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 June 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____________ to ____________ .
Commission File Number 000-26463
MILITARY RESALE GROUP, INC.
(Name of small business issuer as specified in its charter)
New York 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 August 15, 2004, there were 31,113,832 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 - June 30, 2004 and December 31, 2003........... 1
Statements of Operations - three and six months ended June 30,
2004 and 2003................................................ 3
Statements of Cash Flows - six months ended June 30,
2004 and 2003................................................ 4
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis or Plan of Operation......11
Item 3. Controls and Procedures........................................16
PART II. Other Information
Item 2. Changes in Securities and Small Business Issuer Purchases
of Equity Securities........................................17
Item 6. Exhibits and Reports on Form 8-K...............................18
Signatures ..................................................................19
i
ITEM 1. FINANCIAL INFORMATION
MILITARY RESALE GROUP, INC.
BALANCE SHEETS
ASSETS
CONSOLIDATED
AS OF
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
CURRENT ASSETS: (UNAUDITED)
Cash $ 6,277 $ 2,862
Accounts receivable - trade 699,189 765,851
Inventory 417,925 334,950
Prepaid consulting 102,236 484,506
Deposits 37,118 33,218
Prepaid interest 46,245 92,681
Prepaid expenses 14,030 --
----------- -----------
Total Current Assets 1,323,020 1,714,068
----------- -----------
PREPAID INTEREST, NET OF CURRENT PORTION 132,038 132,038
EQUIPMENT
Office equipment 24,507 15,047
Warehouse equipment 159,444 159,444
Software 16,324 16,324
----------- -----------
200,275 190,815
Less accumulated depreciation (124,350) (106,103)
----------- -----------
Net equipment 75,925 84,712
----------- -----------
OTHER ASSETS
Deferred offering costs 23,947 --
Investment Property 345,468 --
----------- -----------
Total Other Assets 369,415 --
----------- -----------
Total Assets $ 1,900,398 $ 1,930,818
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,258,151 $ 2,507,544
Accounts payable, related party 154,056 72,632
Current maturities of capital lease obligations 28,402 51,981
Deferred rent 2,729 2,729
Current portion of accrued interest payable 127,856 99,561
Current portion of notes payable 16,025 90,235
Current portion of convertible notes payable 65,000 85,000
Related party demand note payable 75,000 --
Other Current Liabilities 7,655 --
----------- -----------
Total Current Liabilities 2,734,874 2,909,682
1
MILITARY RESALE GROUP, INC.
BALANCE SHEETS
(CONTINUED)
OBLIGATIONS UNDER CAPITAL LEASES, NET OF CURRENT
MATURITIES 36,351 36,351
DEFERRED RENT, NET OF CURRENT PORTION 21,832 21,832
RELATED PARTIES CONVERTIBLE NOTES PAYABLE 360,000 360,000
NOTES PAYABLE, NET OF CURRENT PORTION 98,975 98,975
CONVERTIBLE NOTES PAYABLE, NET OF CURRENT PORTION 160,000 160,000
MORTGAGE PAYABLE 71,187 --
----------- -----------
Total Liabilities 3,483,219 3,586,840
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.0001, 10,000,000
shares authorized, -0- issued and outstanding -- --
Common Stock Reserved (11,750) --
Common stock, par value $.0001, 50,000,000
shares authorized, 30,293,832
and 21,448,011 issued and outstanding 3,030 2,144
Additional paid-in capital 5,475,071 4,248,547
Accumulated (deficit) (7,049,172) (5,906,713)
----------- -----------
Total Stockholders' Equity (Deficit) (1,582,821) (1,656,022)
----------- -----------
Total Liabilities and Stockholders'
Equity (Deficit) $ 1,900,398 $ 1,930,818
=========== ===========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
2
MILITARY RESALE GROUP, INC.
