current period.
NOTE 5 - RELATED PARTY TRANSACTIONS
In January 2003, the Company entered into a one-year business consulting
agreement with Edward Meyer, Jr. for marketing and managerial consulting
services, and a one-year executive compensation agreement with Edward
Whelan. In consideration of the services to be rendered by Mr. Whelan and
Mr. Meyer, the Company 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 the Company's common stock during each quarter. As of
March 31, 2003, no shares of the Company's common stock had been issued for
services rendered during the term of the agreement.
During the three months ended March 31, 2003, the Company issued an
aggregate of 96,207 shares of the Company's common stock to Mr. Meyer as
consideration under the January 2002 consulting agreement for services
rendered in the 4th quarter of 2002, and an aggregate of 96,207 shares of
the Company's common stock to Mr. Whelan as consideration under his 2002
executive compensation agreement for services rendered in the 4th quarter
of 2002. The shares issued were valued at $0.19 per share, the fair market
value on the date of issuance.
On March 11, 2003, Edward Whelan loaned the Company $10,000. The
corresponding note bears interest at a rate of 8% per annum and is due on
the earlier of demand or June 30, 2003.
Subsequent to the quarter end, the Company issued 109,259 shares of the
Company's common stock to each of Mr. Whelan and Mr. Meyer for the first
quarter of 2003. The aggregate value of the shares issued which were
expensed as accrued stock based compensation at March 31, 2003 totaled
$52,445.
NOTE 6 - CONVERTIBLE NOTES
At March 31, 2003, the Company had an aggregate of $270,000 payable in
convertible notes. $20,000 of the convertible notes bear interest at 8% per
annum and are due on June 30, 2002. $70,000 of the convertible notes bear
interest at 8% per annum prior to June 30, 2002 and 9% per annum thereafter
and are due on June 30, 2003. $180,000 of the convertible notes bear
interest at 8% per annum, including $75,000 due on June 30, 2003 and
$105,000 due on July 30, 2003. The terms of the Company's 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 the Company's 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. 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 the Company's 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 the Company to register under
the Securities Act of 1933 the shares its common stock issuable upon
conversion of the convertible notes not later than June 30, 2003.
The Company follows 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 the Company's convertible notes contained a
beneficial conversion feature on the date of issuance, the Company measured
and recognized the intrinsic value of the beneficial conversion feature of
the convertible notes
6
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
when the convertible notes were issued. During the periods ended March 31,
2003 and 2002, interest expense of $15,000 and $205,000, respectively
(representing the aggregate proceeds to the Company 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 quarter ended March 31, 2003, the Company issued an aggregate
400,000 of the Company's common shares and 650,000 common stock options to
various consultants for services provided or to be provided. Consulting
expense of $153,924 was recognized in 2003 and a prepaid consulting expense
of $122,222 was recorded in 2003. These amounts were based on the fair
market value of the shares on the date of issuance.
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 is 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
If the Company fails to secure any of the above-referenced additional
funding, nor another significant event, such as a merger or acquisition of
another company, the Company will be required to pay $8,000 per month
commencing on July 1, 2003 until the full obligation is paid.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
In March 2003, the Company entered into a consulting agreements for the
provision of marketing and other advisory services. The agreement provides
that, as compensation for such services, the Company will issue 250,000
shares of the Company's common stock and an option to purchase 650,000
shares of the Company's common stock at the lower of $.50 per share or the
price per share granted to any other advisor or employee of the Company
during the term of the agreement. The agreement is for six months.
In February 2003 the Company entered into an agreement with an entity to
act as the Company's financial advisor, investment banker and placement
agent in connection with the placement of credit facilities and securities.
The agreement calls for an equity retainer of 200,000 shares of restricted
common stock and $5,000 per month through August 2003, as well as the
following:
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, the Company entered into a lease modification agreement
for its 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.
7
MILITARY RESALE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
The Company is a defendant in pending litigation regarding its 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. The
Company intends to vigorously defend against such claim and also intends to
pursue its 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
Standard Implemented
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. The Company
implemented this standard on January 1, 2003. The adoption of this
standard did not have a material effect on the Company's financial
statements.
