Table of Contents





U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-QSB

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x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934  For the quarterly period ended December 31, 2005  o Transition report under Section 13 or 15(d) of the Exchange Act  For the transition period from __________ to __________




Commission File Number 0-49659



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XRG, INC.

(Exact Name of Small Business Issuer as Specified in Its Charter)



DELAWARE
        58-2583457(State or Other Jurisdiction ofIncorporation or Organization)
        (I.R.S. EmployerIdentification No.)




601 Cleveland Street, Suite 501, Clearwater, Florida 33755

(Address of Principal Executive Offices)



3 Crafton Square, Pittsburgh, PA 15205

(Former address)



727-475-3060

(Issuers Telephone Number)



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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 a 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 o
        No x




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes o
        No x




The number of shares outstanding of the Issuers Common Stock, $.001 Par Value, as of January 3, 2006 was 19,796,391.



Transitional Small Business Disclosure Format:



Yes o
        No x






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XRG, Inc. and Subsidiaries



Index



PagePart I - Financial InformationItem 1.
        Consolidated Financial Statements (Unaudited)Consolidated Balance Sheet  December 31, 2005
        1Consolidated Statements of Operations -Three and nine months ended December 31, 2005 and 2004
        2Consolidated Statements of Cash Flows -Nine months ended December 31, 2005 and 2004
        3Notes to Consolidated Financial Statements
        6Item 2.
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        19Item 3.
        Evaluation of Disclosure Controls and Procedures
        31Part II - Other InformationItem 1.
        Legal Proceedings
        34Item 2.
        Change in Securities and Use of Proceeds
        35Item 3.
        Defaults Upon Senior Securities
        36Item 5.
        Other Information
        36Item 6.
        Exhibits
        38Signatures
        38Exhibit 31.1 Section 302 CertificationExhibit 31.2 Section 302 CertificationExhibit 32.1 Section 906 Certification








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Table of Contents

PART I  FINANCIAL INFORMATION



Item 1.
        Condensed Financial Statements (Unaudited)




XRG, Inc. and Subsidiaries

Consolidated Balance Sheet

December 31, 2005

(Unaudited)



AssetsCurrent assets:Accounts receivable, net of allowance of $487,595
        
        $
        3,845,753Other current assets
        
        
        335,568Total current assets
        
        
        4,181,321Fixed assets, net of accumulated depreciation
        
        
        651,323Other assets:Goodwill
        
        
        21,441Other assets
        
        
        1,088Total other assets
        
        
        22,529$
        4,855,173Liabilities and Stockholders DeficitCurrent liabilities:Current portion of long-term debt
        
        $
        5,241,869Current portion of capital lease obligations
        
        
        5,171Bank overdraft
        
        
        395,874Accounts payable
        
        
        338,846Accrued expenses
        
        
        1,149,870Accrued purchased transportation
        
        
        354,874Line of credit
        
        
        3,439,210Total current liabilities
        
        
        10,925,714Long-term liabilities:Long-term debt
        
        
        606,628Total long-term liabilities
        
        
        606,628Total liabilities
        
        
        11,532,342Stockholders deficit:Series A Preferred stock; $.001 par value; 5,000,000 shares authorized, issued and cancelled
        
        
        Preferred stock; $.001 par value; 45,000,000 shares authorized
        
        
        Common stock; $.001 par value; 25,000,000 shares authorized;15,122,658 shares issued
        
        
        15,123Additional paid-in capital
        
        
        35,917,596Accumulated deficit
        
        
        (41,634,888
        )Treasury stock, at cost, 187,500 shares
        
        
        (975,000
        )Total stockholders deficit
        
        
        (6,677,169
        )$
        4,855,173




The accompanying notes are an integral part of the consolidated financial statements.



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Table of Contents

XRG, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)



Three months endedDecember 31,
        
        Nine months endedDecember 31,2005
        
        2004
        
        2005
        
        2004Revenues
        
        $
        7,420,980
        
        $
        10,630,462
        
        $
        24,834,176
        
        $
        30,256,917Cost of revenues
        
        
        6,521,594
        
        
        8,650,689
        
        
        22,104,052
        
        
        26,339,938Gross profit
        
        
        899,386
        
        
        1,979,773
        
        
        2,730,124
        
        
        3,916,979Selling, general and administrative expenses
        
        
        1,304,617
        
        
        1,912,775
        
        
        4,755,573
        
        
        8,438,666Bad debt expense
        
        
        (37,405
        )
        
        
        
        
        787
        
        
        Impairment of goodwill
        
        
        653,917
        
        
        
        
        
        653,917
        
        
        Restructuring costs
        
        
        (10,067
        )
        
        
        
        
        570,607
        
        
        13,3781,911,062
        
        
        1,912,775
        
        
        5,980,884
        
        
        8,452,044Loss from operations
        
        
        (1,011,676
        )
        
        66,998
        
        
        (3,250,760
        )
        
        (4,535,065
        )Interest expense
        
        
        (393,209
        )
        
        (187,586
        )
        
        (1,182,466
        )
        
        (784,840
        )Intrinsic value of convertible debt and debt discount for value of detachable warrants
        
        
        (866,792
        )
        
        
        
        
        (1,942,862
        )
        
        (153,844
        )Gain on change in fair value of derivative instrument
        
        
        473,382
        
        
        
        
        
        125,938
        
        
        (786,619
        )
        
        (187,586
        )
        
        (2,999,390
        )
        
        (938,684
        )Net loss
        
        $
        (1,798,295
        )
        $
        (120,588
        )
        $
        (6,250,150
        )
        $
        (5,473,749
        )Basic and diluted loss per share
        
        $
        (0.12
        )
        $
        (0.01
        )
        $
        (0.41
        )
        $
        (0.52
        )Basic and diluted weighted average number of common shares outstanding
        
        
        15,146,460
        
        
        13,920,467
        
        
        15,094,085
        
        
        10,456,005




The accompanying notes are an integral part of the consolidated financial statements.



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Table of Contents

XRG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)



Nine Months EndedDecember 31,2005
        
        2004Operating activitiesNet loss
        
        $
        (6,250,150
        )
        $
        (5,473,749
        )Adjustments to reconcile net loss to net cash used by operating activities:Depreciation and amortization
        
        
        267,579
        
        
        445,281Bad debt expense
        
        
        787
        
        
        112,746Common stock, options and warrants issued for services and compensation
        
        
        477,692
        
        
        1,997,667Impairment of goodwill
        
        
        653,917
        
        
        Stock issued in lieu of interest
        
        
        37,660
        
        
        188,400Amortization of discount and intrinsic value of convertible notes
        
        
        1,942,862
        
        
        73,725Amortization of deferred financing fees
        
        
        194,161
        
        
        20,442Amortization of deferred stock compensation and consulting
        
        
        
        
        
        163,689Amortization of prepaid interest
        
        
        221,068
        
        
        Non-cash restructuring costs
        
        
        261,629
        
        
        Gain on change in fair value of derivative instrument
        
        
        (125,938
        )
        
        (Increase) decrease, net of effect of acquisitions:Accounts receivable
        
        
        1,163,337
        
        
        (1,810,553
        )Other assets
        
        
        127,788
        
        
        (608,394
        )Increase (decrease), net of effect of acquisitions:Accounts payable
        
        
        (8,858
        )
        
        233,102Accrued expenses and other liabilities
        
        
        (587,733
        )
        
        63,339Total adjustments
        
        
        4,625,951
        
        
        879,444Net cash used by operating activities
        
        
        (1,624,199
        )
        
        (4,594,305
        )Investing activitiesPurchase of equipment
        
        
        
        
        
        (567,673
        )Restructuring costs
        
        
        308,978
        
        
        Acquisition for business, net of cash acquired in acquisition
        
        
        
        
        
        (2,000,000
        )Net cash used by investing activities
        
        
        308,978
        
        
        (2,567,673
        )Financing activitiesBank overdraft
        
        
        (64,531
        )
        
        593,593Factoring line of credit, net
        
        
        (615,329
        )
        
        683,151Net borrowings (payments) on related party advances
        
        
        
        
        
        (260,000
        )Proceeds from common stock issued and options
        
        
        501,667
        
        
        6,730,853Proceeds from issuance of notes payable
        
        
        1,730,000
        
        
        421,611Principal payments on notes payable
        
        
        (236,351
        )
        
        (846,128
        )Payments for treasury stock
        
        
        
        
        
        (95,000
        )Payments on capital lease
        
        
        (235
        )
        
        (66,102
        )Net cash provided by financing activities
        
        
        1,315,221
        
        
        7,161,978Net increase in cash
        
        
        
        
        
        Cash at beginning of period
        
        
        
        
        
        Cash at end of period
        
        $
        
        
        $
        




The accompanying notes are an integral part of the consolidated financial statements.



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Table of Contents

XRG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(Unaudited)



Nine Months EndedSeptember 30,2005
        
        2004Supplemental disclosures of cash flow information and non-cash investing and financing activities:Cash paid during the period for interest
        
        $
        596,023
        
        $
        555,556




During the quarter ended June 30, 2005, the Company granted warrants to acquire 5,500,000 shares of its common stock at an exercise price of $2.00 per share to its largest shareholder in conjunction with the Companys June 2005 funding. The June 2005 funding is comprised of units totaling $1,600,000 of which $1,250,000 of debt proceeds were received, $350,000 of stock proceeds were received and the Company granted warrants to purchase 5.5 million shares of its common stock. The warrant to purchase the 5.5 million shares of common stock was allocated 78% to the debt proceeds and 22% to the equity proceeds. The portion allocated to the debt proceeds was valued at $889,996 which was recorded as a discount on notes payable and will be amortized to interest expense over the life of the note.



On August 2, 2005, the Company granted warrants to acquire 3,750,000 shares of its common stock at an exercise price of $2.00 per share to its largest shareholder in conjunction with the Companys August 2005 funding. The August 2005 funding is comprised of units totaling $600,000 of which $450,000 of debt proceeds were received, $150,000 of stock proceeds were received and the Company granted warrants to purchase 3,750,000 shares of its common stock. The warrant to purchase the 3,750,000 shares of common stock was allocated 75% to the debt proceeds and 25% to the equity proceeds. The portion allocated to the debt proceeds was valued at $331,798 which was recorded as a discount on notes payable and will be amortized to interest expense over the life of the note.



The Company has 25,000,000 authorized shares and has 27,734,412 of outstanding shares plus potential shares from the conversion of debt and exercise of warrants and options granted. The 2,734,412 excess potential shares were attributed to the warrants granted on August 2, 2005. The Company calculated the fair market value of these potential shares using the Black Scholes model and the value of $311,968 was recorded as a liability on the Companys Balance Sheet at the date the warrant was granted. At December 31, 2005, the fair market value of the 2,734,412 potential shares was $192,361 which resulted in an decrease of the liability recorded and a gain on fair value of warrants recorded of $125,938 being recorded on the Companys Consolidated Statements of Operations.



During the quarter ended September 30, 2005, the Company agreed with a prior investor that the investor would return the 187,500 shares that had been issued on a subscription basis. At September 30, 2005, the receivable was deemed uncollectible and was reserved for.



During the quarter ended September 30, 2005, two former executives returned a total of 317,291 shares of the Companys common stock in accordance with their final agreement which were subsequently retired by the Company.



During the quarter ended June 30, 2005, the Company issued 372,500 shares of common stock valued at $430,750 which was recorded as a settlement payable at March 31, 2005.



During the quarter ended June 30, 2005, the Company granted a warrant to purchase 1,000,000 shares of its common stock to a note holder who extended the term of the debt through December 31, 2005. This warrant was valued at $721,068 of which $500,000 was recorded as a discount on notes payable and $221,068 was recorded to a deferred equity account as prepaid interest. These amounts were amortized to interest expense over the life of the note.



During the quarter ended June 30, 2005, the Company cancelled 18,000 shares of its treasury stock. This stock was valued at $110,000.



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XRG, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

(Unaudited)



During the quarter ended June 30, 2005, the Company restructured the Highway Transport, Inc. (Highway) agreement from an asset purchase agreement to an agency agreement. As a result of this restructuring, XRG removed approximately $703,000 of fixed asset and approximately $467,000 liabilities related to Highway except the notes payable that XRG is still the primary obligor.



During the nine months ended December 31, 2005, the Company issued 90,000 shares of common stock for interest expense relating to a note payable. These 90,000 shares of common stock were valued at $37,660 based on the quoted market value at the date the shares were owed.



During the first quarter of 2004, note holders converted $490,000 in notes payable into 122,500 shares of common stock.



During the first quarter of 2004, the Company issued 1,250,000 shares of common stock in exchange for the cancellation of 5,000,000 shares of Series A Preferred Stock to three executives.



During the first quarter of 2004, the Company issued 3,000,000 shares of its common stock in conjunction with a cashless warrant exercise by a warrant holder valued at $60,000.



During the first quarter of 2004, the Company issued 580,000 shares of common stock in conjunction with several acquisitions. During the second quarter of 2004, the company amended the agreement with Express Freight Systems, Inc.s (EFS) prior shareholders which requires the EFS prior shareholders to return 187,500 shares of common stock which was recorded as treasury stock at September 30, 2005.



During the six months ended September 30, 2004, the Company granted warrants to purchase approximately 1,123,042 shares of its common stock for offering costs fees. These warrants were valued at $5,205,003.



During the six months ended September 30, 2004, the Company issued 25,000 shares of common stock in exchange for consulting services valued at $135,000 which was recorded as deferred consulting and was amortized to consulting expense over the term of the consulting agreement. During the second quarter of 2004, the Company determined that no more services would be performed so the unamortized amounts were all expensed during September 2004.



During the quarter ended June 30, 2004, the Company issued 5,557,717 shares of its common stock that was recorded as common stock payable at March 31, 2004.



During the second quarter of 2004, the Company recorded 50,000 shares of common stock as issuable as a settlement with a prior employee. These shares were valued at $180,000 and recorded as an administrative expense.



During the second quarter of 2004, the Company agreed to issue 95,833 shares of its common stock to investors who purchased stock during the first quarter of 2004 to bring their purchase price to $2.00 per share.



During the three months ended December 31, 2004, we raised $1,375,000 in exchange for 875,000 shares of Common Stock pursuant to a Stock Purchase Agreement from various investors. There were Finders Fees associated with this financing consisting of $154,500 and Common Stock Purchase Warrants representing the right to purchase 527,000 shares of Common Stock at $2.00.



Prior to March 31, 2004, an investor invested $200,000 which was classified as common stock payable at March 31, 2004. During the quarter ended June 30, 2004, per the investors request, $100,000 of the $200,000 investment was reclassified to an advance to the Company.



The accompanying notes are an integral part of the consolidated financial statements.





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Table of Contents

XRG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



1.  Consolidated Financial Statements



In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and nine months ended December 31, 2005 and 2004, (b) the financial position at December 31, 2005, and (c) cash flows for the nine months ended December 31, 2005 and 2004, have been made.



The unaudited consolidated financial statements and notes are presented as permitted by Form 10-QSB. Accordingly, certain information and note disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes of the Company for the fiscal year ended March 31, 2005. The results of operations for the nine month period ended December 31, 2005 are not necessarily indicative of those to be expected for the entire year.



The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company incurred operating losses of approximately $6,250,000 for the nine months ended December 31, 2005, has an accumulated deficit at December 31, 2005 of approximately $41,635,000, which consists of approximately $15,405,000 from unrelated dormant operations and  $26,230,000 from current operations; and a tangible negative net worth of approximately $6,699,000 as of December 31, 2005. In addition, the Company has negative working capital of approximately $6,744,000 at December 31, 2005 and has used approximately $1,624,000 of cash from operations for the nine months ended December 31, 2005. These factors raise substantial doubt about the Companys ability to continue as a going
concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.