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
UNAUDITED
CONSOLIDATED CONSOLIDATED
FOR THE THREE THREE FOR THE SIX SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
JUNE 30, 2004 JUNE 30, 2003 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- ------------- -------------
REVENUES:
Resale revenue $ 1,859,784 $ 1,534,377 $ 3,821,328 $ 3,146,974
Commission revenue 160,957 135,188 334,389 281,554
------------- ------------- ------------- -------------
Total Revenues 2,020,741 1,669,565 4,155,717 3,428,528
COST OF GOODS SOLD 1,698,938 1,334,367 3,481,499 2,846,693
------------- ------------- ------------- -------------
GROSS PROFIT 321,803 335,198 674,218 581,835
OPERATING EXPENSES:
Stock based compensation 378,493 356,484 789,320 562,853
Salary and payroll taxes 193,879 141,971 356,668 259,109
Professional fees 72,507 136,056 101,599 200,090
Occupancy 59,356 59,356 118,712 118,712
General and administrative 197,181 126,734 336,795 276,793
Depreciation and amortization 8,805 2,670 18,247 17,661
------------- ------------- ------------- -------------
Total Expenses 910,221 823,271 1,721,341 1,435,218
------------- ------------- ------------- -------------
Net (Loss) From Operations (588,418) (488,073) (1,047,123) (853,383)
OTHER (EXPENSES):
Interest expense (38,229) (97,911) (95,336) (233,296)
------------- ------------- ------------- -------------
Total Other (Expense) (38,229) (97,911) (95,336) (233,296)
------------- ------------- ------------- -------------
NET (LOSS) $ (626,647) $ (585,984) $ (1,142,459) $ (1,086,679)
============= ============= ============= =============
NET (LOSS) PER COMMON SHARE BASIC AND DILUTED $ (0.02) $ (0.05) $ (0.04) $ (0.09)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 27,913,739 12,533,035 25,705,861 12,134,457
============= ============= ============= =============
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
3
MILITARY RESALE GROUP, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
UNAUDITED
CONSOLIDATED
FOR THE
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2004 2003
------------ -----------
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net (loss) $ (1,142,459) $(1,086,679)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 18,247 17,661
Amortization of option based interest expense 46,436 133,333
Stock issued for services 682,770 491,580
Options issued for services 94,800 --
Beneficial conversion feature -- 75,000
Stock issued for liquidated damages 11,750 --
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable 66,662 (388,512)
Decrease (Increase) in inventory (82,975) (50,335)
(Increase) in other assets -- (3,856)
(Increase) in deposits (3,900) --
(Increase) in prepaid expenses (13,642) --
Increase in accounts payable and accrued
expenses (249,395) 577,635
Increase in related party accounts payable 81,425 --
Increase in accrued interest payable 44,085 --
Increase in deferred rent obligation -- 4,094
Decrease in mortgage payable (109) --
Increase in other liabilities 7,655 54,533
------------ -----------
Net Cash (Used In) Operating Activities (438,650) (175,546)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (9,459) (1,765)
------------ -----------
Net Cash (Used in) Investing Activities (9,459) (1,765)
------------ -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Payments on capital lease obligations (23,579) (8,941)
Payments on notes payable (60,000) --
Proceeds from issuance of notes 75,000 185,000
Proceeds from issuance of common stock 547,500 --
Payments of offering costs (63,450) --
Payments on deferred offering costs (23,947) --
------------ -----------
Cash Flows Provided by Financing Activities 451,524 176,059
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 3,415 (1,252)
CASH AND CASH EQUIVALENTS, beginning of period 2,862 2,072
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 6,277 $ 820
============ ===========
4
MILITARY RESALE GROUP, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
UNAUDITED
(CONTINUED)
Supplementary information:
Cash paid for:
Interest paid $ 3,921 $ 466
============ ===========
Income taxes $ -- $ --
============ ===========
2004 2003
------------ -----------
Non-cash investing and financing activities:
Issuance of stock and options in
exchange for services $ 263,300 $ 716,202
============ ===========
Issuance of common stock and options as
payment of notes payable $ 50,000 $ --
============ ===========
Issuance of common stock in payment of
accrued compensation $ -- $ 52,445
============ ===========
Issuance of stock options in exchange for
note extensions $ -- $ 364,500
============ ===========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
5
MILITARY RESALE GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. The accompanying unaudited financial
statements reflect all adjustments that, in the opinion of management, are
considered necessary for a fair presentation of the financial position, results
of operations, and cash flows for the periods presented. The results of
operations for such periods are not necessarily indicative of the results
expected for the full fiscal year or for any future period. The accompanying
financial statements should be read in conjunction with the audited financial
statements of Military Resale Group, Inc., included in Form 10-KSB for the
fiscal year ended December 31, 2003.
The financial statements have been prepared on a going concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the normal course of business.
The Company has suffered recurring losses from operations, and has a working
capital deficit 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the following
entities, collectively referred to as "Company" or "DGTL". All significant
inter-company transactions have been eliminated.
Military Resale Group, Inc. Corporation
Ohio Street Partners, Inc. Corporation
Military Resale Group, Inc. acquired Ohio Street Partners, Inc. on June 10, 2004
and is now a wholly owned subsidiary of Military Resale Group, Inc. (See Note
11).
RECLASSIFICATION Certain amounts in the prior period financial statements have
been reclassified for comparative purposes to conform to the presentation in the
current period financial statements.
NOTE 2 - EARNINGS PER SHARE
The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS No. 128). This
Statement simplifies the standards for computing earnings per share (EPS)
previously found in Accounting Principles Board Opinion No. 15, Earnings Per
Share, and makes them more comparable to international EPS standards. SFAS No.
128 replaces the presentation of primary EPS with a presentation of basic EPS.
In addition, the Statement requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted EPS
computation. However, such presentation is not required if the effect is
antidilutive. Accordingly, no such presentation has been made.
NOTE 3 - PREPAID CONSULTING
Prepaid consulting expenses are recorded in connection with common stock and
options issued to consultants for future services and are amortized over the
agreement term. As of June 30, 2004, the Company had a balance of $102,236 in
prepaid consulting expense.
6
MILITARY RESALE GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 4 - PREPAID INTEREST
Prepaid interest is recorded in connection with the issuances of options for the
extension of various notes payable. The prepaid interest is being amortized over
the extension period, with $46,436 charged to interest expense during the six
months ended June 30, 2004.
