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, 2002
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] For the transition period from to .
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Commission File Number 000-26463
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MILITARY RESALE GROUP, INC.
(Name of small business issuer as specified in its charter)
-----------------------------------------------------------
New York 11-2665282
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2180 Executive Circle
Colorado Springs, Colorado 80906
----------------------------------------
(Address of principal executive offices)
(719) 391-4564
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of September 30, 2002, there were 10,833,389 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
PART I. Financial Information Page No.
Item 1. Financial Statements
Balance Sheets - September 30, 2002 and December 31, 2001 1
Statements of Operations - Three months and nine months ended
September 30, 2002 and 2001 2
Statement of Stockholders' Deficit - From October 6, 1997
(inception) through September 30, 2002 3
Statements of Cash Flows - Nine months ended September 30,
2002 and 2001 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 6
Item 3. Controls and Procedures 13
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
i
ITEM 1. FINANCIAL INFORMATION
MILITARY RESALE GROUP, INC
Balance Sheet
(Unaudited)
September 30, December 31,
ASSETS 2002 2001
--------------- --------------
Current Assets
Cash $ 17,548 $ -
Accounts receivable - trade 802,363 441,058
Prepaids 3,714 6,708
Inventory 282,076 252,430
Deposits 23,218 20,406
-------------- --------------
Total Currents Assets 1,128,919 720,602
-------------- --------------
Fixed Assets:
Office equipment 4,607 9,121
Warehouse equipment 205,044 203,132
Vehicles 64,366 64,366
Leasehold improvements 2,440 2,440
--------------- --------------
Software 16,324 15,609
--------------- --------------
292,781 294,668
Less accumulated depreciation (138,501) (102,257)
--------------- --------------
Net Fixed Assets 154,280 192,411
--------------- --------------
TOTAL ASSETS $ 1,283,199 $ 913,013
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade $ 1,374,062 $ 1,047,207
Accrued expenses 95,329 -
Accrued interest payable 247,648 60,657
Bank overdraft - 1,349
Capitalized leases/Notes payable - current portion 341,718 260,522
--------------- --------------
Total Current Liabilities 2,058,757 1,369,735
--------------- --------------
Long-term debt
Notes payable 185,975 91,121
--------------- --------------
Total Long-term debt 185,975 91,121
--------------- --------------
Total Liabilities 2,244,732 1,460,856
--------------- --------------
Stockholders' Equity
Common stock, par value $.0001, 60,000,000 shares
authorized: 10,833,389 and 7,505,004 issued and outstanding
at September 30, 2002 and December 31, 2001, respectively 1,083 750
Additional paid-in capital 1,313,083 407,150
Retained deficit (2,275,699) (955,743)
--------------- --------------
Total Stockholders' Equity (961,533) (547,843)
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,283,199 $ 913,013
=============== ==============
See accountant`s review report.
1
MILITARY RESALE GROUP, INC
Statement of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------ -------------------------
2002 2001 2002 2001
----------- ----------- ------------ -----------
REVENUES:
Gross Sales $1,548,384 $1,181,690 $ 4,561,198 $3,362,747
Commission sales - net 102,706 102,755 226,690 176,987
----------- ----------- ------------ -----------
Total Revenues 1,651,090 1,284,445 4,787,888 3,539,734
----------- ----------- ------------ -----------
COST OF GOODS SOLD: 1,373,106 1,124,434 4,069,592 3,092,992
----------- ----------- ------------ -----------
GROSS PROFIT 277,984 160,011 718,296 446,742
----------- ----------- ------------ -----------
EXPENSES:
Salary and payroll taxes 146,923 96,046 362,885 294,826
Professional fees 421,111 2,988 621,557 165,633
Occupancy 55,262 25,604 165,787 71,433
General and administrative 92,025 60,636 430,503 169,791
Amortization/depreciation 15,160 9,009 36,413 27,027
Lease and auto/truck expense 19,372 9,995 65,690 46,039
----------- ----------- ------------ -----------
Total Operating Expenses 749,853 204,278 1,682,835 774,749
----------- ----------- ------------ -----------
OTHER REVENUES & EXPENSES:
Interest expense (115,563) (3,978) (355,826) (6,229)
Interest/Other income 367 - 409 -
----------- ----------- ------------ -----------
Total Other Revenues & Expenses (115,196) (3,978) (355,417) (6,229)
----------- ----------- ------------ -----------
NET LOSS $ (587,065) $ (48,245) $(1,319,956) $ (334,236)
=========== =========== ============ ===========
Per share information
Weighted average number
of common shares outstanding 9,072,936 5,360,000 9,460,023 6,580,004
=========== =========== ============ ===========
Net Loss per common share $ (0.06) $ (0.01) $ (0.14) $ (0.05)
=========== =========== ============ ===========
See accountant`s review report
2
MILITARY RESALE GROUP, INC
Statement of Stockholders' Deficit
(Unaudited)