The Company has established a profit improvement plan to achieve a more streamlined and efficient operation. As part of this plan, the Company is identifying savings opportunities associated mostly with redundancies and economies of scale. The Company is focusing these efforts on improvement in operating ratios and tractor utilization (average revenue per tractor per week.)  The first stage of this plan included the restructuring of the Companys Express Freight Systems, Inc., acquisition on August 16, 2004 from an asset-based provider to a non-asset based agency transaction. In addition, the Company restructured its asset purchase of Carolina Truck Company (CTC) during April 2005 to permit CTC to restructure to a non-asset based agency transaction and during June 2005 restructured the Highway Transport, Inc. transaction to a non-asset based agency arrangement. These
restructurings fix the Companys operating costs associated with the EFS and Highway companies through an agency arrangement under terminal agreements, and permits CTC to elect to do an agency agreement, if CTC prefers. The Companys profit improvement plan may decrease its operating losses in the future; however, there is no assurance that this plan will be effective in obtaining profitability for the Company. Failure to accomplish these plans could have an adverse impact on the Companys liquidity, financial position and future operations.



There is no assurance that we will be able to raise additional capital in the near future. Our existing investors are not willing to make any additional financial commitments until such time as we are able to stabilize our operations and improve our management and accounting information systems. If we are not able to raise capital in the near future, substantial doubt exists as to our ability to sustain operations.



Revenue Recognition



In accordance with the Emerging Issues Task Force 99-19, the Company records revenue (including fuel surcharge revenues) on a gross basis because the Company is the primary obligor, the carrier of record and insurer of all freight, establishes pricing, prepares all invoicing and has the risk of loss as it relates to the ultimate collection of accounts receivable and uninsured cargo losses. For shipments where a third-party provider is utilized under an agency arrangement to provide some or all of the service, the company records a purchased transportation expense for the costs of transportation paid by the Company to the agent upon delivery of the shipment. Accordingly, revenue and the related direct freight expenses of the Companys business and its agency arrangements are recognized on a gross basis upon completion of freight delivery and no additional services are required by the Company. Fuel
surcharges billed to customers for freight hauled by the Companys agency arrangements are excluded from revenue and paid in entirety to the Agents.



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XRG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



Derivative Instruments



In accordance with the Emerging Issues Task Force 00-19, the Company records a liability for the derivative instrument that results due to the number of potential common stock shares plus outstanding shares that exceed the number of authorized common stock shares. At each balance sheet date, the liability for these potential excess shares is adjusted to fair market value with the change being recorded as a gain or loss on the income statement. The Company has 25,000,000 authorized shares and has 27,734,412 of outstanding shares plus potential shares from the conversion of debt and exercise of warrants and options granted. The 2,734,412 excess potential shares were attributed to the warrants granted on August 2, 2005. The Company calculated the fair market value of these potential shares using the Black Scholes model and the value of $311,968 was recorded as a liability on the Companys balance sheet at
the date the warrant was granted. At December 31, 2005, the fair market value of the 2,644,412 potential shares was $192,361 which resulted in a decrease of the liability recorded and a gain on fair value of warrants recorded of $125,938 being recorded on the Companys Consolidated Statements of Operations.



Stock Based Employee Compensation



For the stock options issued to employees, the Company has elected to apply the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under the intrinsic value based method, compensation cost is measured on the date of grant as the excess of the quoted market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the respective vesting periods of the options.



The following table illustrates the effect on net loss and loss per share as if the fair value based method of accounting had been applied to stock-based employee compensation, as required by SFAS No. 123, Accounting for Stock-Based Compensation and SFAS 148 Accounting for Stock-Based Compensation  transition and disclosure, an amendment of SFAS No. 123 for the three and nine months ended December 31, 2005 and 2004:



Three months endedDecember 31,
        
        Nine months endedDecember 31,2005
        
        2004
        
        2005
        
        2004Net loss, as reported
        
        $
        (1,144,376
        )
        $
        (120,588
        )
        $
        (5,596,231
        )
        $
        (5,473,749
        )Deduct:  Fair value of stock-based employee compensation costs
        
        
        
        
        
        
        
        
        (110,000
        )
        
        (13,205
        )Plus:       Intrinsic value of compensation costs included in net loss
        
        
        
        
        
        
        
        
        110,000
        
        
        13,200Pro forma net loss
        
        $
        (1,144,376
        )
        $
        (120,588
        )
        $
        (5,596,231
        )
        $
        (5,473,754
        )Loss per share:Basic and Diluted  as reported
        
        $
        (0.08
        )
        $
        (0.01
        )
        $
        (0.37
        )
        $
        (0.52
        )Basic and Diluted  pro forma
        
        $
        (0.08
        )
        $
        (0.01
        )
        $
        (0.37
        )
        $
        (0.52
        )






The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model.



Recent Accounting Pronouncements



In December 2004, the FASB issued SFAS 123R, Share Based Payment. SFAS 123R is a revision to SFAS 123 and supersedes APB 25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows.  This statement requires a public entity to expense the cost of employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements.



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XRG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



The initial effective date for SFAS 123R for the Company was the first interim reporting period set to begin after December 15, 2005. On April 14, 2005 the SEC deferred the effective date to be the first interim period of the Companys first fiscal year beginning after December 15, 2005; therefore, XRG, Inc. must comply with the provision of SFAS 123R in the first quarter of fiscal year ending  March 31, 2007. SFAS 123R permits public companies to choose between the following two adoption methods:



1. A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date, or



2. A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. XRG currently accounts for share-based payments to employees using APB 25s intrinsic value method and, as such, recognizes no compensation expense for employee stock options. The impact of the adoption of SFAS 123R on XRG cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. There would have been no material impact on reported results of operations and earnings per share had the Company applied the fair value provisions of SFAS 123 to share-based payments.



The adoption of SFAS 123Rs fair value method may have an impact, possibly material, on XRGs future results of operations but no material impact on overall financial position. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense, if any, to be reported as financing cash flow, rather than as operating cash flow as required under current literature. This requirement may reduce net operating cash flows and increase net financing cash flows in the consolidated statement of cash flows of periods after adoption. Due to timing of the release of SFAS 123R and the choice between the two adoption methods, the Company is still analyzing the ultimate impact that this new pronouncement may have on its results of operations.



On March 29, 2005, the Staff of the Securities and Exchange Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). Although not altering any conclusions reached in SFAS 123R, SAB 107 provides the views of the Staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and, among other things, provide the Staffs views regarding the valuation of share-based payment arrangements for public companies. XRG intends to follow the interpretative guidance on share-based payment set forth in SAB 107 during the Companys adoption of SFAS 123R.



In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement changes the requirements for the accounting for and the reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement requires retrospective application to prior periods financial statements of changes in accounting principle. XRG intends to follow
the interpretive guidance on accounting for changes and error corrections as set forth in FASB No. 154, if applicable.



In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140, that allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. It also eliminates the exemption from applying Statement 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not anticipate that the adoption of SFAS 155 will have an impact on the
Companys overall results of operations or financial position.



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XRG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140, that applies to the accounting for separately recognized servicing assets and servicing liabilities. This Statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not anticipate that the adoption of SFAS 156 will have an impact on the Companys overall results of operations or financial position.



In September 2006, the FASB issued SFAS No. 157, Fair Value Measures (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements. However, it does not apply to SFAS 123 (R). This statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The provisions of this statement should be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied,
except in some circumstances where the statement shall be applied retrospectively. The Company does not anticipate that the adoption of SFAS 157 will have an impact on the Companys overall results of operations or financial position.



Reclassifications



Certain amounts in the 2004 consolidated financial statements have been reclassified to conform with the 2005 presentation. For the three and nine months ended December 31, 2004, agent commissions in the amounts of approximately $1,178,000 and $1,723,000, respectively; have been reclassified from selling, general and administrative expenses to cost of revenues to more accurately present purchased transportation costs.



2.  Per Share Calculations



Per share data was computed by dividing net loss by the basic and diluted weighted average number of shares outstanding during the three and nine months ended December 31, 2005 and 2004. At December 31, 2005 and 2004, 12,611,756 and 1,636,196 potential common stock shares, respectively, are issuable upon the exercise of warrants and options and conversion of debt to common stock are excluded from diluted net loss per share as the effect of such shares would be anti-dilutive.



3.  Fixed assets



As of December 31, 2005, the Company had the following fixed assets, all of which are pledged against debt:




Trailers
        
        $
        309,000Tractors
        
        
        664,750Office equipment and software
        
        
        155,7091,129,459Accumulated depreciation
        
        
        (478,136
        )Total Fixed assets, net
        
        $
        651,323




Depreciation totaled approximately $268,000 and $445,300 for the nine months ended December 31, 2005 and 2004, respectively.



The Company excluded from net fixed assets $702,595 of fixed assets that reverted back to prior owners of such assets based on the restructuring of certain acquisitions during the first quarter ended June 30, 2005. The fair value of such assets approximates the net book value.



4.  Goodwill



At December 31, 2005, the Company evaluated the goodwill of each of its reporting units and recorded a goodwill impairment charge of approximately $654,000. The Company determined the goodwill for Carolina Truck Connection, Inc. of approximately $654,000 was impaired as this transaction is being restructured to a non-asset based agency relationship.



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Table of Contents

XRG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



5.  Notes Payable



The following table outlines the notes payable balance for each entity at December 31, 2005:



XRG, Inc.  Notes payable secured by the assets of the Company: interest ranging from 6.00% to 18.00%; Monthly payments of approximately $13,500 on one note maturing during October 2007; six notes have no principal or interest payments and require a total balloon principal payment of $4,376,275 which is due by December 31, 2006; additionally, all accrued interest is due by December 31, 2006; Secured by all assets of the companies. This balance is net of $778,365 discount on debt.
        $
        4,634,725XRG, Inc.  Convertible note payable; interest 10%, interest only payments payable annually; principal due on November 11, 2005, collateral is senior position in the assets of XRG, Inc. This note is convertible into the Companys common stock at a conversion price of $8.40 per share. This note is currently overdue. In June 2006 the Company entered into a settlement agreement with the note holder for monthly payments of $3,300 until October 2008 with accrued interest being payable in shares of common stock in April, August and December 2007.
        
        100,000XRG, Inc. Notes payable; interest 12.0%; interest only payments payable quarterly; principal due between April 2005 and June 2005; at maturity, the note holder will be paid the remaining unpaid principal at 150% redemption premium plus accrued interest. These notes are currently overdue and in default. In May 2006, the Company entered into a settlement agreement with one of  the $10,000 note holders for monthly payments of $1,000 until March 2007 with accrued interest being payable in shares of common stock
        
        20,000XRG, Inc. Convertible unsecured notes payable; interest 15%; the first 6 months of interest was put into escrow; principal and remaining interest was due December 31, 2004; these notes may be converted into the Companys common stock based upon a $3.00 price per share; Company is obligated to utilize 80% of the cash proceeds from future issuances of certain equity or debt securities, exercise of warrants or options to repay the principal and accrued interest on these notes prior to their maturity. These notes are currently overdue and in default. In April 2006 the Company entered into a settlement agreement with the note holders for monthly payments of $10,000 until June 2007 with accrued interest being payable in cash or shares of common stock in July 2007
        
        155,000XRG, Inc.  Notes payable; interest ranging from 12.0% to 10,000 shares of common stock per month; these notes are overdue and in default.
        
        60,000Carolina Truck Connection, Inc. (CTC)  Notes payable; interest ranging from 6.74% to 8.53%; Monthly payments of approximately $3,400; due at various dates between October 2005 to October 2006; one note required a balloon payment of $180,810 due by December 31, 2006; Secured by equipment.
        
        206,759Highway Transport, Inc.  Notes payable; interest at 8.25%; Monthly payments of approximately $15,800; due September 2009; Secured by equipment.
        
        672,013Total notes payable
        $
        5,848,497Less current portion
        
        (5,241,869)Long-term portion of notes payable
        $
        606,628




The notes payable for the Highway Transport, Inc. (HTI) is still recorded as a liability on the Companys books as the Company is still the primary obligor on the note. It is the intent and desire of the parties to restructure the obligations due United Bank, such that XRG is the primary obligor on 4/7s and HTI and its principals are the obligors on the other 3/7s of the amounts due United Bank. In the agreement between the Company and HTI, HTI is obligated to pay the note and the Company contributes $6,000 to the note payment each month. Since the Company is still the primary obligor on the note from the note holders perspective and HTI has limited resources to pay the note, the Company has recorded the total amount of the note owed on its financial statements and as each note payment is made by HTI, the note is reduced and the difference, net of the $6,000 is recorded as a
restructuring gain. On March 15, 2006 the note was successfully restructured between the Company, HTI and United Bank. The Companys portion of the restructured debt is $396,125 with interest at 9.50% and monthly payments of $6,000, increasing to $9,090 in April 2007. The note matures on March 15, 2011.



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XRG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



On May 20, 2005, the Company entered into a Promissory Notes Modification Agreement with Barron Partners, LP (Barron), its largest shareholder, extending the due date of all of the Barron Notes, until December 31, 2005. Subsequently, the note was extended until December 31, 2006. In connection with this arrangement, Barron agreed to subordinate its right of payment and interest on all of the Barron notes and other future indebtedness to Kenneth A. Steel, Jr., who is the holder of a $500,000 Promissory Note of XRG. The Company is obligated to use at least seventy percent (70%) of the proceeds from any debt or equity financings to repay the Barron and Steel notes.



During June 2005, the Company received funding from Barron, its largest shareholder, consisting of 16 units totaling $1,600,000. A $100,000 unit consisted of (i) a $78,125 promissory note, and (ii) $21,875 allocated to acquire 10,937.5 shares of its common stock at $2.00 per share and the right to acquire 343,750 shares of common stock through a warrant with an exercise price of $2.00. Accordingly, in June 2005, Barron invested $350,000 to acquire 175,000 shares of our common stock and is the holder of a $1,250,000 promissory note. The $1,250,000 promissory note has an annual interest rate of 10% and matures on December 31, 2005. Subsequently, the note was extended until Decmber 31, 2006. In addition, Barron has the right to acquire 5,500,000 shares of common stock pursuant to the warrant granted on June 2, 2005, at an exercise price of $2.00. These warrants have cashless exercise,
registration rights, and most favored nations anti-dilution protection. The warrant to purchase the 5.5 million shares of common stock was allocated 78% to the debt proceeds and 22% to the equity proceeds. The portion of the warrant that was allocated to the debt proceeds was valued at $889,996 using the Black Scholes Option Model which was recorded as a discount on notes payable and will be amortized to interest expense over the life of the note.



On August 2, 2005, XRG, Inc. (XRG) received $600,000 from Barron, its largest shareholder, as an infusion of additional working capital. The agreements for this funding were executed on July 29, 2005. This funding is the form of units, consisting of promissory notes, common stock and common stock purchase warrants. Each $60,000 unit consist of a $45,000 note, 7,500 shares of common stock with a purchase price of $2.00 per share and warrants to acquire 375,000 shares of the Companys common stock exercisable at $2.00, subject to adjustment. Accordingly, in the aggregate, XRG has issued $450,000 of promissory notes bearing interest at 18% per annum with a maturity date of December 31, 2005. Subsequently, the note was extended until December 31, 2006. In addition, XRG issued to Barron 75,000 shares of its common stock at a purchase price of $2.00 per share, for a total purchase price of $150,000.
XRG issued to Barron a warrant to acquire up to 3,750,000 of its common stock exercisable at $2.00 per share. These warrants have cashless exercise, registration rights, and most favored nations anti-dilution protection. The warrant to purchase the 3,750,000 shares of common stock was allocated 75% to the debt proceeds and 25% to the equity proceeds. The portion of the warrant that was allocated to the debt proceeds was valued at $331,798 using the Black Scholes Option Model which was recorded as a discount on notes payable and will be amortized to interest expense over the life of the note.



On November 18, 2005, XRG received $30,000 from Barron Partners, LP in order to meet fuel funding requirements for which Barron was issued a $30,000 promissory note with interest at 18.0% and maturing on March 31, 2006. Subsequently, the note was extended until December 31, 2006.



