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U. S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 AMENDMENT NO. 2
TO
 FORM 10-QSB
 þ
    
    Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2004
 o
    
    Transition report under Section 13 or 15(d) of the Exchange Act
 For the transition period from  to
 Commission File Number 0-49659
 XRG, INC.
  DELAWARE
    
    58-2583457(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 601 Cleveland Street, Suite 501 Clearwater, Florida 33755
  (727) 475-3060
   o þ
   o þ




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##### 



PagePart I  Financial InformationItem 1. Consolidated Financial Statements (Unaudited)Consolidated Balance Sheet  September 30, 2004
    
    
    1Consolidated Statements of Operations  Three and Six months ended September 30, 2004 and 2003
    
    
    2Consolidated Statements of Cash Flows  Three and Six months ended September 30, 2004 and 2003
    
    
    3Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Controls & Procedures
    
    
    28Part II  Other InformationItem 1. Legal Proceedings
    
    
    31Item 2. Change in Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits and Reports on Form 8-K
    
    
    33Signatures
    
    
    34Section 302 CertificationSection 906 Certification




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AssetsCurrent assets:Accounts receivable, net of allowance of $29,000
    
    $
    4,144,558Other current assets
    
    
    459,276Total current assets
    
    
    4,603,834Fixed assets, net of accumulated depreciation
    
    
    1,839,360Other assetsGoodwill
    
    
    3,694,031Other assets
    
    
    1,425,280Total other assets
    
    
    5,119,311$
    11,562,505Liabilities and Stockholders EquityCurrent liabilities:Current portion of long-term debt
    
    $
    966,292Current portion of long-term convertible debt; net of unamortized discount of $73,724
    
    
    290,000Current portion of capital lease obligations
    
    
    7,756Bank overdraft
    
    
    536,480Accounts payable
    
    
    410,114Accrued expenses
    
    
    642,840Accrued purchased transportation
    
    
    31,972Accrued payroll expenses
    
    
    264,722Factorer line of credit
    
    
    3,430,628Related party advances and payables
    
    
    255,126Total current liabilities
    
    
    6,835,930Long-term liabilities:Notes payable
    
    
    817,639Convertible notes payable
    
    
    100,000Other long-term liabilities
    
    
    55,923Total long-term liabilities
    
    
    973,562Total liabilities
    
    
    7,809,492Stockholders equity: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; 500,000,000 shares authorized;
265,003,379 shares issued and 260,793,379 outstanding
    
    
    265,003Common stock payable
    
    
    614,550Additional paid-in capital
    
    
    30,559,490Subscription receivable
    
    
    (5,000
    )Accumulated deficit
    
    
    (26,501,030
    )Treasury stock, at cost, 4,210,000 shares
    
    
    (1,180,000
    )Total stockholders equity
    
    
    3,753,013$
    11,562,505
  1




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Three months ended
    
    
    Six months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Revenues
    
    $
    10,105,147
    
    
    $
    298,225
    
    
    $
    19,626,455
    
    
    $
    298,225Cost of revenues
    
    
    8,449,334
    
    
    
    22,970
    
    
    
    17,144,687
    
    
    
    22,970Gross profit
    
    
    1,655,813
    
    
    
    275,255
    
    
    
    2,481,768
    
    
    
    275,255Selling, general and administrative expenses
    
    
    3,568,641
    
    
    
    1,063,135
    
    
    
    7,070,453
    
    
    
    1,225,625Restructuring costs
    
    
    13,378
    
    
    
    
    
    
    
    13,378
    
    
    
    3,582,019
    
    
    
    1,063,135
    
    
    
    7,083,831
    
    
    
    1,225,625Loss from operations
    
    
    (1,926,206
    )
    
    
    (787,880
    )
    
    
    (4,602,063
    )
    
    
    (950,370
    )Interest expense
    
    
    (242,596
    )
    
    
    (32,437
    )
    
    
    (597,254
    )
    
    
    (68,942
    )Intrinsic value of convertible debt and debt
discount for value of detachable warrants
    
    
    (80,119
    )
    
    
    (122,532
    )
    
    
    (153,844
    )
    
    
    (551,798
    )(322,715
    )
    
    
    (154,969
    )
    
    
    (751,098
    )
    
    
    (620,740
    )Net loss applicable to common shareholders
    
    $
    (2,248,921
    )
    
    $
    (942,849
    )
    
    $
    (5,353,161
    )
    
    $
    (1,571,110
    )Basic and diluted loss per common shareholders
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )Basic and diluted weighted average number of
common shares outstanding
    
    
    258,373,089
    
    
    
    17,435,202
    
    
    
    174,286,167
    
    
    
    13,865,017
  2




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Six months endedSeptember 30,2004
    