Common Stock Additional Total
------------------- Paid-In Retained Stockholders'
Shares Amount Capital Deficit Equity
---------- ------- --------- ------------ ------------
Balance -October 6, 1997 - $ - $ - $ - $ -
Issuance of common stock for cash 800,000 80 120 - 200
Net loss - - - (6,756) (6,756)
---------- ------- --------- ------------ ------------
Balance - December 31, 1997 800,000 80 120 (6,756) (6,556)
---------- ------- --------- ------------ ------------
Issuance of common stock for cash 40,000 4 14,996 - 15,000
Issuance of common stock for services 3,000,000 300 (300) - -
Nel loss - - - (43,372) (43,372)
---------- ------- --------- ------------ ------------
Balance - December 31, 1998 3,840,000 384 14,816 (50,128) (34,928)
---------- ------- --------- ------------ ------------
Issuance of common stock for cash 1,520,000 152 134,848 - 135,000
Nel loss - - - (145,948) (145,948)
---------- ------- --------- ------------ ------------
Balance - December 31, 1999 5,360,000 536 149,664 (196,076) (45,876)
---------- ------- --------- ------------ ------------
Net loss - - - (13,673) (13,673)
---------- ------- --------- ------------ ------------
Balance - December 31, 2000 5,360,000 536 149,664 (209,749) (59,549)
---------- ------- --------- ------------ ------------
Stock issued for services 875,000 87 253,663 - 253,750
Stock issued for subsidiary 1,270,004 127 3,823 - 3,950
Net loss - - - (745,994) (745,994)
---------- ------- --------- ------------ ------------
Balance - December 31, 2001 7,505,004 750 407,150 (955,743) (547,843)
---------- ------- --------- ------------ ------------
Stock issued for services 300,000 30 92,970 - 93,000
Stock issued for services 73,550 7 22,058 - 22,065
Stock issued in lieu of debt 576,923 58 149,942 - 150,000
Stock issued for beneficial conversation
feature as interest 576,923 58 149,942 - 150,000
Stock issued for services 639,727 64 166,265 - 166,329
Stock issued for services 350,000 35 122,465 - 122,500
Stock issued for services 619,540 62 148,628 - 148,690
Stock issued for services 95,861 10 26,831 - 26,841
Stock issued for services 95,861 9 26,832 - 26,841
Net loss for period - - - (1,319,956) (1,319,956)
---------- ------- --------- ------------ ------------
Balance - September 30, 2002 10,833,389 $ 1,083 $1,313,083 $(2,275,699) $(961,533)
========== ======= ========= ============ ============
See accountant`s review report
3
MILITARY RESALE GROUP, INC
Statement of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
------------------------
2002 2001
------------ ----------
Cash Flows from Operating Activities:
Net Loss $(1,319,956) $(334,236)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 36,244 26,027
Stock issued for services 606,266 79,250
Stock issued in lieu of debt 150,000 -
Stock issued for interest 150,000 -
Loss on disposal of equipment 6,380 -
Changes in assets and liabilities:
(Increase) Decrease in accounts receivable (361,305) 16,516
Decrease (Increase) in prepaids 2,994 (22,388)
Increase (Decrease) in deposits (2,812) -
(Increase) Decrease in inventory (29,646) (82,698)
Increase in accounts payable 326,855 231,423
Increase (Decrease) in accrued expenses 282,320 5,260
------------ ----------
Net Cash Used in Operating Activities (152,660) (80,846)
------------ ----------
Cash Flows from Investing Activities
Capital expenditures (4,493) (7,313)
------------ ----------
Cash Flows Used in Investing Activities (4,493) (7,313)
------------ ----------
Cash Flows from Financing Activities:
Bank overdraft (1,349) -
Proceeds from sale of stock - -
Proceeds (payments) from notes payable - net 176,050 100,944
------------ ----------
Cash Flows Provided by Financing Activities 174,701 100,944
------------ ----------
Net Increase (Decrease) in cash and cash equivalents 17,548 12,785
Cash and cash equivalents - beginning of period - -
------------ ----------
Cash and cash equivalents - end of period $ 17,548 $ 12,785
============ ==========
Supplemental information:
Cash paid for interest $ 6,170 $ 6,229
============ ==========
Cash paid for income taxes $ - $ -
============ ==========
Non-cash investing and financing activities:
Issuance of stock in exchange for cancellation of
indebtedness of $150,000 and interest expense of $150,000 $ 300,000 $ -
============ ==========
on convertible notes
See accountant's review report
4
NOTE 1-GENERAL
On October 15, 2001, our Company, formerly known as Bactrol Technologies, Inc.,
and Military Resale Group, Inc., a Maryland corporation that was formed on
October 6, 1997 ("MRG-Maryland"), executed a Stock Purchase Agreement pursuant
to which, on November 15, 2001, 98.2% of MRG's stock was effectively exchanged
for a controlling interest in a publicly held "shell" corporation (the "Reverse
Acquisition") 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 our net monetary assets, accompanied by a recapitalization of
MRG-Maryland with no goodwill or other intangible assets recorded. For
financial reporting purposes, MRG-Maryland was considered the acquirer, and
therefore, the historical operating results of Bactrol Technologies, Inc. are
not presented.