On February 21, 2006, XRG received $580,000 from Barron Partners, LP (Barron) in order to meet interim working capital requirements, which includes the elimination of an overdraft position with Wachovia Bank. The securities acquired by Barron were issued in ten (10) units. Each unit consisted of a $48,000 note, 5,000 shares of Common Stock with a purchase price of $2.00 per share, subject to adjustment and warrants to acquire 10,000,000 shares of XRGs Common Stock exercisable at $2.00, subject to adjustment. In the aggregate, Barron was issued a $480,000 promissory note bearing interest at 12% per annum with a maturity date of December 31, 2006, 50,000 shares of XRGs Common Stock at a purchase of $2.00 per share, and warrants to acquire 100,000,000 shares of XRGs Common Stock exercisable at $2.00 per share.



On June 28, 2006, XRG received $25,000 from Barron Partners, LP in order to meet the first payment in the Couture settlement for which Barron was issued a $25,000 promissory note with interest at 15.0% and maturing on December 31, 2006.



All of the aforementioned notes with Barron Partners, LP are currently in default. The Company is negotiating with Barron for extensions of the due dates.



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Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



The warrants contained a special adjustment feature
that provided that if all holders with most favored nations anti-dilution rights and liquidated damages rights for failure to
register securities executed a release and waiver of liquidated damages rights and most favored nations anti-dilution rights
(Release), then Barron or any other holder thereof agreed that the number of warrants would be reduced to 4,000,000
and the exercise price shall be reduced to $.10 per share. This special adjustment feature was also conditioned upon Ken Steel
executing the above referenced Release. XRG was unable to obtain the Releases from the various holders and Mr. Steel, and
accordingly the terms of the warrants and shares issued to Barron were not adjusted. In addition, Mr. Steel did not agree to
extend the maturity date of his $500,000 promissory note, which matured on December 31, 2005. The shares and warrants issued to
Barron have registration rights, most favored nations anti-dilution protection, cashless exercise provisions, and other rights as
more fully set forth in the body of the Subscription Agreement and Common Stock Purchase Warrant.



On January 5, 2005 Mr. Steel, an existing shareholder advanced us $500,000 pursuant to a promissory note that was originally repayable on February 5, 2005. The Company did not pay this note as due and obtained an original extension through March 31, 2005. As part of the Companys recent restructuring it has entered into a restated promissory note with Ken Steel for $500,000, which is payable on December 31, 2005 and bears interest at 17%. Default interest is 24% and XRG has agreed to grant Mr. Steel a lien and security interest in its assets. Barron has agreed to subordinate repayment of principal and interest on all Barron notes to the repayment of Mr. Steels note. In May 2005, XRG paid Mr. Steel approximately $72,900 to satisfy past defaults and as forbearance consideration. Interest is payable monthly. During June 2005, the Company granted a warrant to this
note holder to acquire up to 1,000,000 shares of its Common Stock at an exercise price of $2.00 per share, subject to anti-dilution adjustment. This warrant was valued at $721,068 of which $500,000 was recorded as a discount on notes payable and $221,068 was recorded to a deferred equity account. These amounts were amortized to interest expense over the life of the note.



6.  Other Equity Transactions



During the quarter ended June 30, 2005, the Company granted warrants to purchase 100,000 shares of its common stock in exchange for accepting a new employment agreement. The warrants were valued at $110,000.



During the quarter ended June 30, 2005, the Company agreed to issue 125,000 shares of common stock in exchange for management services valued at $90,000 based upon the quoted market price at the agreement date in exchange for accepting new terminal agreements.



During the quarter ended June 30, 2005, the Company entered into a new promissory note agreement that was originally due in February 2005. In consideration of the note restructuring, the Company agreed to grant a warrant to acquire up to 1,000,000 shares of its common stock at an exercise price of $2.00 per share. (See note 4)



During the six months ended September 30, 2005, the Company has issued or agreed to issue 264,656 shares of common stock in exchange for consulting services valued at $250,490 which were recorded as consulting fees and $229,650 is recorded as a liability at December 31, 2005.



During the quarter ended June 30, 2005, the Company received $1,667 as payment for a stock subscription receivable from a former officer and director of the Company.



During the quarter ended September 30, 2005, the Company cancelled 317,291 shares of its common stock that had been returned by two former executives in accordance with their final agreement with the Company.



During the quarter ended September 30, 2005, the Company issued 73,820 shares of its common stock as payment for commission fees. These shares were valued at $81,202 based upon the quoted market price of the common stock on the date of the agreement.



During the quarter ending September 30, 2005, the Company agreed with a prior investor that the investor would return the 187,500 shares that had been issued and the investor would not have to pay the remaining $375,000 he owed.



During the nine months ended December 31, 2005, the Company issued 90,000 shares of common stock for interest expense relating to a note payable. These 90,000 shares of common stock were valued at $37,660 based on the quoted market value at the dates the shares were owed.



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XRG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



7.  Restructuring Agreements



The Companys original business model was to operate primarily as an asset based carrier. During the last several months the Company has effectuated a restructuring of its business and operations and migrated to operating primarily as a non-asset based provider of transportation services. The Company effectuated this change in its business model through the restructuring of its previous acquisitions into an agency based business. The Companys restructured operations are described below:




        J. Bently Companies




XRG agreed to restructure the May 2003 acquisition of certain transportation equipment and other assets used by J. Bently Companies, Inc. In connection with the May 2003 agreement, XRGs wholly owned subsidiary, XRG Logistics, Inc. (Logistics), entered into a fleet owner agreement with Joseph Stapleton, which requires XRG to pay Mr. Stapleton 67% of gross freight revenues as compensation for the movement of freight (Original Fleet Owner Agreement). In August 2003, Logistics entered into an independent contractor agreement, which required Logistics to pay a commission of two percent (2%) of gross revenue as additional compensation for assistance and services in connection with the Fleet Owner Agreement (Original Override Agreement).



In order to resolve dispute between the parties, XRG, Mr. Stapleton and Mr. Shadden, as the successors in interest to J. Bently Companies, Inc. agreed to terminate the original purchase agreement, amendments thereto, employment agreements with Mr. Shadden and Mr. Stapleton, the Original Override Agreement and the Original Fleet Owner Agreement. In lieu thereof, XRG and Mr. Shadden have entered into a new terminal agreement on an 85/15 basis. This terminal agreement has a term of five years. In addition, XRG has entered into a new trailer lease and fleet owner agreement with Mr. Stapleton, which requires the payment of seventy-six percent (76%) of line haul revenue to Mr. Stapleton for utilization of his equipment, which is a credit against the 85% agent fee due Mr. Shadden pursuant to the terminal agreement.



XRG agreed to bring all trailer/equipment, capital leases and other financing arrangements with third party creditors current as of May 30, 2005. XRG agreed to return all equipment previously transferred by Mr. Stapleton to XRG back to Mr. Stapleton. XRG agreed to issue a total of 150,000 shares of its restricted common stock at the rate of 50,000 shares per annum to Mr. Stapleton and Mr. Shadden, subject to certain vesting provisions provided the terminal agreement remains in effect through April 30, 2007. In addition, XRG reimbursed Mr. Stapleton and Mr. Shadden $45,000 each for previous deposits for insurance and to pay back Mr. Stapleton $35,000 for workers compensation insurance overcharges.



Effective December 10, 2005 XRG terminated the trailer and terminal agreements with J Bently Companies, Inc., Joseph Stapleton, and Stanley Shadden as Mr. Stapleton and Mr. Shadden were unable to effectively manage their agency in a manner that was financially beneficial to XRG. Although the operations of J Bently Companies did contribute to our revenues, the costs associated with the J Bently Companies operations resulted in a negative contribution to our net income.




        Formal Settlement Agreement: Express Freight Systems




Effective as of April 26, 2005, XRG finalized a settlement agreement with Express Leasing Systems, Inc. (ELS), Express Freight, Inc. (EF) and the former shareholders and employees of Express Freight Systems, Inc. (EFS). This Settlement Agreement formalized the understandings of the parties in connection with the restructuring of the original merger with EFS in April 2004, and the subsequent restructuring of that merger into an agency arrangement, pursuant to a terminal agreement with an effective date of August 16, 2004 and related Bullet Point Addendum. The settlement agreement formalizes the understandings of the parties pursuant to the Bullet Point Addendum.



Material terms of the settlement agreement are summarized below:




        The mutual termination of the master equipment lease agreement (MELA). The MELA required us to pay Express Leasing Systems, Inc. approximately $55,000 per month for a term of 36 months and contained a $1,000,000 buyout at lease end. This lease consisted of a pool of approximately 270 trailers from an entity owned by the prior shareholders of EFS. This termination provides a provision that all trailers under the MELA are made available to the Company for the movement of its freight.


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Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)




        The mutual termination of the facility lease agreement for the office building in Chattanooga, Tennessee from the prior shareholders of EFS and a warehouse facility in California.





        Pursuant to the terms of the EFS merger agreement $2,000,000 from the stock purchase agreement was paid to the former shareholders of EFS that they will retain as purchase consideration. In addition, the former EFS shareholders were issued 375,000 shares of the XRGs common stock. 187,500 shares of common stock will be forfeited and returned to the Company as part of the amendment. The additional $1,000,000 payment to the former EFS shareholders was mutually terminated as part of this amendment.





        EFS, as a wholly-owned subsidiary of ours entered into 6 new employment agreements with the former shareholders and key employees of EFS. These agreements were mutually terminated by us and the former EFS shareholders and employees.





        Former EFS shareholders personally assumed all overdraft bank liabilities and bank loans, as well as, all bank loans of Express Freight Systems, Inc. In addition, former EFS shareholders assumed all trade payables and accruals prior to March 1, 2004. All bad debts and charge-backs attributable to receivables outstanding as of April 21, 2004 were assumed by the former EFS Shareholders.





        The Company entered into a terminal agreement which entitles the former EFS shareholders as agent to receive a commission of 85% of revenues on shipments that are secured, processed and supervised under its direction. Under this agreement, the Company is not responsible for any expenses incurred for the operation of the agents terminal.




XRG has the obligation to fulfill certain funding obligations pursuant to the settlement agreement on a timely basis, including but not limited to funding COMDATA, funding driver payroll, paying insurance, advance funding license/tag fees, and other items as set forth in the settlement agreement. The failure to make these fundings is considered a major funding default, pursuant to the settlement agreement. Upon the occurrence of a second funding default, EF and the Holders have the right to terminate the Terminal Agreement and shall be released from any further liability or obligations to damage provisions of the Terminal Agreement.



XRG has the risk of EF declaring a major funding default because of its limited financial resources if it was unable to timely fulfill its funding obligations under the Settlement Agreement. Representatives of EF have alleged that XRG has already committed a major funding default. If two major funding defaults were deemed to have occurred, that would result in a potential termination of the terminal agreement, which would have a material adverse effect on the financial position of XRG. We are currently in discussion with representatives of EFS as it relates to the holders of EFS retaining the 187,500 shares, which they were obligated to return to XRG in consideration of concessions and modifications to the original Settlement Agreement. In May 2006, XRG entered into a Letter Agreement with EF, ELS and the former shareholders of EFS to waive any past Major Funding Defaults as defined in the
Settlement Agreement in exchange for one million shares of XRGs common stock. Additionally, EF, ELS and the former shareholders of EFS have agreed to return the 187,500 shares of XRG stock in accordance with the original Settlement Agreement.




        Restructuring of Highway Transport, Inc. Acquisition




In April 2004, XRG entered into an asset purchase agreement for Highway Transport, Inc., an Alabama corporation (HTI), and its shareholders, Mr. Ed Brown and Mr. Milton Adams. Pursuant to this agreement, XRG agreed to acquire certain transportation equipment and other assets use by HTI and to assume the debt and liabilities of HTI. In order to resolve disputes among the parties in connection with the prior asset purchase agreement, XRG, HTI and its principals entered into a termination agreement and terminal agreement, effective as of May 30, 2005. Pursuant to the termination agreement XRG was released from certain obligations pursuant to the asset purchase agreement including the employment agreements with Mr. Brown and Mr. Adams, the BELCO leases and other debts other than as set forth in the termination agreement and as described below.



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Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



Pursuant to the termination agreement, XRG repaid HTI $170,000, the proceeds of which were used to make debt service payments on obligations due United Bank and to satisfy other payables of HTI. XRG is also obligated to issue the principals of HTI 75,000 shares of its common stock. Additionally, XRG returned net fixed assets and liabilities in the amount of $235,166 to HTI.



The termination agreement required XRG to pay HTI $6,000 per month for the first 41 months after the termination agreement, and $16,000 per month thereafter for 19 months (Settlement Payments). The understanding of the parties is that the Settlement Payments will be directed to United Bank to pay down the obligations of XRG and HTI to United Bank. On March 15, 2006 the note was successfully restructured between the Company, HTI and United Bank. The Companys portion of the restructured debt is $396,125. As of March 15, 2006, the Settlement Payments were no longer due to HTI since the United Bank debt was restructured.



The terminal agreement with HTI has a term for five
years. HTI covenants to use XRG on an exclusive basis as its carrier. XRG agrees to pay HTI eighty-seven percent (87%) of
revenues. XRG shall retain the remaining thirteen percent (13%) of HTI revenues. If HTI ceases operations, sells substantially all
of its assets, terminates the terminal agreement, defaults in performing its obligations under the terminal agreement, or if any
of such events occur within six (6) months after the effective date of the termination agreement, all previous shares of XRG
common stock issued to the principals of HTI shall be immediately canceled.



If XRG does not fund fuel accounts immediately when due or make settlement of commissions on HTI invoices in presently available fund and fails to cure such default within a 24-hour period after receiving written notice, such shall constitute a major funding default. During any rolling 30-day period, XRG shall be permitted two major funding defaults, and then HTI shall have the right to terminate the terminal agreement and be released of any further obligations to XRG.




        Carolina Truck Connection, Inc.  Amendment




Effective April 1, 2005, XRG entered into the second amendment to the asset acquisition agreement with Carolina Truck Connection, Inc. (CTC), Larry Puckridge and Robert Luther. XRG has issued Mr. Puckridge and Mr. Luther an additional 315,000 shares as additional consideration in connection with the original asset acquisition agreement. In addition, XRG has issued Mr. Puckridge 25,000 shares in consideration for past consulting services. XRG has agreed to continue servicing the debt related to the CTC equipment and is entitled to take title to such equipment which is guaranteed by Mr. Puckridge at such time as Mr. Puckridges guaranties are released and provided that after the annual anniversary date of this agreement XRG shares have a market value of at least $1.60. CTC also has the right to convert the original asset acquisition agreement into an agency
agreement with the revenue split being 85% to CTC and 15% to XRG.



8.  Other Related Party Transactions



Effective April 20, 2005 the Company entered into an administrative services agreement with R&R Express, Inc. (R&R Express) and Richard Francis. The Company appointed Mr. Francis as its Chief Executive Officer, replacing Kevin Brennan. Mr. Francis is also the President of R&R Express. Pursuant to the administrative services agreement; R&R Express is responsible for certain of the daily administrative, procedural and regulatory issues relating to its operations. The Company has agreed to pay R&R Express an administrative services fee equal to 12% of line haul revenue (excluding pass throughs) for all agents. This fee is payable weekly.



In addition the Company agreed to issue to both, R&R Express and Mr. Francis 150,000 shares of its common stock. The Company also agreed to pay Mr. Francis an annual salary of $150,000 per year from its G&A subsidiary as compensation for serving as its Chief Executive Officer and certain of its subsidiaries. The salary of Mr. Francis is considered a credit against the service fee payable to R&R Express. This administration services agreement supersedes the previous agreements between Mr. Francis, KDR Transport, Inc. and R&R Express. The Company has recorded a liability of $229,650 for the consulting services pertaining to the vested common stock that the Company has agreed to issue through December 31, 2005.