NOTE 11 - SEGMENT INFORMATION
The Company operates 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 signification 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 MARCH 31, 2003 COMPARED TO THREE
MONTHS ENDED MARCH 31, 2002
REVENUES. Total revenue for the three months ended March 31, 2003 of
$1,758,963 reflected an increase of $341,705, or approximately 24.1%, compared
to total revenue of $1,417,258 for the three months ended March 31, 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.
Resale revenue for the three months ended March 31, 2003 of $1,612,597
reflected an increase of $255,013, or approximately 18.8%, compared to resale
revenue of $1,357,584 for the three months ended March 31, 2002. This increase
was attributable primarily to the addition of the new products we began
supplying to commissaries during fiscal 2002, including a line of feminine
hygiene products and a line of infant feeding products supplied by Playtex
Products, Inc. that we sell on a resale basis. For the three months ended March
31, 2003, approximately 40.7% of our gross profit was derived from sales
involving resale revenue compared to approximately 66.5% for the three months
ended March 31, 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 three months ended March 31, 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.
In the three months ended March 31, 2003, Playtex Products, Inc., a
supplier for whom we sell products on a resale basis, suspended the sale of its
products to us pending our payment of an outstanding invoice in the approximate
amount of $12,000 for products previously shipped to us. To date, we have not
made such payment and all sales by Playtex remain suspended. We intend to make
the outstanding payment in the second quarter of 2003, and believe that, upon
such payment, Playtex will resume the sale of its products to us pursuant to the
terms of our agreement.
Commission revenues for the three months ended March 31, 2003 of $146,366
reflected an increase of $86,692, or approximately 145%, compared to commission
revenues of $59,674 for the three months ended March 31, 2002. For the three
months ended March 31, 2003, approximately 59.3% of our gross profit was derived
from sales involving commission revenues
10
as compared to approximately 33.5% for the three months ended March 31, 2002.
These increases were attributable primarily to the addition of the new products
we began supplying to commissaries during the first quarter of fiscal 2003,
including products distributed by Mid Valley Products, that we sell on a
commission basis due to our short-term cash shortage 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.
In October 2002, we added to our supplier network the Hillshire Farm and
Kahn's product groups of Sara Lee Foods-USA and certain consumer products
distributed by Chattem, Inc. Hillshire Farms and Kahn's are product lines of
packaged meats and hams. Chattem is a manufacturer of branded consumer products,
principally over-the-counter healthcare products, including Aspercreme, Gold
Bond, Sportscreme, Pamprin, Dexatrim, Rejuvex and Flexall. We have been advised
by Sara Lee Foods-USA, and verified with DeCA, that sales of Hillshire Farm and
Kahn's products in 2001 to the commissaries we currently service amounted to
approximately $950,000. We have been advised by Chattem, and verified with DeCA,
that sales of Chattem's line of products in 2001 to the commissaries we
currently service amounted to approximately $200,000. However, there can be no
assurance that our annual sales of these products will reach such amounts, and
the amount of our actual sales of Hillshire Farm and Kahn's Products and Chattem
products may differ materially from the amounts sold by Sara Lee Foods-USA and
Chattem, respectively, in 2001.
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 March 31, 2003, cost of
goods sold increased by $273,405, or approximately 22.1%, to $1,512,326 from
$1,238,921 for the three months ended March 31, 2002. This increase was
attributable primarily
11
to the addition of new products that we sold on a resale basis. 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, 2003
increased by approximately $91,304, or approximately 51.2%, compared to the
three months ended March 31, 2002, from $178,337 for the three months ended
March 31, 2002 to $246,637 for the three months ended March 31, 2003. This
increase was attributable primarily to the increase in our sale of products on a
commission basis that have no associated cost of good sold.
OPERATING EXPENSES. Total operating expenses aggregated $611,947 for the
three months ended March 31, 2003 as compared to $383,172 for the three months
ended March 31, 2002, representing an increase of $228,475, or approximately
59.6%. The increase in total operating expenses was attributable primarily to
increased professional fees of approximately $64,034 resulting primarily from
the costs of the preparation of a registration statement under the Securities
Act of 1933 relating to a proposed offering of equity securities; increased
stock-based compensation expense of $91,034 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 $38,006 resulting primarily from increased truck rental expense and
increased premiums on health workers' compensation insurance.