NOTE 2 - BASIS OF PRESENTATION
In the opinion of our management, the accompanying unaudited condensed financial
statements include all normal adjustments considered necessary to present fairly
our financial position as of September 30, 2002, and results of operations and
cash flows for the nine months ended September 30, 2002 and 2001. Interim
results are not necessarily indicative of results for a full year.
The consolidated financial statements and notes are presented as permitted by
Form 10-QSB, and do not contain certain information included in our audited
financial statements and notes for the fiscal year ended December 31, 2001.
NOTE 3 - INVENTORY
Inventory of as September 30, 2002 consisted of the following:
Finished Goods 282,076
-------
$282,076
========
5
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 effectiveness of our technologies and 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 (the "Reverse Acquisition"). For financial reporting
6
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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE
MONTHS SEPTEMBER, 2001
Revenue. Total revenue for the three months ended September 30, 2002 of
$1,651,090 reflected an increase of $366,645, or approximately 29%, compared to
total revenue of $1,284,445 for the three months ended September 30, 2001. 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 September 30, 2002 of $1,548,384
reflected an increase of $366,694, or approximately 31%, compared to resale
revenue of $1,181,690 for the three months ended September 30, 2001. For the
three months ended September 30, 2002, approximately 63% of our gross profit was
derived from sales involving resale revenue compared to approximately 36% for
the three months ended September 30, 2001. These increases were attributable
primarily to the addition of the new products we began supplying to commissaries
during the fourth quarter of fiscal 2001, including Slimfast, L'eggs, Bush Beans
and Rayovac Batteries, and during the first and second quarters of fiscal 2002,
including a line of feminine hygiene products and a line of infant feeding
products supplied by Playtex Products, Inc., which we sell on a resale basis, as
well as the implementation of our long-term strategy to increase our ratio of
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.
Commission revenue for the three months ended September 30, 2002 of
$102,706 reflected a decrease of $49, or less than 1%, compared to commission
revenue of $102,755 for the three months ended September 30, 2001. For the three
months ended September 30, 2002, approximately 37% of our gross profit was
derived from sales involving commission revenue compared to approximately 64%
for the three months ended September 30, 2001. These decreases were attributable
primarily to the implementation of our long-term strategy to increase our ratio
of sales of products sold on a resale basis, rather than a commission basis. We
cannot be certain as to whether or not these trends will continue; however, in
the long term we are seeking to increase the ratio of our sales of products sold
7
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. To do so, we intend to continue to seek 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 March 2002, we entered into an agreement with Playtex Products, Inc. to
distribute, on a resale basis, approximately 70 Stock Keeping Units (SKUs)
manufactured or supplied by Playtex, including a line of feminine hygiene
products and a line of infant feeding products. We have been advised by
Playtex, and verified with DeCA, that sales by Playtex in 2001 to the
commissaries we currently service amounted to approximately $350,000. However,
there can be no assurance that our sales of Playtex products will reach such
amount, and the amount of our actual sales of Playtex products may differ
materially from the amounts sold by Playtex in 2001 as a result of one or more
of the factors described above, among others.
In April 2002, we began distributing products for Pfizer, Inc. under an
agreement that provided for the distribution of approximately 114 SKUs of Pfizer
products. In June 2002, the agreement was terminated by Pfizer because we were
unable to consistently meet our delivery obligations due to our insufficient
working capital. During the term of our agreement with Pfizer, we received
revenue from the sale of Pfizer products of approximately $168,000. Management
believes the termination of the Pfizer agreement will not have a material
adverse impact on our results of operations for fiscal 2002.