The administrative services agreement has a five-year term, which is consistent with the term of the Companys terminal agreements with its agents. The administrative services agreement is cancelable by R&R Express prior to its date of expiration by providing us at least one years written notice. The Company may cancel the administrative services agreement at any time with at least forty-five days prior written notice to R&R Express. R&R Express has agreed to a non-competition and non-solicitation of the Companys customers, employees and agents during the term of the agreement and for a twenty-four month period thereafter, excluding the business of R&R Express Intermodal, Inc.



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Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



Pursuant to the administrative services agreement, XRG is the carrier of record and insurer of all freight subject to the terminal agreements. All invoicing, bills of lading and other documents evidencing liability, ownership or legal obligations shall be the responsibility of XRG. XRG has the right to establish all pricing policies under the terminal agreements. XRG has the risk of loss as it relates to the ultimate collection of accounts receivable and uninsured cargo losses. XRG is the primary obligor with customers pursuant to the terminal agreements.



On February 20, 2006, XRG and R&R Express, Inc., agreed to terminate the Administrative Services Agreement between XRG, Inc., XRG G&A, Inc., R&R Express, Inc. and Richard Francis, which was originally entered as of April 1, 2005 and amended on or about April 25, 2005. XRG, R&R Express, Inc., and Mr. Francis agreed to a 30-day transition period to relocate the administrative functions, which were managed by R&R Express, Inc. and Mr. Francis at R&R Express, Inc. Pittsburghs headquarters back to XRG.



In connection with the termination of the Administrative Services Agreement, effective February 21, 2006, Mr. Francis resigned as our Chief Executive Officer and a Director. The termination of this relationship also affects XRGs ability to maintain the business and revenue of R&R Express Intermodal, Inc. In March 2006, R & R Express Intermodal, Inc. ceased operating as an agency of XRG.



XRG appointed Eddie R. Brown as its new Chief Executive Officer, effective February 21, 2006. Mr. Brown brings over thirty-five years of trucking industry experience to the Company. He is the co-founder and CEO of Highway Transport, Inc. in Evergreen, Alabama, a terminal which operates with XRG under an agency agreement.



Effective March 1, 2006, XRG moved all of its general and administrative functions from Pittsburgh as they relate to billing, collections, driver payroll, safety and insurance to Chattanooga, Tennessee. These functions operate in their own space with XRG employees at the offices of our terminal, Express Freight.



9.  Legal Proceedings



The following is a summary of current pending legal proceedings and claims. From time to time, we may be involved in other litigation relating to our business. There is no assurance that we may not be involved in future litigation which will have a material adverse affect upon us due to the costs associated with defending such matters or an unfavorable outcome in such proceedings. Our recent restructuring and limited financial resources increases the risk that we will be involved in future litigation.




        Highbourne Litigation




On April 8, 2005, Stephen Orenic, a principal of AGB Transportation Services, LLC, the successor in interest to Highbourne Corporation, notified XRG that AGB was terminating the terminal agreement dated October 4, 2004 between AGB and XRG Logistics, Inc. Mr. Orenic alleged that XRG failed to make timely payments of certain regular commissions and monthly productivity bonuses. XRG disagrees with the allegations made by Mr. Orenic and believes that the termination was improper.



On April 27, 2005, XRG filed a complaint against Highbourne Corporation, its successor in interest, AGB Transportation Services, LLC, and the principals of these entities, Stephen Orenic and Sherri Kenner, in the Circuit Court for the 13th Judicial Circuit in and for Pinellas County, Florida, Case No. 05-3766. The complaint alleges that AGB, Orenic and Kenner breached the original acquisition agreement entered into between the parties in February 2004. In addition, the complaint alleges that Orenic and Kenner have violated the confidential and non-compete provisions of their employment agreements. XRG alleges that the actions of Orenic, Kenner and AGB in entering into a new agency agreement with a third party, American Trans-Freight, LLC, and the utilization by such parties of XRGs transportation equipment is improper. Furthermore, XRG alleges that such parties are improperly using its
customer list, supplier list, shipper contracts and owner/operator contracts for their own benefit and for the benefit of a competitor of XRG.



XRG is seeking various remedies, including damages relating to breach of contract, replevin of assets, breach of fiduciary duty of Orenic and Kenner, including but not limited to the duties of loyalty and fair dealing, and also that Orenic and Kenner have breached the restrictive covenants and covenants not to compete set forth in their employment agreements.



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XRG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



In November 2006, XRG settled their claims with Highbourne Corporation, AGB Transportation Services, LLC, Orenic and Kenner. However, the operations of Highbourne are no longer included in the XRG financial statements from April 8, 2005 through December 31, 2005.




        Couture Litigation




On May 4, 2005, XRG was served with a complaint filed by Stephen R. Couture in the Pinellas County, Florida, Circuit Court, Case No. 05-3084CI-11, alleging that XRG was in breach of his employment agreement. Mr. Couture alleges that XRG unilaterally and arbitrarily reduced the compensation due Mr. Couture to an amount less than the amount provided for in his agreement. In addition, Mr. Couture alleged that XRG unilaterally did away with car reimbursement and car insurance benefits provided in the employment agreement. In addition, he alleged that XRG has failed to pay his unused vacation.



Mr. Couture had refused to voluntarily resign as director of XRG, notwithstanding the institution of this lawsuit. On August 5, 2005, XRG received the written consents from the holders of 9,416,042 shares of its common stock, representing approximately 62% of its outstanding common consented to the removal of Stephen Couture as a director of XRG.



XRG has filed a counterclaim for declaratory relief, breach of contract, breach of fiduciary duty, and fraud in the inducement against Mr. Couture in the above referenced action.



On June 22, 2006, Mr. Couture and XRG entered into a mediation agreement. Mr. Couture agrees to return all of his and his fathers shares of common stock totaling 574,166 shares in exchange for six monthly payments of $25,000 and one payment of $4,375. XRG management and counsel felt that the settlement was reasonable and less than half the anticipated legal fees to litigate the matter.




        Note holder Litigation




The Company is a defendant in a lawsuit filed in the Circuit Court of the Sixth Judicial Circuit in Pinellas County, Florida by five individuals who are the holders of its 15% senior convertible notes and warrants. The Company is in default in the payment obligations under these notes. The Company was obligated to repay such notes in the event of subsequent financings. The Company did not make payments on such notes. These notes have matured. Our exposure in this case is approximately $155,000 of principal amount of unpaid notes, accrued and unpaid interest plus attorneys fees. The Company has the $155,000 plus unpaid interest recorded on our balance sheet.



In April 2006 the Company entered into a settlement
agreement with the noteholders for monthly payments of $10,000 until June 2007 with accrued interest being payable in cash or
shares of common stock in July 2007.




        Former Employee Claims




Andrew Davis, a former employee has filed a charge of discrimination with the U.S. Equal Employment Opportunity Commission (EEOC) as well as a complaint with the Department of Labor alleging he was terminated in violation of Sarbanes-Oxley. The Department of Labor found that Mr. Davis allegations were without merit and has withdrawn the complaint. The EEOC reached the same conclusion.




        RSV Claims




In April 2004, XRG through a wholly owned subsidiary, entered into an agreement and plan of merger with RSV, Inc. (RSV), a Tennessee corporation. XRG issued the shareholders of RSV 100,000 shares of its common stock, and agreed to assume certain indebtedness and liabilities of RSV. XRG has determined not to assume the liabilities and debts of RSV due to the results of its due diligence investigations and XRGs limited financial resources. Counsel to RSV has alleged damages in excess of $400,000 relating to XRGs failure to assume the debt of RSV and fulfill the conditions of the merger agreement.



Pursuant to the RSV merger agreement, the stock of RSV was to be held in escrow. However, it is XRGs understanding that RSV shares were never delivered to the escrow agent. In addition, XRG never took title to the RSV assets. However, XRG issued its shares to the RSV shareholders. Accordingly, XRG believes that the RSV shareholders have the right to a return of their RSV shares and that the XRG shares issued to the RSV shareholders should be returned to XRG.



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XRG, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Nine Months Ended December 31, 2005 and 2004 (Unaudited)



Based upon the above factors, the Company recorded the common stock issued to RSV as a deposit which was written off during the quarter ended March 31, 2005. The Company has booked an accrual for the damages claimed by RSV as of December 31, 2005.



10.  Subsequent Events



Effective January 31, 2006 XRG notified its shareholders of record that shareholders holding a majority of the voting power amended the Certificate of Incorporation in order to increase the amount of authorized common stock from 25,000,000 shares to 50,000,000 shares.



During the quarter ended March 31, 2006, XRG entered into four new agency agreements with terminals in Memphis, Tennessee; Augusta, Georgia; Atkins, Arkansas and Russellville, Arkansas.



On April 1, 2006 Eddie R. Brown entered into a three year employment agreement with XRG with a base compensation of $104,000 per year, a revenue override of 0.15% of billed line haul and brokerage revenues, and 1,000,000 shares of the Companys common stock vested over three years.



Effective August 3, 2006 the Company entered into a factoring arrangement with Corporate Billing, Inc. (CBI)  Under the terms of the Client Agreement, XRG is advanced 90.0% of the daily billing and maintains a reserve of 10.0% with CBI from which interest at the Wall Street Journal prime rate and the discount fee of 0.45% is deducted. The advance rate was an improved by 5.0% over CAPCOs advance rate and the interest rate was reduced by 5.0%. Additionally, the were no commitment fees or renewal fees.



On August 3, 2006 XRG terminated its accounts receivable financing relationship with CAPCO.



On October 20, 2006, XRG received $600,000 from Barron Partners, LP in order to finance the transaction agreements with Chromos, Inc based in Central Florida to enter into a three year agency agreement with XRG and with Local Logistics, LLC to enter into a three year agency agreement with XRG, and working capital for XRG for which Barron was issued a $600,000 promissory note with interest at 12.0%, maturing on April 20, 2008 with payments of interest and principal beginning February 2007.



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Item 2.
        Managements Discussion and Analysis of Financial Condition and Results of Operations




The forward-looking statements safe harbor
does not apply to our company because we issue penny stock and are excluded from the safe harbor pursuant to Section
27A(b)(1)(C) of the Securities Act of 1933, as amended, and Section 21E(b)(1)(C) of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Nevertheless, this Quarterly Report on Form 10-QSB contains forward-looking statements. In
addition, from time to time, the Company or its representatives have made or may make other forward-looking statements orally or
in writing. All forward-looking statements included in this document are based on information available to the Company on the date
hereof. It is important to note that the Companys actual results could differ materially from those projected in such
forward-looking statements contained in this Form 10-QSB. The forward-looking statements contained here-in are based on current
expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments regarding,
among other things, the Companys ability to secure financing or investment for capital expenditures, future economic and
competitive market conditions, and future business decisions. All these matters are difficult or impossible to predict accurately
and many of which may be beyond the control of the Company. Although the Company believes that the assumptions underlying its
forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this form 10-QSB will prove to be accurate.



Overview



XRG, Inc. (XRG) was incorporated in November 2000 under the laws of the State of Delaware. XRG is a holding company that owns subsidiary interstate trucking companies. Currently, XRG operates through its wholly owned subsidiaries XRG G&A, Inc., Express Freight Systems, Inc. (EFS), XRG Logistics, Inc. (XRG Logistics), and R&R Express Intermodal, Inc. (R&R). These subsidiaries operate under authority granted by the United States Department of Transportation (DOT) and various state agencies. For descriptive purposes herein, the registrant, XRG and its operating subsidiaries are collectively referred to as XRG or the Company, unless context otherwise requires.



Our original business model was to operate primarily as an asset based carrier. During the last several months we have effectuated a restructuring of our business and operations and migrated to operating primarily as a non-asset based provider of transportation services. We effectuated this change in our business model through the restructuring of our previous acquisitions into an agency based business.



We primarily operate through independent agents, who then arrange with independent truckers to haul the freight to the desired destination. XRGs contractor network consists of four agents. Carolina Truck Connection (CTC) located in Fletcher, North Carolina is our only remaining asset based carrier. Customer relationships are primarily managed by our agents who solicit freight business directly from shippers and also provide dispatch and other services to owner-operators. Independent agents, fleet owners, and owner-operators are compensated based upon a percentage of revenue they generate for XRG. We also subcontract broker freight loads to other unaffiliated transportation companies when needed to provide additional capacity to our customers.



While we believe that the restructuring from an asset based carrier to an agency based business will substantially reduce our negative working capital and losses generated from operations we will need additional capital to effectuate our long-term business strategy and achieve profitability. There is no assurance any funding source will provide such additional capital. In addition, even if XRG were to obtain additional capital the terms and conditions relating to such financing could be very dilutive to existing shareholders.



Our corporate offices are located at 601 Cleveland Street, Suite 501, Clearwater, Florida 33755 and our telephone number is (727) 475-3060. Our operations and administrative staff are located at 329 Wauhatchie Pike, Chattanooga, Tennessee 37419 and the telephone number is (800) 792-2520.



Summary of Restructured Operations



The following table summarizes our operations during the nine months ended December 31, 2006:



Company
        
        HeadquartersLocation
        
        CarrierType
        
        Owner/Operators or OwnedTractors
        
        TrailersJ. Bently Companies, Inc.
        
        Sweetwater, TN
        
        Van
        
        45 Owner Operators
        
        170R&R Express Intermodal, Inc. (R&R)
        
        Pittsburgh, PA
        
        Intermodal
        
        27 Owner Operators
        
        Highway Transport Services, Inc. (HTI)
        
        Evergreen, AL
        
        Flatbed
        
        35 Owner Operators
        
        44Express Freight Systems, Inc. (EFS)
        
        Chattanooga, TN
        
        Van
        
        91 Owner Operators
        
        308Carolina Truck Connection, Inc. (CTC)
        
        Fletcher, NC
        
        Van
        
        31 Tractors, 11 Owner Operators
        
        92






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
        J. Bently Companies




XRG agreed to restructure the May 2003 acquisition of certain transportation equipment and other assets used by J. Bently Companies, Inc. In connection with the May 2003 agreement, XRGs wholly owned subsidiary, XRG Logistics, Inc. (Logistics), entered into a fleet owner agreement with Joseph Stapleton, which requires XRG to pay Mr. Stapleton 67% of gross freight revenues as compensation for the movement of freight (Original Fleet Owner Agreement). In August 2003, Logistics entered into an independent contractor agreement, which required Logistics to pay a commission of two percent (2%) of gross revenue as additional compensation for assistance and services in connection with the Fleet Owner Agreement (Original Override Agreement).



In order to resolve dispute between the parties, XRG, Mr. Stapleton and Mr. Shadden, as the successors in interest to J. Bently Companies, Inc. agreed to terminate the original purchase agreement, amendments thereto, employment agreements with Mr. Shadden and Mr. Stapleton, the Original Override Agreement and the Original Fleet Owner Agreement. In lieu thereof, XRG and Mr. Shadden have entered into a new terminal agreement on an 85/15 basis. This terminal agreement has a term of five years. In addition, XRG has entered into a new trailer lease and fleet owner agreement with Mr. Stapleton, which requires the payment of seventy-six percent (76%) of line haul revenue to Mr. Stapleton for utilization of his equipment, which is a credit against the 85% agent fee due Mr. Shadden pursuant to the terminal agreement.



XRG agreed to bring all trailer/equipment, capital leases and other financing arrangements with third party creditors current as of May 30, 2005. XRG agreed to return all equipment previously transferred by Mr. Stapleton to XRG back to Mr. Stapleton. XRG agreed to issue a total of 150,000 shares of its restricted common stock at the rate of 50,000 shares per annum to Mr. Stapleton and Mr. Shadden, subject to certain vesting provisions provided the terminal agreement remains in effect through April 30, 2007. In addition, XRG reimbursed Mr. Stapleton and Mr. Shadden $45,000 each for previous deposits for insurance and to pay back Mr. Stapleton $35,000 for workers compensation insurance overcharges.