INTEREST EXPENSE. Interest expense of $135,385 for the three months ended
March 31, 2003 reflected an decrease of $75,785 as compared to interest expense
of $211,170 for the three months ended March 31, 2002. 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 $205,000 aggregate principal amount of convertible promissory
notes issued in the three months ended March 31, 2002 as compared to $15,000
aggregate principal amount of convertible promissory notes issued in the three
months ended March 31, 2003, offset by amortization of option-based interest
expense of approximately $100,000 during the three months ended March 31, 2003.
NET LOSS. Primarily as a result of the increased operating and interest
expenses discussed above, we incurred a net loss of $500,695 for the three
months ended March 31, 2003 as compared to a net loss of $416,005 for the three
months ended March 31, 2002.
Liquidity and Capital Resources
At March 31, 2003, we had a cash balance of approximately $2,146. Our
principal source of liquidity has been borrowings. Since November 2001, we have
funded our operations primarily from borrowings of approximately $600,000. In
the fourth quarter of 2001 and the first half of 2002, we issued $240,000
aggregate principal amount of convertible promissory notes (the "9% convertible
notes") that mature, in nearly all instances, on June 30, 2003 and bear interest
at the rate of 8% per annum prior to June 30, 2002 and 9% per annum thereafter.
In April 2002, $150,000 aggregate principal amount of 9% convertible notes (and
$2,380 accrued
12
interest thereon) was converted by the holders into an aggregate of 1,793,573
shares of our common stock. The remaining 9% convertible notes are convertible
at any time and from time to time by the noteholders into a maximum of 1,350,000
shares of our common stock (subject to certain anti-dilution adjustments) if the
9% convertible notes are not in default, or a maximum of 2,700,000 shares of our
common stock (subject to certain anti-dilution adjustments) if an event of
default has occurred in respect of such notes. The terms of the 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
June 30, 2003. In July 2002, the holders of $20,000 aggregate principal amount
of convertible notes maturing on June 30, 2002 denied our request to extend the
maturity until July 30, 2003. The outstanding principal and interest on such
convertible notes have not yet been paid and, thus, such convertible notes are
currently in default.
The terms of our 9% convertible notes and 8% convertible notes (discussed
below) 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, to permit the
noteholder to receive the number of shares discussed above. 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.
In the second half of 2002, we issued $165,000 aggregate principal amount
of convertible promissory notes (the "8% convertible notes") that mature on
either June 30, 2003 or July 30, 2003 and bear interest at the rate of 8% per
annum. The 8% convertible notes are convertible at any time and from time to
time by the noteholders into a maximum of 2,475,000 shares of our common stock
(subject to certain antidilution adjustments) if the 8% convertible notes are
not in default, or a maximum of 4,950,000 shares of our common stock (subject to
certain anti-dilution adjustments) if an event of default has occurred in
respect of such notes. The terms of the 8% convertible notes require us to
register under the Securities Act of 1933 the shares of our common stock
issuable upon conversion of the 8% convertible notes not later than June 30,
2003.
In the first quarter of 2003, we borrowed an aggregate of $10,000 from
Edward T. Whelan, our Chief Executive Officer and Chairman of our Board of
Directors. The loan is payable on demand and bears interest at the rate of 8%
annum. The loan contains contingent payment terms which vary depending on the
success of our efforts to raise additional funding.
In January and March 2003, we issued $15,000 aggregate principal amount of
convertible promissory notes that mature on June 30, 2003 and bear interest at
8% per annum. Such notes are
13
convertible at any time and from time to time by the noteholders into a maximum
of 225,000 shares of our common stock (subject to certain anti-dilution
adjustments) if the convertible notes are not in default, or a maximum of
450,000 shares of our common stock (subject to certain anti-dilution
adjustments) if an event of default has occurred in respect of such notes. The
terms of such notes require us to register under the Securities Act of 1933 the
shares of our common stock issuable upon conversion of such notes not later than
June 30, 2003.
In March 2003, we borrowed $100,000 from a single lender. The loan matures
on March 26, 2004 and bears interest at 15% per annum.