NOTE 5 - RELATED PARTY TRANSACTIONS
On March 31, 2004 and June 30, 2004 pursuant to a consulting agreement with the
Company's former chief executive officer, the Company issued 247,560 and 303,261
shares of common stock, respectively, and granted options to purchase 247,560
and 303,261 shares of common stock, respectively, at $.25 per share for a period
of five years for services rendered valued at $144,000. The value of the stock
and the value of the options was $72,000 each based on $12,000 each per month.
The number of shares and options issued was determined by dividing $36,000 by
80% of the average low price of the common stock in each quarter.
NOTE 6 - SECURITIES ISSUED FOR SERVICES
During the six months ended June 30, 2004, the Company issued an aggregate
200,000 of the Company's common shares to a consultant for services provided and
expensed $40,000 (the value of the services) as stock based compensation.
During the six months ended June 30, 2004 the Company issued 100,000 shares of
the Company's common stock valued at $9,000 to a consultant for services to be
provided. The value of the stock is recorded as prepaid consulting and will be
amortized over the six month term of the agreement.
On January 29, 2004 the Company issued 50,000 shares of common stock valued at
$11,000 as a retainer fee for services to be performed in connection with
raising of capital (See Note 9). This amount is recorded as prepaid consulting
and is being amortized over the six month term of the agreement.
During the six months ended June 30, 2004 pursuant to a consulting agreement
with an unrelated party, the Company granted warrants to purchase 320,000 shares
of the Company's common stock at $.125 for a period of five years. These
warrants were valued at $52,870, the fair value using the Black-Scholes European
Pricing Model. The average risk free interest rate used was 3.39%, volatility
was estimated at 96% and the expected life was five years. The warrants were
granted as compensation to the Company's investment banker for raising $500,000
by selling 4,000,000 shares of common stock. This investment banker was also
paid $40,000 as commission for the sale of stock.
During the six months ended June 30, 2004 the Company issued 100,000 shares of
common stock valued at $17,000 to a consultant for services to be rendered over
a period of 180 days. This amount is recorded as prepaid consulting and is being
amortized over the term of the agreement.
During the six months ended June 30, 2004 the Company entered into a one-year
business consulting agreement with an unrelated party for management and
financial consulting services. Under the terms of the agreement the consultant
will receive $5,000 per month for the term of the agreement and received 250,000
shares of common stock valued at $47,500. This amount is recorded as prepaid
consulting and is being amortized over the term of the agreement.
During the six months ended June 30, 2004 the Company issued 500,000 shares of
common stock to a consultants for services rendered and expensed $70,000 (the
fair value of the common stock on the date of issuance) as stock based
compensation.
During the six months ended June 30, 2004 the Company issued 200,000 shares of
common stock and granted warrants to purchase 200,000 shares of the Company's
common stock at $.25 per share for a period of five years to a stockholder for
services rendered. The stock was valued at $34,000 (the fair value of the common
stock on the date of issuance) and expensed as stock based compensation. The
warrants were valued at $22,800, the fair value using the Black-Scholes European
Pricing Model and expensed as stock based compensation. The average risk free
interest rate used was 3.96%, volatility was estimated at 93% and the expected
life was five years.
7
MILITARY RESALE GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 7 - COMMON STOCK
During the six months ended June 30, 2004 the Company sold 4,000,000 shares of
common stock to several individuals at $.125 per share for total consideration
of $460,000, net of offering costs paid of $40,000. These individuals were also
given warrants to purchase 2,000,000 shares of common stock at $.25 per share
for a period of five years. The terms of the stock subscription agreements
provide that in the event the average closing bid price of the common stock for
the ten days preceding the effective date of the Registration Statement (to be
filed) is $.17 or below, then the purchase price for the shares shall be reset
to a purchase price equal to the average price minus $.05, provided that the
purchase price is not less than $.065 per share. Upon the occurrence of the
price adjustment, the Company will issue to each subscriber the additional
shares they are entitled to based upon the adjusted price. In addition, if the
Registration Statement (to be filed) is not declared effective on or before June
30, 2004, then commencing on the first day of each month thereafter until
December 1, 2004 or the declared effective date of the Registration Statement,
the Company will issue each subscriber, as liquidated damages, additional shares
of common stock equal to 10% of the number of shares purchased by each
subscriber (See Note 12).
During the six months ended June 30, 2004 the Company sold 450,000 shares of
common stock to several individuals for $.10 to $.125 per share for total
consideration of $43,250, net of offering costs of $4,250. In accordance with
the terms of the stock subscription agreements, if the Company's Registration
Statement (to be filed) is not declared effective on or before June 30, 2004,
then commencing on the first day of each month thereafter until December 1, 2004
or the declared effective date of the Registration Statement, the Company will
issue each subscriber, as liquidated damages and not as a penalty, additional
shares of common stock equal to 10% of the number of shares purchased by each
subscriber (See Note 12).
During the six months ended June 30, 2004, the Company issued 62,500 shares of
common stock valued at $11,750 to a stockholder as liquidated damages for the
Company not registering the stockholder's common stock by January 31, 2004. The
Company also recorded common stock reserved of $11,750 for an additional 62,500
shares of common stock that should have been issued as additional liquidated
damages.