Effective December 10, 2005 XRG terminated the trailer and terminal agreements with J Bently Companies, Inc., Joseph Stapleton, and Stanley Shadden as Mr. Stapleton and Mr. Shadden were unable to effectively manage their agency in a manner that was financially beneficial to XRG. Although the operations of J Bently Companies did contribute to our revenues, the costs associated with the J Bently Companies operations resulted in a negative contribution to our net income.




        Formal Settlement Agreement: Express Freight Systems




Effective as of April 26, 2005, XRG finalized a settlement agreement with Express Leasing Systems, Inc. (ELS), Express Freight, Inc. (EF) and the former shareholders and employees of Express Freight Systems, Inc. (EFS). This Settlement Agreement formalized the understandings of the parties in connection with the restructuring of the original merger with EFS in April 2004, and the subsequent restructuring of that merger into an agency arrangement, pursuant to a terminal agreement with an effective date of August 16, 2004 and related Bullet Point Addendum. The settlement agreement formalizes the understandings of the parties pursuant to the Bullet Point Addendum.



Material terms of the settlement agreement are summarized below:




        The mutual termination of the master equipment lease agreement (MELA). The MELA required us to pay Express Leasing Systems, Inc. approximately $55,000 per month for a term of 36 months and contained a $1,000,000 buyout at lease end. This lease consisted of a pool of approximately 270 trailers from an entity owned by the prior shareholders of EFS. This termination provides a provision that all trailers under the MELA are made available to the Company for the movement of its freight.





        The mutual termination of the facility lease agreement for the office building in Chattanooga, Tennessee from the prior shareholders of EFS and a warehouse facility in California.





        Pursuant to the terms of the EFS merger agreement $2,000,000 from the stock purchase agreement was paid to the former shareholders of EFS that they will retain as purchase consideration. In addition, the former EFS shareholders were issued 375,000 shares of the XRGs common stock. 187,500 shares of common stock will be forfeited and returned to the Company as part of the amendment. The additional $1,000,000 payment to the former EFS shareholders was mutually terminated as part of this amendment.


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
        EFS, as a wholly-owned subsidiary of ours entered into 6 new employment agreements with the former shareholders and key employees
of EFS. These agreements were mutually terminated by us and the former EFS shareholders and employees.





        Former EFS shareholders personally assumed all overdraft bank liabilities and bank loans, as well as, all bank loans of Express Freight Systems, Inc. In addition, former EFS shareholders assumed all trade payables and accruals prior to March 1, 2004. All bad debts and charge-backs attributable to receivables outstanding as of April 21, 2004 were assumed by the former EFS Shareholders.





        The Company entered into a terminal agreement which entitles the former EFS shareholders as agent to receive a commission of 85% of revenues on shipments that are secured, processed and supervised under its direction. Under this agreement, the Company is not responsible for any expenses incurred for the operation of the agents terminal.




XRG has the obligation to fulfill certain funding obligations pursuant to the settlement agreement on a timely basis, including but not limited to funding COMDATA, funding driver payroll, paying insurance, advance funding license/tag fees, and other items as set forth in the settlement agreement. The failure to make these fundings is considered a major funding default, pursuant to the settlement agreement. Upon the occurrence of a second funding default, EF and the Holders have the right to terminate the Terminal Agreement and shall be released from any further liability or obligations to damage provisions of the Terminal Agreement.



XRG has the risk of EF declaring a major funding default because of its limited financial resources if it was unable to timely fulfill its funding obligations under the Settlement Agreement. Representatives of EF have alleged that XRG has already committed a major funding default. If two major funding defaults were deemed to have occurred, that would result in a potential termination of the terminal agreement, which would have a material adverse effect on the financial position of XRG. We are currently in discussion with representatives of EFS as it relates to the holders of EFS retaining the 187,500 shares, which they were obligated to return to XRG in consideration of concessions and modifications to the original Settlement Agreement. In May 2006, XRG entered into a Letter Agreement with EF, ELS and the former shareholders of EFS to waive any past Major Funding Defaults as defined in the
Settlement Agreement in exchange for one million shares of XRGs common stock. Additionally, EF, ELS and the former shareholders of EFS have agreed to return the 187,500 shares of XRG stock in accordance with the original Settlement Agreement.




        Restructuring of Highway Transport, Inc. Acquisition




In April 2004, XRG entered into an asset purchase agreement for Highway Transport, Inc., an Alabama corporation (HTI), and its shareholders, Mr. Ed Brown and Mr. Milton Adams. Pursuant to this agreement, XRG agreed to acquire certain transportation equipment and other assets use by HTI and to assume the debt and liabilities of HTI. In order to resolve disputes among the parties in connection with the prior asset purchase agreement, XRG, HTI and its principals entered into a termination agreement and terminal agreement, effective as of May 30, 2005. Pursuant to the termination agreement XRG was released from certain obligations pursuant to the asset purchase agreement including the employment agreements with Mr. Brown and Mr. Adams, the BELCO leases and other debts other than as set forth in the termination agreement and as described below.



Pursuant to the termination agreement, XRG repaid HTI $170,000, the proceeds of which were used to make debt service payments on obligations due United Bank and to satisfy other payables of HTI. XRG is also obligated to issue the principals of HTI 75,000 shares of its common stock. Additionally, XRG returned net fixed assets and liabilities in the amount of $235,166 to HTI.



The termination agreement requires XRG to pay HTI $6,000 per month for the first 41 months after the termination agreement, and $16,000 per month thereafter for 19 months (Settlement Payments). The understanding of the parties is that the Settlement Payments will be directed to United Bank to pay down the obligations of XRG and HTI to United Bank. On March 15, 2006 the note was successfully restructured between the Company, HTI and United Bank. The Companys portion of the restructured debt is $396,125. As of March 15, 2006, the Settlement Payments were no longer due to HTI since the United Bank debt was restructured.



The terminal agreement with HTI has a term for five years. HTI covenants to use XRG on an exclusive basis as its carrier. XRG agrees to pay HTI eighty-seven percent (87%) of revenues. XRG shall retain the remaining thirteen percent (13%) of HTI revenues. If HTI ceases operations, sells substantially all of its assets, terminates the terminal agreement, defaults in performing its obligations under the terminal agreement, or if any of such events occur within six (6) months after the effective date of the termination agreement, all previous shares of XRG common stock issued to the principals of HTI shall be immediately canceled.



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If XRG does not fund fuel accounts immediately when due or make settlement of commissions on HTI invoices in presently available fund and fails to cure such default within a 24-hour period after receiving written notice, such shall constitute a major funding default. During any rolling 30-day period, XRG shall be permitted two major funding defaults, and then HTI shall have the right to terminate the terminal agreement and be released of any further obligations to XRG.




        Carolina Truck Connection, Inc.  Amendment




Effective April 1, 2005, XRG entered into the second amendment to the asset acquisition agreement with Carolina Truck Connection, Inc. (CTC), Larry Puckridge and Robert Luther. XRG has issued Mr. Puckridge and Mr. Luther an additional 315,000 shares as additional consideration in connection with the original asset acquisition agreement. In addition, XRG has issued Mr. Puckridge 25,000 shares in consideration for past consulting services. XRG has agreed to continue servicing the debt related to the CTC equipment and is entitled to take title to such equipment which is guaranteed by Mr. Puckridge at such time as Mr. Puckridges guaranties are released and provided that after the annual anniversary date of this agreement XRG shares have a market value of at least $1.60. CTC also has the right to convert the original asset acquisition agreement into an agency
agreement with the revenue split being 85% to CTC and 15% to XRG.




        Termination of Highbourne Asset Acquisition Agreement/AGB Terminal Agreement  Related Litigation




On April 8, 2005, Stephen Orenic, a principal of AGB Transportation Services, LLC, the successor in interest to Highbourne Corporation, notified XRG that AGB was terminating the terminal agreement dated October 4, 2004 between AGB and XRG Logistics, Inc. Mr. Orenic alleged that XRG failed to make timely payments of certain regular commissions and monthly productivity bonuses. XRG disagrees with the allegations made by Mr. Orenic and believes that the termination was improper.



On April 27, 2005, XRG filed a complaint against Highbourne Corporation, its successor in interest, AGB Transportation Services, LLC, and the principals of these entities, Stephen Orenic and Sherri Kenner, in the Circuit Court for the 13th Judicial Circuit in and for Pinellas County, Florida, Case No. 05-3766. The complaint alleges that AGB, Orenic and Kenner breached the original acquisition agreement entered into between the parties in February 2004. In addition, the complaint alleges that Orenic and Kenner have violated the confidential and non-compete provisions of their employment agreements. XRG alleges that the actions of Orenic, Kenner and AGB in entering into a new agency agreement with a third party, American Trans-Freight, LLC, and the utilization by such parties of XRGs transportation equipment is improper. Furthermore, XRG alleges that such parties are improperly using its
customer list, supplier list, shipper contracts and owner/operator contracts for their own benefit and for the benefit of a competitor of XRG.



XRG is seeking various remedies, including damages relating to breach of contract, replevin of assets, breach of fiduciary duty of Orenic and Kenner, including but not limited to the duties of loyalty and fair dealing, and also that Orenic and Kenner have breached the restrictive covenants and covenants not to compete set forth in their employment agreements.



In November 2006, XRG settled their claims with Highbourne Corporation, AGB Transportation Services, LLC, Orenic and Kenner. However, the operations of Highbourne are no longer included in the XRG financial statements for the nine months ended December 31, 2005.




        Administrative Services Agreement with R&R Express, Inc. and Richard Francis




Effective April 20, 2005 the Company entered into an Administrative Services Agreement with R&R Express, Inc. (R&R Express) and Richard Francis. The Company appointed Mr. Francis as its Chief Executive Officer, replacing Kevin Brennan. Mr. Francis is also the President of R&R Express. Pursuant to the Administrative Services Agreement; R&R Express is responsible for certain of the daily administrative, procedural and regulatory issues relating to its operations. The Company has agreed to pay R&R Express an administrative services fee equal to 12% of line haul revenue (excluding pass throughs) for all agents. This fee is payable weekly.



In addition the Company agreed to issue to both, R&R Express and Mr. Francis 150,000 shares of its common stock. The Company also agreed to pay Mr. Francis an annual salary of $150,000 per year from its G&A subsidiary as compensation for serving as its Chief Executive Officer and certain of its subsidiaries. The salary of Mr. Francis is considered a credit against the service fee payable to R&R Express. This Administration Services Agreement supersedes the previous agreements between Mr. Francis, KDR Transport, Inc. and R&R Express. The Company has recorded a liability of $229,650 for the consulting services pertaining to the vested common stock that the Company has agreed to issue through December 31, 2005.



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The Administrative Services Agreement had a five-year term, which is consistent with the term of the Companys terminal agreements with its agents. The Administrative Services Agreement was cancelable by XRG and R&R Express prior to its date of expiration by providing written notice in accordance with the timeframe within the agreement. R&R Express had agreed to a non-competition and non-solicitation of the Companys customers, employees and agents during the term of the agreement and for a twenty-four month period thereafter, excluding the business of R&R Express Intermodal, Inc.



Pursuant to the Administrative Services Agreement, XRG is the carrier of record and insurer of all freight subject to the terminal agreements. All invoicing, bills of lading and other documents evidencing liability, ownership or legal obligations shall be the responsibility of XRG. XRG has the right to establish all pricing policies under the terminal agreements. XRG has the risk of loss as it relates to the ultimate collection of accounts receivable and uninsured cargo losses. XRG is the primary obligor with customers pursuant to the terminal agreements. However, all invoicing, collections, safety, payroll and insurance services were performed or provided by R&R Express and Francis in accordance with the Administrative Services Agreement.



On February 20, 2006, XRG and R&R Express, Inc., agreed to terminate the Administrative Services Agreement between XRG, Inc., XRG G&A, Inc., R&R Express, Inc. and Richard Francis, which was originally entered as of April 1, 2005 and amended on or about April 25, 2005. XRG, R&R Express, Inc., and Mr. Francis agreed to a 30-day transition period to relocate the administrative functions, which were managed by R&R Express, Inc. and Mr. Francis at R&R Express, Inc. Pittsburghs headquarters back to XRG.



In connection with the termination of the Administrative Services Agreement between XRG, Inc., XRG G & A, Inc., R&R Express, Inc. and Richard Francis, effective February 21, 2006, Mr. Francis resigned as our Chief Executive Officer and a Director. The termination of this relationship also affects XRGs ability to maintain the business and revenue of R&R Express Intermodal, Inc. In March 2006, R & R Express Intermodal, Inc. ceased operating as an agency of XRG.



GENERAL



Managements Interim Operating Plan



The major components of our turn around plan consist of the following:




        Reduction of overhead by reducing personnel in our Clearwater, Florida office.





        Restructuring of our business model from an asset based carrier to a non-asset based carrier.





        We secured a new accounts receivable financing facility with CAPCO Financial Company. This financing has improved our cash flow position because of the lower costs of funds.





        Changes in our executive management team. We have entered into settlement agreements with Kevin Brennan and Don Huggins.





        Eddie R. Brown became XRGs new Chief Executive Officer, effective February 21, 2006; bringing over thirty-five years of trucking industry experience to the Company.





        Recruiting additional agents and owner operators in new markets and expanding our network in existing markets. We have entered into a new employment agreement with Larry Berry who has substantial experience in the trucking and transportation industry to assist us in securing new business.





        We have deferred principal payments on certain of our debt service obligations until December 31, 2006 with Barron and Mr. Steel. We have been able to settle or defer payments relating to approximately $255,000 of convertible notes payable..





        Effective March 1, 2006, XRG moved all of its general and administrative functions as they relate to billing, collections, driver payroll, safety and insurance to Chattanooga, Tennessee. These functions operate in their own space with XRG employees at the offices of our terminal, Express Freight.





        We eliminated substantial liquidated damages in connection with the withdrawal of our previous registration statement.




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Current Business Strategy



Our new business strategy employs primarily a non-asset based operating structure. We believe that implementing this business strategy has several advantages over asset-based trucking companies that own significant tractor fleets and use an employee sales force:




        Operating costs vary directly with revenue.Agents and owner-operators are compensated based on a percentage of revenues. The benefit of this structure is that short-term fluctuations in operating activity have less of an impact on our financial statements than they have on asset based truck transportation companies that assume all of the fixed cost. Therefore, our operating costs tend to be in direct proportion to revenues.





        Minimize capital investments and fixed costs.Our non-asset based structure allows us to limit our investment in tractors and trailers and allows us to grow our core business with less capital requirements.





        Performance/commission based compensation.Our agents and owner-operators are compensated based on performance that provides them with the incentive to seek new revenue opportunities. In addition, our owner operators seek to increase their equipment utilization as well as operating their equipment more safely, efficiently, and reliably because of this performance based compensation structure.




We intend on recruiting additional agents and owner operators in new markets and expanding our network in existing markets. Agents typically represent a small number of shippers in local markets and are attuned to the specific transportation requirements of these customers. In addition, agents are instrumental in recruiting owner-operators in these local markets so that we can provide capacity on short notice to shippers. We will require additional capital in order to expand our business and recruit additional agents. There is no assurance that we will be able to expand our business and achieve profitability under this business strategy.



During the quarter ended March 31, 2006, XRG entered into four new agency agreements with terminals in Memphis, Tennessee; Augusta, Georgia; Atkins, Arkansas and Russellville, Arkansas. It is anticipated that these new agencies will generate approximately $8,000,000 in annual billings.



Revenue



We generate substantially all of our revenue by transporting freight for our customers. Generally, we are paid by the mile or by the load for our services. The main factors that affect our revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, and the number of miles we generate with our equipment. These factors relate, among other things, to the U.S. economy, inventory levels, the level of truck capacity in our markets, specific customer demand, and our average length of haul. We also derive revenue from fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services. Fuel surcharges billed to customers for freight hauled by the Companys agency arrangements are excluded from revenue and paid in entirety to the Agents.