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 Farm 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
8
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 where 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,
2002, cost of goods sold increased by $248,672, or approximately 22%, to
$1,373,106 from $1,124,434 for the three months ended September 30, 2001. This
increase was attributable primarily to the addition of new products that we sell
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 September 30, 2002
increased by $117,973, or approximately 74%, compared to the three months ended
September 30, 2001, from $160,011 for the three months ended September 30, 2001
to $277,984 for the three months ended September 30, 2002. This increase was
attributable primarily to the addition of new products that we purchase for
resale to the commissaries we service.
OPERATING EXPENSES. Total operating expenses aggregated $749,853 for the
three months ended September 30, 2002 as compared to $204,278 for the three
months ended September 30, 2001, representing an increase of $545,575, or
approximately 267%. The increase in total operating expenses for the three
month period ended September 30, 2002 was attributable primarily to increased
professional fees of $418,123, resulting primarily from the issuance of shares
of our common stock for consulting services rendered to the Company and to legal
and accounting costs associated with the preparation of a registration statement
under the Securities Act of 1933 relating to a proposed offering of equity
securities; increased occupancy expense of $29,658 resulting from our move to
larger office and warehouse facilities in September 2001; increased salary
expenses and payroll taxes of $50,877; and increased general and administrative
expenses of $31,389 resulting primarily from increased premiums on health and
workers' compensation insurance.
INTEREST EXPENSE. Interest expense of $115,563 for the three months ended
September 30, 2002 reflected an increase of $111,585 as compared to interest
expense of $3,978 for the three months ended September 30, 2001. The increase
in interest expense was attributable primarily to interest expense of $105,000
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 $105,000 aggregate principal amount of convertible
promissory notes issued in the third quarter of 2002.
9
NET LOSS. For the reasons discussed above, we incurred a net loss of
$587,065 for the three months ended September 30, 2002 as compared to a net loss
of $48,245 for the three months ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
REVENUE. Total revenue for the nine months ended September 30, 2002 of
$4,787,888 reflected an increase of $1,248,154, or approximately 35%, compared
to total revenue of $3,539,734 for the nine months ended September 30, 2001.
Resale revenue for the nine months ended September 30, 2002 of $4,561,198
reflected an increase of $1,198,451, or approximately 34%, compared to resale
revenue of $3,362,747 for the nine months ended September 30, 2001. For the
nine months ended September 30, 2002, approximately 68% of our gross profit was
derived from sales involving resale revenue compared to approximately 60% for
the nine months ended September 30, 2001. These increases were attributable
primarily to the addition of the new products we began offering during the 2001
period, as discussed above, as well as the implementation of our long term
strategy to increase the ratio of sales on a resale basis rather than a
commission basis.
COMMISSION REVENUES for the nine months ended September 30, 2002 of
$226,690 reflected an increase of $49,703, or approximately 28%, compared to
commission revenues of $176,987 for the nine months ended September 30, 2001.
For the nine months ended September 30, 2002, approximately 32% of our gross
profit was derived from sales involving commission revenues as compared to
approximately 40% for the nine months ended September 30, 2001.
COST OF GOODS SOLD. During the nine months ended September 30, 2002, cost
of goods sold increased by approximately $976,600, or approximately 32%, to
$4,069,592 from $3,092,992 for the nine months ended September 30, 2001. This
increase was attributable primarily to the addition of new products that we sell
on a resale basis.
GROSS PROFIT. Gross profit for the nine months ended September 30, 2002
increased by $271,554, or approximately 61%, compared to the nine months ended
September 30, 2001, from $446,742 for the nine months ended September 30, 2001
to $718,296 for the nine months ended September 30, 2002. This increase was
attributable primarily to addition of new products that we purchase for resale
to commissaries we service.
OPERATING EXPENSES. Total operating expenses aggregated $1,682,835 for the
nine months ended September 30, 2002 as compared to $774,749 for the nine months
ended September 30, 2001, representing an increase of $908,086, or approximately
117%. The increase in total operating expenses was attributable primarily to
increased professional fees of $455,924, resulting primarily from the issuance
of shares of our common stock for consulting services rendered to the Company
and to legal and accounting costs associated with the preparation of a
registration statement under the Securities Act of 1933 relating to a proposed
offering of equity securities; increased occupancy expense of $94,354 resulting
from our move to larger office and warehouse facilities in September 2001;
10
increased salary expenses and payroll taxes of $68,059; and increased general
and administrative expenses of $260,712 resulting primarily from increased
premiums on health workers' compensation insurance.