NOTE 8 - PROMISSORY NOTE PAYABLE
On March 27, 2003, the Company issued a promissory note for $100,000 to Romano,
Ltd. The note bears interest at 15% per annum and was due on March 26, 2004,
subject to the following contingent payment terms upon the Company's raising or
securing additional funding from any third party source:
ADDITIONAL FUNDING TERMS MODIFICATION
--------------------- -----------------------------------------------------------
$250,000 Payment of 10% of outstanding principal and accrued interest
$500,000 Payment of 15% of outstanding principal and accrued interest
$1,000,000 or more Payment of 100% of outstanding principal and accrued interest
When the Company failed to secure any of the above-referenced additional
funding, nor another significant event, such as a merger or acquisition of
another company, the Company was required to pay $8,000 per month commencing on
July 1, 2003 until the full obligation was paid.
The Company repaid $25,000 during the year ended December 31, 2003 and repaid
the remaining $75,000 principal balance during the three months ended March 31,
2004. The Company paid $25,000 and 400,000 shares of the Company's common stock
and warrants to purchase 250,000 shares of the Company's common stock
exercisable at $.25 per share for a period of three years. The value of the
common stock and warrants was $50,000, based upon the fair market value of the
note. At the time the note was exchanged for stock and warrants, the Company had
entered into private placements of common stock on terms similar to the exchange
transaction.
The Company signed a $30,000 note with Romano, Ltd., for the accrued interest on
the original $100,000 loan with interest at 15% per annum, payable beginning on
April 1, 2004 with equal consecutive installments payable on the fifteenth of
every month in the amount of $5,000 until paid in full or March 26, 2005. At
June 30, 2004 the balance remaining on this note was $15,000.
8
MILITARY RESALE GROUP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 9 - RELATED PARTY DEMAND NOTE PAYABLE
During the six months ended June 30, 2004 the Company issued a note payable to a
related party who is now the Company's Chief Executive Officer and Chairman of
the Board of Directors in the amount of $75,000. The note is due on demand or
September 10, 2004, or upon the sale of the San Diego condominium (See Note 11),
whichever occurs sooner and bears interest at the rate of 8% per annum.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
On January 29, 2004 the Company entered into a business consulting agreement
with an unrelated party for financial advisory and investment banking services
and issued the consultant 50,000 shares of its common stock valued at $11,000.
The consultant will advise the Company as to issues of capital formation, assist
the Company on the market awareness of its stock by setting up road shows and
will assist the Company in raising $300,000 through the issuance of common stock
at $.125 and warrants to purchase 1,200,000 shares of common stock exercisable
at $.25 per share for five years. Upon successful closing of the above raising
of capital, the Company will pay the consultant a cash fee commission of 10% of
the capital raised plus a cash non-accountable expense allowance of 2.5% of the
capital raised. In addition, upon raising the capital, the consultant will be
entitled to 300,000 warrants with similar terms as those issued in the capital
raised. No capital has been raised as of June 30, 2004.
The Company was the plaintiff in litigation with one of its vendors. During the
six months ended June 30, 2004 the Company entered into a judgment in which they
were ordered to pay the vendor $5,356 with the amount due accruing interest at
8% per annum. As of June 30, 2004 the Company had not paid any amount to this
vendor but has accrued $5,437 at June 30, 2004. Subsequent to March 31, 2004,
the Company received a Writ of Garnishment and are expecting to have the
original judgment amount of $5,356 plus interest and other charges of $181
garnished from one of their bank accounts. Subsequent to June 30, 2004 this
amount was garnished from the Company's bank account.
NOTE 11 - PURCHASE OF OHIO STREET PARTNERS, INC.
On June 10, 2004 the Company acquired Ohio Street Partners, Inc. ("Ohio"), a
Delaware corporation from Data Recovery Continuum, Inc. ("DRCI"). As
consideration for all of the outstanding shares of the common stock of Ohio, the
Company issued 1,920,000 shares of common stock valued at $211,200 (the fair
market value of the common stock on the date the agreement was signed) and five
year warrants to purchase 960,000 shares of common stock at $.25 to DRCI. The
warrants were valued at $63,360, the fair value using the Black-Scholes European
Pricing Model. The average risk free interest rate used was 3.96%, volatility
was estimated at 93% and the expected life was five years. Ohio's sole asset was
a single-family residential condominium located in San Diego, California. The
property is valued at $345,468 (based upon the common stock and warrants issued
and debt assumed) and is subject to a mortgage of $71,297. Subsequent to June
30, 2004, in accordance with the terms of the agreement, the owner of DRCI was
appointed to the Board of Directors of the Company and as of August 9, 2004,
became the Company's Chief Executive Officer and Chairman of the Board of
Directors (See Note 12).
As part of the acquisition, the owner of DRCI loaned the Company $75,000
evidenced by a demand note (See Note 9). DRCI signed a subscription agreement
with the Company for the 1,920,000 shares of common stock issued. The terms of
the stock subscription agreement provide that in the event the average closing
bid price of the common stock for the ten days preceding the effective date of
the Registration Statement (to be filed) is $.17 or below, then the purchase
price for the shares shall be reset to a purchase price equal to the average
price minus $.05, provided that the purchase price is not less than $.065 per
share. Upon the occurrence of the price adjustment, the Company will issue to
DRCI the additional shares they are entitled to based upon the adjusted price.