Revenue Equipment



We operate approximately 240 tractors at December 31, 2005, which consists of company-owned equipment, equipment provided by independent contractors (owner operators) or by a fleet agreement.



Owner operators provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. We do not have the capital outlay of purchasing the tractor. Also, expenses associated with owned equipment, such as interest and depreciation, are not incurred, as well as driver compensation, fuel, and other expenses are not incurred. The payments to owner operators are recorded in cost of revenues. The majority of our current fleet is owner operator based.



Critical Accounting Policies and Estimates



Our financial statements reflect the selection and application of accounting policies, which require management to make significant estimates and assumptions. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that currently affect our financial condition and results of operations.



Preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, and expenses and related contingent liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenues, bad debts, income taxes, contingencies, and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.



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We record an allowance for doubtful accounts based on (1) specifically identified amounts that we believe to be uncollectible and (2) an additional allowance based on certain percentages of our aged receivables, which are determined based on historical experience and our assessment of the general financial conditions affecting our customer base to be uncollectible. At December 31, 2005, the allowance for doubtful accounts was $487,595 or approximately 11% of total trade accounts receivable. If actual collections experience changes, revisions to our allowance may be required. After reasonable attempts to collect a receivable have failed, the receivable is written off against the allowance. In addition, we review the components of other receivables, consisting primarily of advances to drivers and agents, and write off specifically identified amounts that we believe to be uncollectible.



In accordance with EITF 99-19, we record revenue on a gross basis because we are the primary obligors, the carrier of record and insurer of all freight, establish pricing, prepare all invoicing and have the risk of loss as it relates to the ultimate collection of accounts receivable and uninsured cargo losses. We recognize operating revenues (including fuel surcharge revenues) and related direct costs when the shipment is delivered. For shipments where a third-party provider is utilized under an agency arrangement to provide some or all of the service and the Company is the primary obligor in regards to the delivery of the shipment, establishing customer pricing, and has credit risk on the shipments, the Company records both revenues for the dollar value of services billed by the Company to the customer and purchased transportation expense for the costs of transportation paid by the Company to the agent upon
delivery of the shipment. Accordingly, revenue and the related direct freight expenses of our business and our agency arrangements are recognized on a gross basis upon completion of freight delivery. Fuel surcharges billed to customers for freight hauled by our agency arrangements are excluded from revenue and paid in entirety to the agents.



For the stock options issued to employees, we have elected to apply the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under the intrinsic value based method, compensation cost is measured on the date of grant as the excess of the quoted market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the respective vesting periods of the options.



Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statements carrying amounts of existing assets and liabilities and their respective income tax basis (principally fixed assets). Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of change in tax rates is recognized as income or expense in the period that included the enactment date.



Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. Our judgment concerning future cash flows is an important part of this determination. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less the costs to sell.



In accordance with SFAS No. 142, we do not amortize goodwill but instead we evaluate it annually for impairment and will evaluate it between annual tests if an event occurs or circumstances change which indicate that the carrying value of a reporting units goodwill might be impaired. We complete our annual impairment tests in the fourth quarter of each year and generally recognize an impairment loss when the carrying value of a reporting units goodwill exceeds the units estimated fair value. The fair value of goodwill is derived by using a discounted cash flow analysis. This analysis involves estimates and assumptions by management regarding future estimated cash flows for the reporting units. We believe that the estimates and assumptions are reasonable, and that they are consistent with the assumptions, which the reporting units use for internal planning purposes. However, significant
judgment is involved in estimating these factors and they include inherent uncertainties. If we had used other estimates and assumptions, the analysis could have resulted in different conclusions regarding the amount of goodwill impairment, if any. Furthermore, additional future impairment losses could result if actual results differ from those estimates.



Recent Accounting Pronouncements



In December 2004, the FASB issued SFAS 123R, Share Based Payment. SFAS 123R is a revision to SFAS 123 and supersedes APB 25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows.  This statement requires a public entity to expense the cost of employee services received in exchange for an award of equity instruments. This statement also provides guidance on valuing and expensing these awards, as well as disclosure requirements of these equity arrangements. The initial effective date for SFAS 123R for the Company was the first interim reporting period set to begin after December 15, 2005. On April 14, 2005 the SEC deferred the effective date to be the first interim period of the Companys first fiscal year beginning after December 15, 2005; therefore, XRG, Inc. must comply with the provision of SFAS 123R in the first quarter of fiscal year
ending March 31, 2007. SFAS 123R permits public companies to choose between the following two adoption methods:



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1.   A modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date, or



2.   A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. XRG currently accounts for share-based payments to employees using APB 25s intrinsic value method and, as such, recognizes no compensation expense for employee stock options. The impact of the adoption of SFAS 123R on XRG cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. There would have been no material impact on reported results of operations and earnings per share had the Company applied the fair value provisions of SFAS 123 to share-based payments.



The adoption of SFAS 123Rs fair value method may have an impact, possibly material, on XRGs future results of operations but no material impact on overall financial position. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense, if any, to be reported as financing cash flow, rather than as operating cash flow as required under current literature. This requirement may reduce net operating cash flows and increase net financing cash flows in the consolidated statement of cash flows of periods after adoption. Due to timing of the release of SFAS 123R and the choice between the two adoption methods, the Company is still analyzing the ultimate impact that this new pronouncement may have on its results of operations.



On March 29, 2005, the Staff of the Securities and Exchange Commission (SEC or the Staff) issued Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). Although not altering any conclusions reached in SFAS 123R, SAB 107 provides the views of the Staff regarding the interaction between SFAS 123R and certain SEC rules and regulations and, among other things, provide the Staffs views regarding the valuation of share-based payment arrangements for public companies. XRG intends to follow the interpretative guidance on share-based payment set forth in SAB 107 during the Companys adoption of SFAS 123R.



In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement changes the requirements for the accounting for and the reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement requires retrospective application to prior periods financial statements of changes in accounting principle. XRG intends to follow
the interpretive guidance on accounting for changes and error corrections as set forth in FASB No. 154, if applicable.



In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140, that allows a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. It also eliminates the exemption from applying Statement 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not anticipate that the adoption of SFAS 155 will have an impact on the
Companys overall results of operations or financial position.



In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140, that applies to the accounting for separately recognized servicing assets and servicing liabilities. This Statement requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not anticipate that the adoption of SFAS 156 will have an impact on the Companys overall results of operations or financial position.



In September 2006, the FASB issued SFAS No. 157,
Fair Value Measures (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that
require or permit fair value measurements. However, it does not apply to SFAS 123 (R). This statement shall be effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal
year, including any financial statements for an interim period within that fiscal year. The provisions of this statement should be
applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except in some
circumstances where the statement shall be applied retrospectively. The Company does not anticipate that the adoption of SFAS 157
will have an impact on the Companys overall results of operations or financial position.



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RESULTS OF OPERATIONS



Three months ended December 31, 2005 compared to three months ended December 31, 2004



XRG generated $7,420,980 in revenues during the three-month period ended December 31, 2005 as compared to $10,630,462 during the three-month period ended December 31, 2004. Our revenues decreased $3,209,482 for the three-month period ended December 31, 2005 compared to the same period in 2004. This decrease is the result of the termination of our terminal agreement with Highbourne Corporation in April 2005 and J Bently Companies in December 2005. In addition, we have been unable to expand our business and customer base due to our limited financial resources.



Cost of revenues were $6,521,594 and $8,650,689 resulting in a gross margin of $899,386 and $1,979,773 during the three-month period ended December 31, 2005 and 2004, respectively. During the three-month period ended December 31, 2005, the major components of cost of revenues are purchased transportation costs which are comprised mainly of owner operator settlements of approximately $4,835,000 and agent commissions of $901,000. For the three-month period ended December 31, 2004, the major components of cost of revenues were owner operator settlements of $4,429,000, agent commissions of $1,178,000 and company driver payroll costs of approximately $1,068,000. The cost of revenues decreased during the threemonth period ended December 31, 2005 compared to the same period in 2004 as a result of lower revenues.



For the three-month period ended December 31, 2005, total selling, general and administrative expenses were $1,304,617 as compared to $1,912,775 for the same period of the previous year, a decrease of $608,158 or 32%. This decrease is primarily the result of controlling costs and reducing our corporate overhead expenses.



We recorded a reduction in restructuring costs in the amount of $10,067 for the threemonth period ended December 31, 2005. This reduction in the restructuring costs during the three-month period ended Decmber 31, 2005 is due to a reduction in the HTI debt for the portion that is recorded on our books as we are the primary obligor, but it is paid by HTI.



Interest expense for the three-month period ended December 31, 2005 and 2004 was $393,209 and $187,586, respectively. This increase of $205,623 is primarily the result of increased debt which we incurred to fund our operations during the past year and the amortization of financing fees in the amount of $64,720 from our accounts receivable financing facility.



We recorded $866,792 related to the amortization of intrinsic value of convertible debt, debt discount for the value of detachable warrants and the debt discount for the allocation of fair market value between common stock and debt during the three-month period ended December 31, 2005. These amounts are non-cash amounts that are amortized over the life of the notes.



We recorded a gain of $473,382 for the three-month
period ended December 31, 2005 for the fair market value of the 2,734,412 potential shares that are in excess of the
Companys authorized shares at December 31, 2005.



We had a net loss of $1,798,295 for the three-month
period ended December 31, 2005 as compared to a net loss of $120,588 for the three-month period ended December 31, 2004. This
increase in our net loss of $1,677,707 over that of the three-month period ended December 31, 2004 is the result of the additional
interest from increased debt, the amortization of the intrinsic value of convertible debt and the impairment of
goodwill.



Nine months ended December 31, 2005 compared to nine months ended December 31, 2004



XRG generated $24,834,176 in revenues during the nine-month period ended December 31, 2005 as compared to $30,256,917 during the nine-month period ended December 31, 2004. Our revenues decreased $5,422,741 from the nine- month period ended December 31, 2004 to the same period in 2005. This decrease is primarily the result of the termination of our terminal agreement with Highbourne Corporation in April 2005 and J Bently Companies in December 2005.



Cost of revenues were $22,104,052 and $26,339,938 resulting in a gross margin of $2,730,124 and $3,916,979 during the nine-month period ended December 31, 2005 and 2004, respectively. Related expenses during the nine-month period ended December 31, 2005 were primarily costs associated with purchased transportation. The major components of purchased transportation costs during the nine-month period ended December 31, 2005 were owner operator settlements of approximately $14,353,000, agent commissions of approximately $3,027,000, fuel costs of  approximately $1,938,000 and company driver payroll costs of approximately $846,000. The major components of purchased transportation costs during the nine-month period ended December 31, 2004 were owner-operator settlements of approximately $14,468,000, agent commissions of approximately $1,723,000, fuel of approximately $1,728,000 and company driver payroll
costs of  approximately $3,093,000.



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For the nine-month period ended December 31, 2005, total selling, general and administrative expenses were $4,755,573 as compared to $8,438,666 for the same period of the previous year, a decrease of $3,683,093 or 44%. This decrease is primarily the result of controlling costs and reducing our corporate overhead expenses.



We recorded restructuring costs of $570,607 for the nine-month period ended December 31, 2005 as compared to $13,378 for the nine-month period ended December 31, 2004. The restructuring costs for the nine-month period ended December 31, 2005 are from costs that were incurred in restructuring acquisitions and terminal agreements as part of our new business strategy.



Interest expense for the nine-month period ended December 31, 2005 and 2004 was $1,182,466 and $784,840, respectively. This increase of $397,626 is primarily the result of increased debt which we incurred to fund our operations during the past year and the amortization of financing fees in the amount of $194,161 from our accounts receivable financing facility.



We recorded $1,942,862 and $153,844 related to the amortization of intrinsic value of convertible debt, debt discount for the value of detachable warrants and the debt discount for the allocation of fair market value between common stock and debt during the nine-month period ended December 31, 2005 and 2004, respectively. These amounts are non-cash amounts that are amortized over the life of the notes.



We recorded a gain of $125,938 for the nine-month period ended December 31, 2005 for the fair market value of the 2,734,412 potential shares that are in excess of the Companys authorized shares at December 31, 2005.



We had a net loss of $6,250,150 for the nine-month period ended December 31, 2005 as compared to a loss of $5,473,749 for the nine-month period ended December 30, 2004. This increase in our net loss of $776,401 over that of the nine-month period ended December 31, 2004 is primarily due to the accounting for non-cash items, such as, the intrinsic value of convertible debt and the impairment of goodwill, and restructuring costs.



LIQUIDITY AND CAPITAL RESOURCES



To date, we have funded our capital requirements and our business operations with funds provided by borrowings and equity investments.




        Interim Financing Arrangements with Barron




In order to satisfy our interim working capital requirements, we have borrowed funds from Barron, our largest shareholder. The following table sets forth a summary of the date, amount, interest rate, collateral and extended maturity date relating to such borrowings:



DATE
        
        AMOUNT
        
        INTERESTRATE
        
        COLLATERAL
        
        CURRENTMATURITY DATE
        
        EXTENDEDMATURITY DATE9/10/04
        
        $
        225,810
        
        6
        %
        20 Trailers
        
        3/31/05
        
        12/31/0610/1/04
        
        
        166,275
        
        6
        %
        15 Tractors
        
        3/31/05
        
        12/31/062/23/05
        
        
        1,180,000
        
        10
        %
        All Assets
        
        4/23/05
        
        12/31/063/3/05
        
        
        800,000
        
        10
        %
        All Assets
        
        5/1/05
        
        12/31/066/2/05
        
        
        1,250,000
        
        10
        %
        All Assets
        
        12/31/05
        
        12/31/067/29/05
        
        
        450,000
        
        18
        %
        All Assets
        
        12/31/05
        
        12/31/0611/18/05
        
        
        30,000
        
        18
        %
        All Assets
        
        3/31/06
        
        12/31/06Financing Subsequent to December 31, 20052/21/06
        
        
        480,000
        
        12
        %
        All Assets
        
        12/31/06
        
        12/31/066/28/06
        
        
        25,000
        
        15
        %
        All Assets
        
        12/31/06
        
        12/31/0610/20/06
        
        
        600,000
        
        12
        %
        All Assets
        
        4/20/08




On May 20, 2005, we entered into a Promissory Notes Modification Agreement with Barron, extending the due date of certain of the above Notes, until December 31, 2005. Subsequently, the note was extended until December 31, 2006. In connection with this arrangement, Barron agreed to subordinate its right of payment and interest on such notes and other future indebtedness to Kenneth A. Steel, Jr., who is the holder of a $500,000 promissory note of XRG. We are obligated to use at least seventy percent (70%) of the proceeds from any debt on equity financings to repay these notes.



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During June 2005, the Company received funding from Barron, its largest shareholder, consisting of 16 units totaling $1,600,000. A $100,000 unit consisted of (i) a $78,125 promissory note, and (ii) $21,875 allocated to acquire 10,937.5 shares of its common stock at $2.00 per share and the right to acquire 343,750 shares of common stock through a warrant with an exercise price of $2.00. Accordingly, in June 2005, Barron invested $350,000 to acquire 175,000 shares of our common stock and is the holder of a $1,250,000 promissory note. The $1,250,000 promissory note has an annual interest rate of 10% and matures on December 31, 2005. Subsequently, the note was extended until December 31, 2006. In addition, Barron has the right to acquire 5,500,000 shares of common stock pursuant to the warrant granted on June 2, 2005, at an exercise price of $2.00. These warrants have cashless exercise,
registration rights, and most favored nations anti-dilution protection. The warrant to purchase the 5.5 million shares of common stock was allocated 78% to the debt proceeds and 22% to the equity proceeds. The portion of the warrant that was allocated to the debt proceeds was valued at $889,996 which was recorded as a discount on notes payable and will be amortized to interest expense over the life of the note.