INTEREST EXPENSE. Interest expense of $355,826 for the nine months ended
September 30, 2002 reflected an increase of $349,597 as compared to interest
expense of $6,229 for the nine months ended September 30, 2001. The increase in
interest expense was attributable primarily to interest expense of $330,000
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 $330,000 aggregate principal amount of convertible
promissory notes issued in the nine months ended September 30, 2002.
NET LOSS. Primarily as a result of the increased operating and interest
expenses discussed above, we incurred a net loss of $1,319,956 for the nine
months ended September 30, 2002 as compared to a net loss of $334,236 for the
nine months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, we had a cash balance of $17,548. Our principal
source of liquidity has been borrowings. Since November 2001, we have funded
our operations primarily from borrowings of approximately $525,000. In the
fourth quarter of 2001 and the first and second quarters of 2002, we issued
$260,000 aggregate principal amount of convertible promissory notes (the "9%
Convertible Notes") that mature on December 31, 2002 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 interest thereon) was converted by the holders into an aggregate
of 1,993,573 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 1,153,900 shares of our common stock (subject to certain anti-dilution
adjustments) if the 9% Convertible Notes are not in default, or a maximum of
2,307,800 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 December 31, 2002.
In the third quarter of 2002, we issued $105,000 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 489,667 shares of our common stock
(subject to certain anti-dilution adjustments). 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
December 31, 2002.
11
In the third quarter of 2002, we borrowed $10,000 from a single lender. In
connection with each such loan, we executed a demand promissory note that bears
interest at the rate of 8% per annum and matures on December 31, 2002.
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 sell only a nominal number of shares (i.e. 500,000 shares) 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 a nominal amount of proceeds from our proposed
offering of common stock, we expect capital expenditures to be approximately
$200,000 during the next twelve months, primarily for the acquisition of an
inventory control system. It is expected that our principal uses of cash 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, 2002, we had liquid assets of $819,911, consisting of cash
and accounts receivable derived from operations, and other current assets of
$309,008, consisting primarily of inventory of products for sale and/or
distribution. Long term assets of $154,280 consisted primarily of warehouse
equipment used in operations.
Current liabilities of $2,058,757 at September 30, 2002 consisted of
$1,374,062 of accounts payable and $341,718 for the current portion of
capitalized leases and notes payable, of which approximately $210,000 was
payable to our officers or our other affiliates.
Our working capital deficit was $929,838 as of September 30, 2002 for the
reasons described above.
During the nine months ended September 30, 2002, we used cash of $152,660
in operating activities, primarily as a result of the net loss incurred during
this period.
12
During the nine months ended September 30, 2002, we used net cash of $4,493
in investing activities, all of which was used for capital expenditures.
Financing activities, consisting primarily of short-term borrowings,
provided net cash of $174,701 during the nine months ended September 30, 2002.
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 August 2002, we issued 619,540 shares of our common stock to
consultants and employees or their designees, including Edward T. Whelan, our
Chief Executive Officer and one of our directors, for services performed for the
Company. 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.
In August 2002, we issued to two affiliates of the Company an aggregate of
$100,000 principal amount of convertible promissory notes that mature on June
30, 2003 and bear interest at 8% per annum. Such notes are convertible into a
maximum of 436,000 shares of our common stock at the option of the noteholders
at any time. The terms of such notes require us to register under the Securities
13
Act of 1933 the shares of our common stock issuable upon conversion of such
notes not later than December 31, 2002. Such notes 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.
In September 2002, we issued to a single purchaser a convertible promissory
note in the principal amount of $5,000 that matures on July 30, 2003 and bears
interest at the rate of 8% per annum. Such note is convertible at any time and
from time to time by the noteholder into a maximum of 53,667 shares of our
common stock (subject to certain anti-dilution adjustments). The terms of the
such note require us to register under the Securities Act of 1933 the shares of
our common stock issuable upon conversion of the note not later than December
31, 2002. Such note was issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, on the basis
that such issuance did not involve a public offering, no underwriter fees or
commissions were paid in connection with such issuance and such person was an
'accredited investor' as defined in Regulation D under the Securities Act of
1933, as amended.
(d) None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) On August 15, 2002, 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 Quarterly Report on Form 10-QSB/A for the period
ended June 30, 2002 as required by 18 U.S.C. 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
14
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 14, 2002.
MILITARY RESALE GROUP, INC.
By: /s/ Ethan D. Hokit____________
------------------------------
Name: Ethan D. Hokit
Title: President (Principal Accounting Officer and Principal Financial Officer)
15
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
16
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
November 14, 2002
17
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
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/ Ethan D. Hokit
---------------------
Name: Ethan D. Hokit
Title: Chief Financial Officer
November 14, 2002
19