In addition, if the Registration Statement (to be filed) is not declared
effective on or before June 30, 2004, then commencing on the first day of each
month thereafter until December 1, 2004 or the declared effective date of the
Registration Statement, the Company will issue DRCI, as liquidated damages,
additional shares of common stock equal to 10% of the number of shares issued to
DRCI. (See Note 12)
NOTE 12 - SUBSEQUENT EVENTS
On July 16, 2004 the Company sold 400,000 shares of common stock under a stock
subscription agreement to a stockholder at $.125 per share for total
consideration of $50,000. The stockholder was also granted warrants to purchase
200,000 shares of common stock at $.25 per share for a period of five years. The
terms of the stock subscription agreements provide that in the event the average
closing bid price of the common stock for the ten days preceding the effective
date of the Registration Statement (to be filed) is $.17 or below, then the
purchase price for the shares shall be reset to a purchase price equal to the
average price minus $.05, provided that the purchase price is not less than
$.065 per share. Upon the occurrence of the price adjustment, the Company will
issue to each subscriber the additional shares they are entitled to based upon
the adjusted price. In addition, if the Registration Statement (to be filed) is
not declared effective on or before August 31, 2004, then commencing on the
first day of each month thereafter until December 1, 2004 or the declared
effective date of the Registration Statement, the Company will issue each
subscriber, as liquidated damages, additional shares of common stock equal to
10% of the number of shares purchased by each subscriber.
9
NOTE 12 - SUBSEQUENT EVENTS (CONTINUED)
On August 7, 2004 Ed Whelan resigned as the Company's Chief Executive Officer
and Chairman of the Board of Directors. Mr. Whelan entered into an agreement,
release and waiver. In consideration for his resignation, Mr. Whelan will be
paid monthly in arrears for a period of six months, for the period beginning
September 1, 2004 in restricted shares of the Company's common stock according
to the same formula he was paid prior to his resignation (See Note 5). Mr.
Whelan will also receive an equal amount of five-year warrants to purchase the
Company's common stock at $0.25 per share. The Company will pay for Mr. Whelan's
cost of healthcare from September 1, 2004 to February 28, 2005. In addition Mr.
Whelan will be reimbursed $84,751 for expenses incurred by him directly in
connection with his role and obligations as Chief Executive Officer and Chairman
of the Board, payable in equal monthly installments by the Company over a
twenty-four month period beginning on September 30, 2004 and will be evidenced
by a promissory note. Mr. Whelan will also receive as further consideration,
two-year warrants to purchase 1,000,000 shares of common stock of the Company at
$0.25 per share and two-year warrants to purchase 1,000,000 shares of common
stock of the Company at $5.00 per share to be issued within 45 days of execution
of the agreement.
On August 7, 2004 Richard Tannenbaum resigned as both counsel to and from the
Company's Board of Directors. Mr. Tannenbaum entered into an agreement, release
and waiver. In consideration for his resignation, Mr. Tannenbaum will be paid
for past services rendered in the amount of $111,954 payable in equal monthly
installments over the twenty-four month period beginning on September 30, 2004
and will be evidenced by a promissory note. Mr. Tannenbaum will also receive as
further consideration, two-year warrants to purchase 400,000 shares of common
stock of the Company at $0.25 per share and two-year warrants to purchase
1,000,000 shares of common stock of the Company at $5.00 per share to be issued
within 45 days of execution of the agreement.
In connection with the acquisition of Ohio Street Partners, Inc., (See Note 11)
Mr. Lee Brukman was appointed to the Company's Board of Directors on July 6,
2004. On August 9, 2004 after the resignation by Ed Whelan as Chief Executive
Officer and Chairman of the Board of Directors and Richard Tannenbaum as legal
counsel and member of the Board of Directors, the Company appointed Lee Brukman
as Chairman of the Board of Directors and Chief Executive Officer.
Subsequent to June 30, 2004 pursuant to their stock subscription agreements
entered into during the six months ended June 30, 2004 (See Notes 7 and 11) the
Company issued 440,000 shares of common stock value at $61,600 (the fair market
value of the common stock on July 1, 2004) to several shareholders as liquidated
damages for the month of July 2004. In addition, pursuant to the terms of their
stock agreements entered into during 2003 and the six months ended June 30,
2004, the Company should have issued an additional 257,000 shares of common
stock valued at $35,980 (the fair market value of the common stock on July 1,
2004) to several additional shareholders as liquidated damages for the month of
July 2004. Pursuant to the terms of the agreements, each shareholder is entitled
to ten percent of the original shares purchased each month beginning July 1,
2004 if the common stock was not registered by June 30, 2004. In addition,
because the registration statement has not been declared effective as of August
1, 2004, these same shareholders are entitled to an additional 697,000 shares of
common stock valued at $90,610 (the fair market value of the common stock on
August 2, 2004) as liquidated damages for the month of August.
10
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.