On August 2, 2005, XRG, Inc. (XRG) received $600,000 from Barron, its largest shareholder, as an infusion of additional working capital. The agreements for this funding were executed on July 29, 2005. This funding is the form of units, consisting of promissory notes, common stock and common stock purchase warrants. Each $60,000 unit consist of a $45,000 note, 7,500 shares of common stock with a purchase price of $2.00 per share and warrants to acquire 375,000 shares of the Companys common stock exercisable at $2.00, subject to adjustment. Accordingly, in the aggregate, XRG has issued $450,000 of promissory notes bearing interest at 18% per annum with a maturity date of December 31, 2005. Subsequently, the note was extended until December 31, 2006. In addition, XRG issued to Barron 75,000 shares of its common stock at a purchase price of $2.00 per share, for a total purchase price of
$150,000. XRG issued to Barron a warrant to acquire up to 3,750,000 of its common stock exercisable at $2.00 per share. These warrants have cashless exercise, registration rights, and most favored nations anti-dilution protection. The warrant to purchase the 3,750,000 shares of common stock was allocated 75% to the debt proceeds and 25% to the equity proceeds. The portion of the warrant that was allocated to the debt proceeds was valued at $331,798 which was recorded as a discount on notes payable and will be amortized to interest expense over the life of the note.



On November 18, 2005, XRG received $30,000 from Barron Partners, LP in order to meet fuel funding requirements for which Barron was issued a $30,000 promissory note with interest at 18.0% and maturing on March 31, 2006. Subsequently, the note was extended until December 31, 2006.



On February 21, 2006, XRG received $580,000 from Barron Partners, LP (Barron) in order to meet interim working capital requirements, which includes the elimination of an overdraft position with Wachovia Bank. The securities acquired by Barron were issued in ten (10) units. Each unit consisted of a $48,000 note, 5,000 shares of Common Stock with a purchase price of $2.00 per share, subject to adjustment and warrants to acquire 10,000,000 shares of XRGs Common Stock exercisable at $2.00, subject to adjustment. In the aggregate, Barron was issued a $480,000 promissory note bearing interest at 12.0% per annum with a maturity date of December 31, 2006, 50,000 shares of XRGs Common Stock at a purchase of $2.00 per share, and warrants to acquire 100,000,000 shares of XRGs Common Stock exercisable at $2.00 per share.



On June 28, 2006, XRG received $25,000 from Barron Partners, LP in order to meet the first payment in the Couture settlement for which Barron was issued a $25,000 promissory note with interest at 15.0% and maturing on December 31, 2006.



All of the aforementioned notes with Barron Partners, LP are currently in default. The Company is negotiating with Barron for extensions of the due dates.



On October 20, 2006, XRG received $600,000 from Barron Partners, LP in order to finance the transaction agreements with Chromos, Inc based in Central Florida to enter into a three year agency agreement with XRG and with Local Logistics, LLC to enter into a three year agency agreement with XRG, and working capital for XRG for which Barron was issued a $600,000 promissory note with interest at 12.0%, maturing on April 20, 2008 with payments of interest and principal beginning February 2007.



The shares and warrants issued to Barron have registration rights, most favored nations anti-dilution protection, cashless exercise provisions, and registration rights with liquidated damages.



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
        Restructured Arrangements with Kenneth A. Steel, Jr.




On January 5, 2005 Mr. Steel, an existing shareholder advanced us $500,000 pursuant to a promissory note that was originally repayable on February 5, 2005. The Company did not pay this note as due and obtained an original extension through March 31, 2005. As part of the Companys recent restructuring it has entered into a restated promissory note with Ken Steel for $500,000, which is payable on December 31, 2005 and bears interest at 17%. Default interest is 24% and XRG has agreed to grant Mr. Steel a lien and security interest in its assets. Barron has agreed to subordinate repayment of principal and interest on all Barron notes to the repayment of Mr. Steels note. In May 2005, XRG paid Mr. Steel approximately $72,900 to satisfy past defaults and as forbearance consideration. Interest is payable monthly. During June 2005, the Company granted a warrant to
this note holder to acquire up to 1,000,000 shares of its Common Stock at an exercise price of $2.00 per share, subject to anti-dilution adjustment. This warrant was valued at $721,068 of which $500,000 was recorded as a discount on notes payable and $221,068 was recorded to a deferred equity account. These amounts were amortized to interest expense over the life of the note.




        Current Liquidity




During the nine-month period ended December 31, 2005; we used $1,315,222 in cash from operating activities as compared to $4,594,305 during the same period in 2004. There were no investing activities for the present nine-month period. Financing activities for the nine-month period ended December 31, 2005 provided $1,315,222 of which $1,730,000 is proceeds from promissory notes and $501,667 is proceeds from common stock and options exercised. Our current cash balance at December 31, 2005 is -0-.



During October 2005, we entered into an agreement with CAPCO whereby CAPCO advanced $200,000 to us from which CAPCO received a certificate of deposit pledge from Barron in the amount of $200,000. Also, CAPCO increased the advance rate from 85% to 87.5% of the accounts receivables that are less than ninety days old. On January 6, 2006, the Company must repay the $200,000 and the advance rate will decrease back to 85% of the eligible accounts receivables. If the Company does not pay back the $200,000 by January 6, 2006 or if the Company has an event of default with CAPCO: CAPCO may liquidate the pledged certificate of deposit. We entered into this agreement as several of our accounts receivable were over ninety days and we determined that when we converted to the Load Z system to do our billing, not all of the invoices were printed and mailed. Currently the invoices printed and mailed are compared to a
listing of invoices for that day to ensure they are all printed and mailed out. The CAPCO advance of $200,000 and increase of the advance rate is to provide us some liquidity while we are collecting on these invoices and we will use the monies we collect on the over ninety days to pay the advance and to absorb the reduction in the advance rate. At January 31, 2006 we reduced our advance rate back to 85.0%, but were unable to repay the $200,000 advance from CAPCO until we moved our accounts receivable financing to Corporate Billing, Inc. on August 3, 2006, at which time the $200,000 advance was repaid to CAPCO.



We are currently in default under $155,000 of 15% convertible notes due to six note holders that matured on December 31, 2004; $20,000 of 12% notes due to two note holders that matured during April and June 2005 and have a redemption premium of 150%; $10,000 of 12% notes due to two note holders which matured on September and October 2004; and one other promissory note of $50,000 due to one holder which matured on February 1, 2005. We issued the $50,000 note holder 7,500 shares of our common stock at maturity for accrued interest. We also are obligated to issue 10,000 shares of common stock each month until this note is paid off. We have negotiated settlement agreement for three of the notes in default as described in Note 4  Notes Payable in Notes to Consolidated Financial Statements.



Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. We incurred operating losses of approximately $5,596,000 for the nine months ended December 31, 2005, have an accumulated deficit at December 31, 2005 of approximately $40,981,000, which consists of approximately $15,405,000 from unrelated dormant operations and $25,576,000 from current operations; and a tangible negative net worth of approximately $6,699,000 as of December 31, 2005. In addition, we have negative working capital of approximately $6,744,000 at December 31, 2005 and have used approximately $1,315,222 of cash from operations for the nine months ended December 31, 2005. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary in the event we cannot continue in existence.



There is no assurance that we will be able to raise additional capital in the near future. Our existing investors are not willing to make any additional financial commitments until such time as we are able to stabilize our operations and improve our management and accounting information systems. If we are not able to raise capital in the near future, substantial doubt exists as to our ability to sustain operations.



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Seasonality



In the transportation industry, results of operations frequently show a seasonal pattern. Our operating results in the first and fourth calendar quarters are normally lower due to reduced demand during the winter months. Harsh weather can also adversely affect our performance by reducing demand and our ability to transport freight and increasing operating expenses.



Inflation



Most of our expenses are affected by inflation, which generally results in increased operating costs. In response to fluctuations in the cost of petroleum products, particularly diesel fuel, we have implemented a fuel surcharge in our contractual agreements. The fuel surcharge is designed to offset the cost of fuel above a base price and increases as fuel prices escalate over the base. We believe that the net effect of inflation on our results of operations is minimal.



Item 3.
        Evaluation of Disclosure Controls and Procedures




(a)Evaluation of disclosure controls and procedures.As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, current management concluded that our disclosure controls and procedures for the quarter ended December 31, 2005 were inadequate and that XRG continues to experience material weaknesses in its disclosure controls and procedures. In an attempt to mitigate such disclosure controls and procedures weaknesses we have taken various measures. We have also restructured our business model from an asset based to a non-asset based carrier which should
substantially reduce the accounting and administrative controls and procedures requirements imposed upon us. During the quarter ended December 31, 2005, we continued implementing one uniform accounting and information systems software package  Load Z. During the quarter, we determined that this system would not meet our needs and began reviewing industry standard software to implement which we hope will improve our financial and information reporting systems. However, we do not currently have the available cash resources to acquire an industry standard software platform. In addition, such platforms will still need substantial modifications in order to meet the needs of the XRG operating models.



We have not begun the process of establishing compliance with Section 404 of Sarbanes-Oxley. There is no assurance that we will be able to timely comply with the Section 404 Sarbanes-Oxley controls and procedure requirements in connection with the audit of our fiscal 2007 financial statements.



(b)Changes in internal controls over financial reporting.In connection with the new rules, we are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that our systems evolve with our business. In connection with our ongoing evaluation of internal controls over financial reporting, certain internal control matters were noted that require corrective actions.



On February 1, 2005 we received a letter from the Division of Corporate Finance of the Securities and Exchange Commission regarding Item 4.01 of Form 8-K relating to a change in our auditors filed October 14, 2004 and on Internal Control Weaknesses and Management Reportable Conditions letter issued by our prior auditors.



Our former auditors, Pender Newkirk & Company, CPAs (PNC) advised us of weaknesses in our internal accounting controls necessary for the preparation of financial statements during our fiscal year ended March 31, 2004. In the 2004 Reporting Package dated August 7, 2004 our former auditors identified certain reportable conditions that were considered material weaknesses in our internal controls subsequent to filing our form 10-KSB on July 14, 2004. Our former auditors reviewed our disclosures on internal controls in Item 8(a) 10-KSB prior to filing. However, we are disclosing the reasons why the disclosure controls and procedures were ineffective during our fiscal year ended March 31, 2004, and what measures we have taken to improve our internal controls and procedures.



Internal controls considered to be a material weakness in the 2004 Reporting Package are as follows:



1.   During the audit, PNC encountered that detail schedules and other documentation supporting general ledger accounts did not always agree with the general ledger balances, causing numerous adjusting entries to the final general ledger. In addition, many account balances required extensive reconciliation and outside corroboration to finalize financial information.



These issues caused significant delays in producing financial statements at the end of the accounting period and will continue to cause delays, as well as allow for possible irregularities, including fraud, to exist and continue without notice.



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2.   Due to the limited number of people working in XRGs offices, many critical duties were combined. During the audit, certain companies within the consolidated group had a single individual prepare and sign checks, reconcile bank accounts, perform payroll duties and maintain the general ledger.



3.   The Company did not verify that all legal requirements were met prior to issuing shares of stock in exchange for convertible debt. As a result of this deficiency, the Company issued stock in error to certain convertible debt holders. PNC also discovered that some debt holders who were issued stock were subsequently paid cash for the same debt securities.



4.   The Company does not prepare a disclosure, a 10-KSB, nor a MD&A checklist to assist in preparing financial statements and the 10-KSB.



5.   During sales cut-off testing, PNC noted numerous sales for the year ended March 31, 2004 that were recorded subsequent to year-end.



6.  
PNC identified inaccurate payroll tax returns filed for XRG, Inc. and XRG Logistics, Inc.



We are continuing the process of identifying and implementing corrective actions identified to improve the design and effectiveness of our internal controls, including enhancement of systems and procedures. Significant additional resources will be required to establish and maintain appropriate controls and procedures and to prepare the required financial and other information during this process.



Even after corrective actions have been implemented, the effectiveness of our controls and procedures may be limited by a variety of risks including:




        faulty human judgment and simple errors, omissions or mistakes;





        collusion of two or more people;





        inappropriate management override of procedures; and





        risk that enhanced controls and procedures may still not be adequate to assure timely and reliable financial information.




If we fail to have effective internal controls and procedures for financial reporting in place, we could be unable to provide timely and reliable financial information.



We did not take measures during our fiscal year ended March 31, 2005 to remediate the internal control weakness identified in the 2004 reporting package. However, we are in the process of attempting to address and eliminate the material weaknesses in our internal controls and procedures as identified in the 2004 reporting package as follows:



We have appointed Jay Ostrow, our current Principal Accounting Officer and Controller, to Chief Financial Officer. A substantial amount of our financial statement preparation and underlying schedules were prepared utilizing the services of an outside consultant during the preparation of our 2004 and 2005 audits under the prior CFO. However, we believe it is essential to have a fulltime and competent Chief Financial Officer, if we are to adequately remediate the controls and procedures deficiencies identified by PNC.



During the year ended March 31, 2005 we utilized at one time or another three separate accounting and informational reporting software packages. Daily revenues and direct costs were recorded in Strategy-5. Journal entries were recorded in LoadZ and part of our accounts payable were recorded in ACC Pac. It was generally agreed that Strategy-5 was difficult to use and that many users did not follow input protocol procedures which resulted in numerous phantom and duplicate transactions that required reversal or adjustment. Furthermore, these systems did not interface with each other and we were not able to generate accurate trial balances and general ledgers without substantial manual input and use of excel format spreadsheets. Subsequent to March 31, 2005, we made the decision to abandon ACC Pac and Strategy-5.



During the remainder of the year ended March 31, 2006, we will use LoadZ as our primary accounts payable, general ledger and informational reporting software package, but not for distribution. As of the date of this filing we have implemented LoadZ for all of our subsidiaries and agents. We have determined that we need to purchase industry standard software. We are in the process of determining which software package fits our needs and financial situation. We hope that by acquiring and utilizing one uniform information reporting package it will eliminate many of the problems identified in the 2004 reporting package.



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During the year ended March 31, 2005 we did not timely reconcile our bank accounts. We are currently dedicating an accounting clerk to make more timely reconciliations of all bank accounts on a monthly basis.



In October 2005, we hired an Operations Accounting Manager, with industry background and experience, to oversee our daily operational processes, including billing, collections and driver settlements. This individual is currently based in our Chattanooga office.



Effective March 1, 2006, XRG moved all of its general and administrative functions as they relate to billing, collections, driver payroll, safety and insurance to Chattanooga, Tennessee. These functions operate in their own space with XRG employees at the offices of our terminal, Express Freight, which is our highest grossing terminal and central to all of our other operating terminals and agents.



Our Board of Directors requires all new contracts be approved by the Board. Board approval is required to issue new shares of our stock. This approval process requires proof that all legal requirements are met prior to issuing shares of stock.



In the future, we will use a 10-KSB and MD&A checklist as a guide in preparing our financial statements and notes.



During the quarter ended June 30, 2004, we began using Spectrum HR (now O2HR), an employee leasing company, to facilitate our payroll processing for all employees for all divisions. Spectrum HR remits the payroll taxes and completes the payroll reports on our behalf. We plan on continuing this relationship with Spectrum HR, which should reduce problems with accurately filing our payroll tax returns.



During the quarter ended December 31, 2005 we continued to experience inadequacies in our accounting systems and internal controls. These include the departure of accounting personnel, including the former chief financial officer; continued difficulties in the conversion of several accounting and logistics management software packages; interpretation for the proper accounting treatment of complex equity transactions, delinquent issuance of stock certificates and balancing out the accounts receivable booked to the invoices sent out which resulted in a large accounts receivable over ninety days.



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PART II  OTHER INFORMATION



Item 1.
        Legal Proceedings




The following is a summary of current pending legal proceedings and claims. From time to time, we may be involved in other litigation relating to our business. There is no assurance that we may not be involved in future litigation which will have a material adverse affect upon us due to the costs associated with defending such matters or an unfavorable outcome in such proceedings. Our recent restructuring and limited financial resources increases the risk that we will be involved in future litigation.