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 additional borrowings.
In the event we are able to generate sales proceeds of at least $500,000 in our
proposed 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.
Assuming that we receive net proceeds of at least $500,000 from our
proposed offering, we expect capital expenditures to be approximately $200,000
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 March 31, 2003, we had liquid assets of $499,951, consisting of cash and
accounts receivable derived from operations, and other current assets of
$443,076, consisting primarily of inventory of products for sale and/or
distribution and prepaid expenses. Long term assets of $188,139 consisted
primarily of warehouse equipment used in operations.
Current liabilities of $2,396,155 at March 31, 2003 consisted primarily of
$1,582,737 of accounts payable and accrued expenses and $610,000 for notes
payable, of which $240,000 was payable to our officers or our other affiliates.
Our working capital deficit was $1,453,128 as of March 31, 2003 for the
reasons described above.
14
During the three months ended March 31, 2003, we used cash of $105,413 in
operating activities primarily as a result of the net loss we incurred during
this period.
During the three months ended March 31, 2003, we used net cash of $1,683 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 $107,170 during the three months ended March
31, 2003.
ITEM 3. CONTROLS AND PROCEDURES
(a) Based upon an evaluation performed within 90 days of this Report, 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) The CEO and CFO each note that, since the date of his evaluation until
the date of this Report, there have been no significant changes in internal
controls or in other factors that could significantly affect internal controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) In January and March 2003, we issued $15,000 aggregate principal amount
of convertible promissory notes that mature on June 30, 2003 and bear interest
at 8% per annum. Such notes are convertible at any time and from time to time by
the noteholders into a maximum of 225,000 shares of our common stock (subject to
certain anti-dilution adjustments) if the convertible notes are not in default,
or a maximum of 450,000 shares of our common stock (subject to certain
anti-dilution adjustments) if an event of default has occurred in respect of
such notes. The terms of such notes require us to register under the Securities
Act of 1933 the shares of our common stock issuable upon conversion of such
notes not later than June 30, 2003. Such notes were issued by us in reliance
upon the exemption from registration provided by Section
15
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
---------- -----------
10.1 Consulting Agreement dated January 2, 2003 between our company
and Edward Meyer, Jr.
10.2 Business Consulting Agreement dated as of March 10, 2003 between
our company and Martin Nielson (incorporated herein by reference
to Exhibit 4.1 to our Registration Statement on Form S-8
(Registration No. 333-81258)).
99.1 Certification of our Principal Executive Officer, Edward T.
Whelan, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 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. On May 2, 2003, the Company filed a Current Report
on Form 8-K providing certifications of its Chief Executive Officer and Chief
Financial Officer with respect to its Annual Report on Form 10-KSB for the year
ended December 31, 2002 as required by 18 U.S.C. 1350 (Section 906 of the
Sarbanes-Oxley act of 2002).
16
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 May 29, 2003.
MILITARY RESALE GROUP, INC.
By: /S/ ETHAN D. HOKIT
------------------------------
Name: Ethan D. Hokit
Title: President (Principal
Accounting Officer and Principal
Financial Officer)
17
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
-------------------------------------------
Pursuant to 18 U.S.C. 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Edward T. Whelan, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Military Resale
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
18
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /S/ EDWARD T. WHELAN
------------------------------
Name: Edward T. Whelan
Title: Chief Executive Officer
May 29, 2003
19
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to 18 U.S.C. 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Ethan D. Hokit, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Military Resale
Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
20
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /S/ ETHAN D. HOKIT
------------------------------
Name: Ethan D. Hokit
Title: Chief Financial Officer
May 29, 2003
21
Exhibit No. Description
---------- -----------
10.1 Consulting Agreement dated January 2, 2003 between our company
and Edward Meyer, Jr.
10.2 Business Consulting Agreement dated as of March 10, 2003 between
our company and Martin Nielson (incorporated herein by reference
to Exhibit 4.1 to our Registration Statement on Form S-8
(Registration No. 333-81258)).
99.1 Certification of our Principal Executive Officer, Edward T.
Whelan, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of our Principal Financial Officer, Ethan D.
Hokit, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.