11
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE
MONTHS ENDED JUNE 30, 2003
Revenues. Total revenue for the three months ended June 30, 2004 of $2,020,741
reflected an increase of $351,176, or approximately 21%, compared to total
revenue of $1,669,565 for the three months ended June 30, 2003. Our revenues are
derived in either one of two ways. In the majority of instances, we purchase
products from manufacturers and suppliers for resale to the commissaries we
service. In such cases, we resell the manufacturer's or supplier's products to
the commissaries at generally the same prices we pay for such products, which
prices generally are negotiated between the manufacturer or supplier and the
Defense Commissary Agency ("DeCA"). Revenue is recognized as the gross sales
amount received by us from such sales ("resale revenues"), which include (i) the
purchase price paid by the commissary plus (ii) a negotiated storage and
delivery fee paid by the manufacturer or supplier. In the remaining instances,
we act as an agent for the manufacturer or supplier of the products we sell, and
earn a commission paid by the manufacturer or supplier, generally in an amount
equal to a percentage of the manufacturer's or supplier's gross sales amount
("commission revenues"). In such cases, revenue is recognized as the commission
we receive on the gross sales amount. The increase in our total revenues was
primarily due to the addition of the frozen chicken line of Tyson Foods, Inc. in
December 2003, a line of health and beauty aids manufactured by Alberto Culver,
Inc. in January 2004 and a frozen vegetable line produced by VIP Sales Company
Inc. in January 2004, all of which we sell to commissaries on a resale basis.
Resale revenue for the three months ended June 30, 2004 of $1,859,784 reflected
an increase of $325,407, or approximately 21.2%, compared to resale revenue of
$1,534,377 for the three months ended June 30, 2003. For the three months ended
June 30, 2004, approximately 50% of our gross profit was derived from sales
involving resale revenue compared to approximately 59.7% for the three months
ended June 30, 2003. The increase in resale revenue was attributable primarily
to addition of the suppliers discussed above. We cannot be certain as to whether
this trend will continue. However, in the long term, we are seeking to increase
the ratio of our sales of products sold on a resale basis, rather than a
commission basis, because we believe we can increase our profitability on such
sales by taking advantage of payment discounts frequently offered by the
manufacturers and suppliers of such products. Provided we can generate
sufficient cash from operations or financing activities, we intend to do so by
seeking to add new products that we can offer to commissaries on a resale basis
from our existing manufactures and suppliers and from others with whom we do not
currently have a working relationship.
Commission revenues for the three months ended June 30, 2004 of $160,957
reflected an increase of $25,679, or approximately 19%, compared to commission
revenues of $135,188 for the three months ended June 30, 2003. For the three
months ended June 30, 2004, approximately 50% of our gross profit was derived
from sales involving commission revenues as compared to approximately 40.3% for
the three months ended June 30, 2003. The increase in commission revenues was
attributable primarily to a change in our supplier of fresh chicken products in
the third quarter of 2003 from Tyson Foods, Inc., whose products we sold on a
resale basis, to ConAgra Foods, Inc., whose products we sell on a commission
basis.
Management believes our long-term success will be dependent in large part on our
ability to add additional product offerings to enable us to increase our sales
and revenues. However, we believe our ability to add additional product
offerings, 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 June 30, 2004, cost of goods sold
increased by $364,571, or approximately 27.3%, to $1,698,938 from $1,334,367 for
the three months ended June 30, 2003. This increase was attributable primarily
to increased sales of products that we sold on a resale basis as discussed
above. We cannot be certain as to whether or not this trend will continue;
however, in the long term we are seeking to increase the ratio of our sales on a
resale basis, as discussed above.
Gross Profit. Gross profit for the three months ended June 30, 2004 decreased by
$13,395, or approximately 4.2%, compared to the three months ended June 30,
2003, from $335,198 for the three months ended June 30, 2003 to $321,803 for the
three months ended June 30, 2004.
12
Operating Expenses. Total operating expenses aggregated $910,221 for the three
months ended June 30, 2004 as compared to $823,271 for the three months ended
June 30, 2003, representing a increase of $86,949, or approximately 10.6%.
Interest Expense. Interest expense of $38,229 for the three months ended June
30, 2004 reflected a decrease of $59,682 as compared to interest expense of
97,911 for the three months ended June 30, 2003. The decrease in interest
expense was attributable primarily to decreased interest expense resulting from
the recognition of the beneficial conversion feature (the right to convert debt
into shares of our common stock at a discount to the fair market value of our
common stock) of convertible promissory notes. We issued $60,000 aggregate
principal amount of convertible promissory notes in the three months ended June
30, 2003, but did not issue any convertible notes in the three months ended June
30, 2004
Net Loss. Primarily as a result of the increased operating expenses discussed
above, we incurred a net loss of $626,647 for the three months ended June 30,
2004 as compared to a net loss of $585,984 for the three months ended June 30,
2003.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Revenues. Total revenue for the six months ended June 30, 2004 of $4,155,717
reflected an increase of $727,189, or approximately 21.2%, compared to total
revenue of $3,428,528 for the six months ended June 30, 2003.