        Highbourne Litigation




On April 8, 2005, Stephen Orenic, a principal of AGB Transportation Services, LLC, the successor in interest to Highbourne Corporation, notified XRG that AGB was terminating the terminal agreement dated October 4, 2004 between AGB and XRG Logistics, Inc. Mr. Orenic alleged that XRG failed to make timely payments of certain regular commissions and monthly productivity bonuses. XRG disagrees with the allegations made by Mr. Orenic and believes that the termination was improper.



On April 27, 2005, XRG filed a complaint against Highbourne Corporation, its successor in interest, AGB Transportation Services, LLC, and the principals of these entities, Stephen Orenic and Sherri Kenner, in the Circuit Court for the 13th Judicial Circuit in and for Pinellas County, Florida, Case No. 05-3766. The complaint alleges that AGB, Orenic and Kenner breached the original acquisition agreement entered into between the parties in February 2004. In addition, the complaint alleges that Orenic and Kenner have violated the confidential and non-compete provisions of their employment agreements. XRG alleges that the actions of Orenic, Kenner and AGB in entering into a new agency agreement with a third party, American Trans-Freight, LLC, and the utilization by such parties of XRGs transportation equipment is improper. Furthermore, XRG alleges that such parties are improperly using its
customer list, supplier list, shipper contracts and owner/operator contracts for their own benefit and for the benefit of a competitor of XRG.



XRG is seeking various remedies, including damages relating to breach of contract, replevin of assets, breach of fiduciary duty of Orenic and Kenner, including but not limited to the duties of loyalty and fair dealing, and also that Orenic and Kenner have breached the restrictive covenants and covenants not to compete set forth in their employment agreements.



In November 2006, XRG settled their claim with Highbourne Corporation, AGB Transportation Services, LLC, Orenic and Kenner. However, the operations of Highbourne are no longer included in the XRG financial statements from April 8, 2005 through December 31, 2005.




        Couture Litigation




On May 4, 2005, XRG was served with a complaint filed by Stephen R. Couture in the Pinellas County, Florida, Circuit Court, Case No. 05-3084CI-11, alleging that XRG was in breach of his employment agreement. Mr. Couture alleges that XRG unilaterally and arbitrarily reduced the compensation due Mr. Couture to an amount less than the amount provided for in his agreement. In addition, Mr. Couture alleged that XRG unilaterally did away with car reimbursement and car insurance benefits provided in the employment agreement. In addition, he alleged that XRG has failed to pay his unused vacation.



Mr. Couture had refused to voluntarily resign as director of XRG, notwithstanding the institution of this lawsuit. On August 5, 2005, XRG received the written consents from the holders of 9,416,042 shares of its common stock, representing approximately 62% of its outstanding common consented to the removal of Stephen Couture as a director of XRG.



XRG has filed a counterclaim for declaratory relief, breach of contract, breach of fiduciary duty, and fraud in the inducement against Mr. Couture in the above referenced action.



On June 22, 2006, Mr. Couture and XRG entered into a mediation agreement. Mr. Couture agrees to return all of his and his fathers shares of common stock totaling 574,166 shares in exchange for six monthly payments of $25,000 and one payment of $4,375. XRG management and counsel felt that the settlement was reasonable and less than half the anticipated legal fees to litigate the matter.



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
        Note holder Litigation




The Company is a defendant in a lawsuit filed in the Circuit Court of the Sixth Judicial Circuit in Pinellas County, Florida by five individuals who are the holders of its 15% senior convertible notes and warrants. The Company is in default in the payment obligations under these notes. The Company was obligated to repay such notes in the event of subsequent financings. The Company did not make payments on such notes. These notes have matured. Our exposure in this case is approximately $155,000 of principal amount of unpaid notes, accrued and unpaid interest plus attorneys fees.  The Company has the $155,000 plus unpaid interest recorded on our balance sheet.



In April 2006 the Company entered into a settlement
agreement with the noteholders for monthly payments of $10,000 until June 2007 with accrued interest being payable in cash or
shares of common stock in July 2007.




        Former Employee Claims




Andrew Davis, a former employee has filed a charge of discrimination with the U.S. Equal Employment Opportunity Commission (EEOC) as well as a complaint with the Department of Labor alleging he was terminated in violation of Sarbanes-Oxley. The Department of Labor found that Mr. Davis allegations were without merit and has withdrawn the complaint. The EEOC reached the same conclusion.




        RSV Claims




In April 2004, XRG through a wholly owned subsidiary, entered into an agreement and plan of merger with RSV, Inc. (RSV), a Tennessee corporation. XRG issued the shareholders of RSV 100,000 shares of its common stock, and agreed to assume certain indebtedness and liabilities of RSV. XRG has determined not to assume the liabilities and debts of RSV due to the results of its due diligence investigations and XRGs limited financial resources. Counsel to RSV has alleged damages in excess of $400,000 relating to XRGs failure to assume the debt of RSV and fulfill the conditions of the merger agreement.



Pursuant to the RSV merger agreement, the stock of RSV was to be held in escrow. However, it is XRGs understanding that RSV shares were never delivered to the escrow agent. In addition, XRG never took title to the RSV assets. However, XRG issued its shares to the RSV shareholders. Accordingly, XRG believes that the RSV shareholders have the right to a return of their RSV shares and that the XRG shares issued to the RSV shareholders should be returned to XRG.



Based upon the above factors, the Company recorded the common stock issued to RSV as a deposit which was written off during the quarter ended March 31, 2005. The Company has booked an accrual for the damages claimed by RSV as of December 31, 2005.



Item 2.
        Change in Securities and Use of Proceeds




During the three months ended September 30, 2005 we issued 250,000 shares of our common stock for cash for $500,000 for working capital. These shares were issued to a sophisticated investor. We believe the transaction was exempt from registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder.



During the three months ended September 30, 2005 we issued in total 198,820 shares of our common stock in exchange for services valued at approximately $171,202. These shares were issued to individuals, who are sophisticated investors. We believe these transactions were exempt from registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder.



During the three months ended December 31, 2005 we issued in total 90,000 shares of our common stock for interest valued at approximately $37,660. These shares were issued to an individual, who is a sophisticated investor. We believe these transactions were exempt from registration under Section 4(2) of the Securities Act of 1933 and Rule 506 promulgated thereunder.



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Item 3.
        Defaults Upon Senior Securities




We are currently in default under $155,000 of 15% convertible notes due to six note holders that matured on December 31, 2004; $20,000 of 12% notes due to two note holders that matured during April and June 2005 and have a redemption premium of 150%; $10,000 of 12% notes due to two note holders which matured on September and October 2004; and one other promissory note of $50,000 due to one holder which matured on February 1, 2005. We issued the $50,000 note holder 7,500 shares of our common stock at maturity for accrued interest. We also are obligated to issue 10,000 shares of common stock each month until this note is paid off. In addition, we have satisfied part of our obligations to various other note holders through the conversion of such notes and the sale of the shares received upon conversion pursuant to Rule 144.  At December 31, 2005, we have accrued interest on all of these securities that are in
default. We have negotiated settlement agreement for three of the notes in default as described in Note 4  Notes Payable in Notes to Consolidated Financial Statements.



Item 5.
        Other Information




Mr. Richard Francis became our Chief Executive Officer in April, 2005 replacing Kevin Brennan. Mr. Francis was previously the President of XRG, G&A, Inc. and R&R Express Intermodal, Inc., both XRG wholly-owned subsidiaries.



Mr. Terence Leong became a Director on May 20, 2005. Since 1996, Mr. Leong is the owner of Walker Street Associates, a management consulting firm. Additionally, Mr. Leong has assisted Barron, our principal note holder, in other financings and restructuring arrangements.



Effective May 20, 2005, a Mutual General Release was entered into between XRG, Barron and Donald Huggins. Mr. Huggins agreed that upon execution of this Release by all parties, he shall resign as a Director of XRG. Mr. Huggins agreed to release XRG and Barron from all claims, including but not limited to, obligations of XRG to Mr. Huggins pursuant to his Consulting Agreement dated March 1, 2004 and the Amendment thereto dated February 10, 2005. Mr. Huggins was released of all claims by XRG or Barron except claims grounded upon fraud, malfeasance, misappropriation of assets or theft. In addition, Mr. Huggins agreed to reduce his stock ownership in the Company by twenty-five percent (25%) so that his net holdings is approximately five hundred fifty two thousand five hundred (552,500) shares. Mr. Huggins was released of all claims by XRG or Barron except claims
grounded upon fraud, malfeasance, misappropriation of assets or theft.



XRG also entered into a similar agreement with its former Chief Executive Officer, Mr. Kevin Brennan. The Company agreed to pay Mr. Brennan Thirteen Thousand Four Hundred Twenty-Five and 90/100 Dollars ($13,425.90) and Mr. Brennan agreed to reduce his stock ownership in the Company from five hundred twenty-nine thousand one hundred sixty-seven (529,167) shares to three hundred sixty-nine eight hundred seventy (369,870) shares. In addition, Mr. Brennan released XRG from all obligations under his Employment Agreement originally dated March 1, 2004 as amended on February 10, 2005. XRG and Barron agreed to release Mr. Brennan from any claims or causes of action excepting only those which are grounded or based upon fraud, malfeasance, misappropriation of assets or theft.



On August 5, 2005, XRG received the written consents from the holders of 9,416,042 shares of its common stock, representing approximately 62% of its outstanding common stock appointing Richard Francis, Terence Leong and Michael Cronin as directors to service until the next annual meeting of shareholders or until such individual successors have been duly elected and qualified. In addition, these shareholders also consented to the removal of Stephen Couture as a director of XRG. These shareholders also ratified and approved the appointment of Mahoney Cohen & Co., CPA, as XRGs independent outside auditors for fiscal year ending March 31, 2006. Reference is hereby made to the Definitive Information Statement on Schedule 14C, which was filed on August 5, 2005 for additional information regarding these actions.



Effective December 10, 2005 XRG terminated the trailer and terminal agreements with J Bently Companies, Inc., Joseph Stapleton, and Stanley Shadden as Mr. Stapleton and Mr. Shadden were unable to effectively manage their agency in a manner that was financially beneficial to XRG. Although the operations of J Bently Companies did contribute to our revenues, the costs associated with the J Bently Companies operations resulted in a negative contribution to our net income.



Effective January 31, 2006 XRG notified its shareholders of record that shareholders holding a majority of the voting power amended the Certificate of Incorporation in order to increase the amount of authorized common stock from 25,000,000 shares to 50,000,000 shares.



On February 20, 2006, XRG and R&R Express, Inc., agreed to terminate the Administrative Services Agreement between XRG, Inc., XRG G&A, Inc., R&R Express, Inc. and Richard Francis, which was originally entered as of April 1, 2005 and amended on or about April 25, 2005. XRG, R&R Express, Inc., and Mr. Francis agreed to a 30-day transition period to relocate the administrative functions, which were managed by R&R Express, Inc. and Mr. Francis at R&R Express, Inc. Pittsburghs headquarters back to XRG.



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In connection with the termination of the Administrative Services Agreement, effective February 21, 2006, Mr. Francis resigned as our Chief Executive Officer and a Director. The termination of this relationship also affects XRGs ability to maintain the business and revenue of R&R Express Intermodal, Inc. In March 2006, R & R Express Intermodal, Inc. ceased operating as an agency of XRG.



XRG appointed Eddie R. Brown as its new Chief Executive Officer, effective February 21, 2006. Mr. Brown brings over thirty-five years of trucking industry experience to the Company. He is the co-founder and CEO of Highway Transport, Inc. in Evergreen, Alabama, a terminal which operates with XRG under an agency agreement.



On February 21, 2006, XRG received $580,000 from Barron Partners, LP (Barron) in order to meet interim working capital requirements, which includes the elimination of an overdraft position with Wachovia Bank. The securities acquired by Barron were issued in ten (10) units. Each unit consisted of a $48,000 note, 5,000 shares of Common Stock with a purchase price of $2.00 per share, subject to adjustment and warrants to acquire 10,000,000 shares of XRGs Common Stock exercisable at $2.00, subject to adjustment. In the aggregate, Barron was issued a $480,000 promissory note bearing interest at 12.0% per annum with a maturity date of December 31, 2006, 50,000 shares of XRGs Common Stock at a purchase of $2.00 per share, and warrants to acquire 100,000,000 shares of XRGs Common Stock exercisable at $2.00 per share.



Effective March 1, 2006, XRG moved all of its general and administrative functions from Pittsburgh as they relate to billing, collections, driver payroll, safety and insurance to Chattanooga, Tennessee. These functions operate in their own space with XRG employees at the offices of our terminal, Express Freight.



On March 15, 2006 the note between the Company and United Bank was successfully restructured between the Company, HTI and United Bank. The Companys portion of the restructured debt is $396,125 with interest at 9.50% and monthly payments of $6,000 increasing to $9,090 in April 2007. The note matures on March 15, 2011.



During the quarter ended March 31, 2006, XRG entered into four new agency agreements with terminals in Memphis, Tennessee; Augusta, Georgia; Atkins, Arkansas and Russellville, Arkansas.



On April 1, 2006 Eddie R. Brown entered into a three year employment agreement with XRG with a base compensation of $104,000 per year, a revenue override of 0.15% of billed line haul and brokerage revenues, and 1,000,000 shares of the Companys common stock vested over three years.



In April 2006 the Company entered into a settlement agreement with the $155,000 convertible unsecured note holders for monthly payments of $10,000 until June 2007 with accrued interest being payable in cash or shares of common stock in July 2007.



In May 2006 the Company entered into a settlement agreement with a $10,000 note holder for monthly payments of $1,000 until February 2007 with accrued interest being payable in shares of common stock in March 2007.



On June 22, 2006, Mr. Couture and XRG entered into a mediation agreement. Mr. Couture agrees to return all of his and his fathers shares of common stock totaling 574,166 shares in exchange for six monthly payments of $25,000 and one payment of $4,375. XRG management and counsel felt that the settlement was reasonable and less than half the anticipated legal fees to litigate the matter.



In June 2006 the Company entered into a settlement agreement with the $100,000 convertible note holder for monthly payments of $3,300 until October 2008 with accrued interest being payable in shares of common stock in April, August and December 2007.



On June 28, 2006, XRG received $25,000 from Barron Partners, LP in order to meet the first payment in the Couture settlement for which Barron was issued a $25,000 promissory note with interest at 15.0% and maturing on December 31, 2006.



Effective August 3, 2006 The Company entered into a factoring arrangement with Corporate Billing, Inc. (CBI)  Under the terms of the Client Agreement, XRG is advanced 90.0% of the daily billing and maintains a reserve of 10.0% with CBI from which interest at the Wall Street Journal prime rate and the discount fee of 0.45% is deducted. The advance rate was an improved by 5.0% over CAPCOs advance rate and the interest rate was reduced by 5.0%. Additionally, the were no commitment fees or renewal fees.



On August 3, 2006 XRG terminated its accounts receivable financing relationship with CAPCO.



On October 20, 2006, XRG received $600,000 from Barron
Partners, LP in order to finance the transaction agreements with Chromos, Inc based in Central Florida to enter into a three year
agency agreement with XRG and with Local Logistics, LLC to enter into a three year agency agreement with XRG, and working capital
for XRG for which Barron was issued a $600,000 promissory note with interest at 12.0%, maturing on
April 20, 2008 with payments of interest and principal beginning February 2007.



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Item 6.
        Exhibits




Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Richard Francis



Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Jay Ostrow



Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by Richard Francis and Jay Ostrow.





SIGNATURES



Pursuant to the requirements of the Securities Act of 1934, the Registrant had duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized.





XRG, Inc.Dated:   January 3, 2006
        
        
        /s/ Eddie R. BrownEddie R. BrownChief Executive Officer, Presidentand Director




/s/ Jay E. OstrowJay E. OstrowChief Financial Officer and PrincipalAccounting Officer and Director






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