Resale revenue for the six months ended June 30, 2004 of $3,821,328 reflected an
increase of $674,354, or approximately 21.4%, compared to resale revenue of
$3,146,974 for the six months ended June 30, 2003. For the six months ended June
30, 2004, approximately 50.4% of our gross profit was derived from sales
involving resale revenue compared to approximately 51.6% for the six months
ended June 30, 2003. The increase in resale revenue was attributable primarily
to addition of the suppliers discussed above. We cannot be certain as to whether
this trend will continue. However, in the long term, we are seeking to increase
the ratio of our sales of products sold on a resale basis, rather than a
commission basis, because we believe we can increase our profitability on such
sales by taking advantage of payment discounts frequently offered by the
manufacturers and suppliers of such products. Provided we can generate
sufficient cash from operations or financing activities, we intend to do so by
seeking to add new products that we can offer to commissaries on a resale basis
from our existing manufactures and suppliers and from others with whom we do not
currently have a working relationship.
Commission revenues for the six months ended June 30, 2004 of $334,389 reflected
an increase of $52,835, or approximately 18.8%, compared to commission revenues
of $281,554 for the six months ended June 30, 2003. For the six months ended
June 30, 2004, approximately 49.6% of our gross profit was derived from sales
involving commission revenues as compared to approximately 48.4% for the six
months ended June 30, 2003. The increase in commission revenues was attributable
primarily to a change in our supplier of fresh chicken products in the third
quarter of 2003 from Tyson Foods, Inc., whose products we sold on a resale
basis, to ConAgra Foods, Inc., whose products we sell on a commission basis.
Cost of Goods Sold. Cost of goods sold for the six months ended June 30, 2004,
cost of goods sold increased by $634,806, or approximately 22.3%, to $3,481,499
from $2,846,693 for the six months ended June 30, 2003. This increase was
attributable primarily to increased sales of products that we sold on a resale
basis as discussed above. We cannot be certain as to whether or not this trend
will continue; however, in the long term we are seeking to increase the ratio of
our sales on a resale basis, as discussed above.
Gross Profit. Gross profit for the six months ended June 30, 2004 increased by
$92,383, or approximately 15.9%, compared to the six months ended June 30, 2003,
from $581,835 for the six months ended June 30, 2003 to $674,218 for the six
months ended June 30, 2004.
13
Operating Expenses. Total operating expenses aggregated $1,721,341 for the six
months ended June 30, 2004 as compared to $1,435,218 for the six months ended
June 30, 2003, representing an increase of $286,123, or approximately 19.9%.
Interest Expense. Interest expense of $95,336 for the six months ended June 30,
2004 reflected a decrease of $137,960 as compared to interest expense of 233,296
for the six months ended June 30, 2003.
Net Loss. Primarily as a result of the increased operating expenses discussed
above, we incurred a net loss of $1,142,459 for the six months ended June 30,
2004 as compared to a net loss of $1,086,679 for the six months ended June 30,
2003.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had a cash balance of $6,277. Since 2001, we have funded
our operations primarily from the sale of common stock and borrowings of
approximately $850,000 through the issuance of demand notes and convertible
notes bearing interest at either 8% or 9% per annum and having original maturity
dates of three to five months following the date of issuance of such convertible
notes. At June 30, 2004, none of such demand notes was outstanding and $585,000
aggregate principal amount of convertible notes were outstanding, of which
$520,000 aggregate principal amount mature on or about June 3, 2006 and $65,000
aggregate principal amount have matured but have not yet been paid. Such
convertible notes require us to register under the Securities Act of 1933 the
shares our common stock issuable upon conversion of such convertible notes. The
terms of our convertible notes provide generally that the holders may convert,
at any time and from time to time, all or a portion of the outstanding balance
under each convertible note into a number of shares (subject to certain
anti-dilution adjustments) of our common stock that will allow the noteholder to
receive common stock having a market value equal to 150% of the converted
balance of the note. To achieve this result, the conversion price of such notes
has been initially set at $0.25; provided, that the closing price per share of
our common stock as reported on the OTC Bulletin Board on the date of conversion
is at least $0.375 per share. If such closing price is less than $0.375 per
share, the conversion price shall be proportionately reduced, but in no event to
a conversion price that is less than $0.25 per share, to permit the noteholder
to receive the number of shares discussed above.
Our current cash levels, together with the cash flows we generate from operating
activities, are not sufficient to enable us to execute our business strategy. As
a result, we intend to seek additional capital through the sale of shares of our
common stock. In December 2001, we filed with the Securities and Exchange
Commission a registration statement relating to such shares for gross sales
proceeds of up to $5,000,000. Such registration statement has not yet been
declared effective, and there can be no assurance that the Securities and
Exchange Commission will declare such registration statement effective in the
near future, if at all. In the interim, we intend to fund our operations based
on our cash position and the near term cash flow generated from operations, as
well as additional borrowings and the sale of unregistered shares of our common
stock in private placements to accredited investors. In the six months ended
June 30, 2004, we sold and issued shares of our common stock to accredited
investors for aggregate gross proceeds of $547,500. Such proceeds were used for
the repayment of current liabilities and for working capital purposes.
In the event we are able to generate sales proceeds of at least $750,000 in our
proposed public offering, we believe that the net proceeds of such sale,
together with anticipated revenues from sales of our products, will satisfy our
capital requirements for at least the next 12 months. However, we would require
additional capital to realize our strategic plan to expand distribution
capabilities and product offerings. These conditions raise substantial doubt
about our ability to continue as a going concern. Our actual financial results
may differ materially from the stated plan of operations. Our independent
auditors have indicated in its report on our 2003 financial statements that our
recurring losses from operations and our difficulties in generating sufficient
cash flow to meet our obligations and sustain our operations raise substantial
doubt about our ability to continue as a going concern. Such qualification may
hinder our ability to raise or obtain the capital we require or have an adverse
impact on the terms upon which we are able to attract or obtain such capital. In
addition, such qualification may adversely impact our ability to attract and
maintain new customer accounts.
Assuming that we receive net proceeds of at least $750,000 from our proposed
offering (of which there can be no assurance), we expect capital expenditures to
be approximately $100,000 during the next 12 months, primarily for the
acquisition of an inventory control system and a web-based marketing software
program. It is expected that our principal uses of cash during that period will
be to provide working capital, to finance capital expenditures, to repay
indebtedness and for other general corporate purposes, including sales and
marketing and new business development. The amount of spending for any
particular purpose is dependent upon the total cash available to us and the
success of our public offering of common stock.
14
At June 30, 2004, we had liquid assets of $705,466, consisting of cash and
accounts receivable derived from operations, and other current assets of
$617,554, consisting primarily of inventory of products for sale and/or
distribution and prepaid expenses. Long term assets of $577,378 consisted
primarily of warehouse equipment used in operations, the investment property and
the long-term portion of prepaid interest.
Current liabilities of $2,734,874 at June 30, 2004 consisted primarily of
$2,412,207 of accounts payable and accrued expenses, including related party
amounts.
Our working capital deficit was $1,411,854 as of June 30, 2004 for the reasons
described above.
During the three months ended June 30, 2004, we used cash of $ 438,650 in
operating activities, primarily as a result of the net loss we incurred during
this period.
During the three months ended June 30, 2004, we used net cash of $ 9,459 in
investing activities, all of which was used for capital expenditures.
Financing activities, consisting primarily of proceeds from the sale and
issuance of shares of our common stock, provided net cash of $451,524 during the
three months ended June 30, 2004.
OFF BALANCE SHEET ARRANGEMENTS
At June 30, 2004, we had no off-balance sheet arrangements that had or were
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to our
stockholders.
15
ITEM 3. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. Our management, with the participation
of our chief executive officer and chief financial officer, has evaluated the
effectiveness of our company's disclosure controls and procedures (as much term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on such evaluation, our chief executive officer and chief
financial officer have concluded that, as of the end of such period, our
company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act.
(b) Internal Control Over Financial Reporting. There have been not been any
changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
(c) Recent Sales of Unregistered Securities.
(i) In the three months ended June 30, 2004, we issued to investors in a
private placement investment units consisting of an aggregate of 1,920,000
shares of our common stock and five-year warrants to purchase an aggregate of
960,000 shares of our common stock at $0.125 per share for gross proceeds to us
of $360,000. In connection with such issuances, we granted registration rights
to such investors. Such shares and warrants were issued in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, on the basis that such issuance did not involve a public
offering and such persons were "accredited investors" as defined in Regulation D
under the Securities Act of 1933, as amended.
(ii) In the three months ended June 30, 2004, we issued an aggregate of 200,000
shares of our common stock and five year warrants to purchase an aggregate of
200,000 shares of our common stock at $0.125 to a consultant for business
consulting services to be rendered to the Company, which services were valued at
$49,000 in the aggregate. Such shares were issued in reliance upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933, as
amended, on the basis that such issuance did not involve a public offering, no
underwriter fees or commissions were paid in connection with such issuance and
such persons were "accredited investors" as defined in Regulation D under the
Securities Act of 1933, as amended.
(iii)In the three months ended June 30, 2004, we issued 247,560 shares of our
common stock and five-year options to purchase 247,560 shares of our common
stock at $0.25 per share to our Chief Executive Officer for services rendered
during the three months ended June 30, 2004 pursuant to the terms of his
employment arrangement. The services were valued at $72,000. Such shares were
issued in reliance upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, on the basis that such issuance did
not involve a public offering, no underwriter fees or commissions were paid in
connection with such issuance and such person was an "accredited investor" as
defined in Regulation D under the Securities Act of 1933, as amended.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed herewith or are incorporated by
reference to Exhibits previously filed.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Agreement, Realease & Waiver, dated August 5, 2004, between
Edward Whelan and the Company.
10.2 Agreement, Realease & Waiver, dated August 7, 2004, between
Richard Tanenbaum and the Company.
31.1 Certification of our Principal Executive Officer, Lee Brukman,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of our Principal Financial Officer, Ethan D. Hokit,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of our Principal Executive Officer, Lee Brukman,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of our Principal Financial Officer, Ethan D. Hokit,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
On June 29, 2004 we filed a current report on Form 8-K providing a copy of
the transcript from management's teleconference presentation on June 21,
2004
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in Colorado Springs,
Colorado on August 10, 2004.
MILITARY RESALE GROUP, INC.
By: /s/ Ethan D. Hokit
-------------------------
Name: Ethan D. Hokit
Title: President
(Principal Accounting Officer
and Principal Financial Officer)
19