    
    2003Operating activitiesNet loss
    
    $
    (5,353,161
    )
    
    $
    (1,571,110
    )Adjustments to reconcile net loss to net cash
used by operating activities:Depreciation and amortization
    
    
    321,909
    
    
    
    6,811Bad debt
    
    
    8,000
    
    
    
    Common stock, options and warrants issued for services and compensation
    
    
    1,596,331
    
    
    
    856,076Stock issued in lieu of interest
    
    
    158,000
    
    
    
    4,955Amortization of discount and intrinsic value of convertible notes
    
    
    73,725
    
    
    
    551,798Amortization of deferred financing fees
    
    
    20,442
    
    
    
    Amortization of deferred stock compensation and consulting
    
    
    163,689
    
    
    
    (Increase) decrease, net of effect of acquisitions:Accounts receivable
    
    
    (958,753
    )
    
    
    Other assets
    
    
    (223,288
    )
    
    
    Increase (decrease), net of effect of acquisitions:Accounts payable
    
    
    50,367
    
    
    
    40,827Accrued expenses and other liabilities
    
    
    89,880
    
    
    
    9,340Total adjustments
    
    
    1,300,302
    
    
    
    1,469,807Net cash used by operating activities
    
    
    (4,052,859
    )
    
    
    (101,303
    )Investing activitiesPurchase of equipment
    
    
    (12,923
    )
    
    
    (1,305
    )Acquisition of businesses
    
    
    (2,000,000
    )
    
    
    Deposit on purchase of transportation equipment
    
    
    
    
    
    
    (50,000
    )Net cash used by investing activities
    
    
    (2,012,923
    )
    
    
    (51,305
    )Financing activitiesBank overdraft
    
    
    485,149
    
    
    
    Increase in advances to J. Bently Companies, Inc.
    
    
    
    
    
    
    (355,758
    )Factoring line of credit
    
    
    625,811
    
    
    
    Net borrowings (payments) on stockholder advances
    
    
    (15,000
    )
    
    
    7,500Proceeds from common stock issued and to be issued and options exercised
    
    
    5,425,865
    
    
    
    403,918Proceeds from issuance of notes payable, net
    
    
    255,336
    
    
    
    170,000Principal payments on notes payable
    
    
    (551,922
    )
    
    
    (20,000
    )Payment for treasury stock
    
    
    (95,000
    )
    
    
    Payments on capital lease
    
    
    (64,457
    )
    
    
    Net cash provided by financing activities
    
    
    6,065,782
    
    
    
    205,660Net increase in cash
    
    
    
    
    
    
    53,052Cash at beginning of period
    
    
    
    
    
    
    16,563Cash at end of period
    
    $
    
    
    
    $
    69,615
  3




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Six Months EndedSeptember 30,2004
    
    2003Supplemental disclosures of cash flow
information and non-cash investing
and financing activities:Cash paid during the period
for interest
    
    $
    455,381
    
    
    $
    36,188
            4




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Three months ended
    
    
    Six months endedSeptember 30,
    
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net loss, as reported
    
    $
    (2,248,921
    )
    
    $
    (942,849
    )
    
    $
    (5,353,161
    )
    
    $
    (1,571,110
    )Deduct: Fair value of stock-based
employee compensation costs
    
    
    (13,205
    )
    
    
    
    
    
    
    (13,205
    )
    
    
    Plus: Intrinsic value of
compensation costs included in net
loss
    
    
    13,200
    
    
    
    
    
    
    
    13,200
    
    
    
    Pro forma net loss
    
    $
    (2,248,926
    )
    
    $
    (942,849
    )
    
    $
    (5,353,166
    )
    
    $
    (1,571,110
    )Loss per share:Basic and Diluted  as reported
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )Basic and Diluted  pro forma
    
    $
    (0.01
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )
    7




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3.
    
    Fixed assets
  Trailers
    
    $
    281,000Tractors
    
    
    1,556,500Machinery and equipment
    
    
    8,000Office equipment and software
    
    
    221,9092,067,409Accumulated depreciation
    
    
    (228,049
    )Total Fixed assets, net
    
    $
    1,839,360
     4.
    
    Capital lease obligations
  8




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5.
    
    Notes Payable
   XRG, Inc.  Notes payable; Interest ranging from 12.00% to 15.00%;
Interest only payments payable quarterly; principal due at various
dates through June 2005; $20,000 of notes are in default at
September 30, 2005, notes are unsecured;
    
    $
    300,294XRG, 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 $0.42 per share.
    
    
    100,000Carolina Truck Connection, Inc. (CTC)  Notes payable; interest
ranging from 6.48% to 8.53%; Monthly payments of approximately
$6,000; due at various dates between September 2005 to December
2008 and a balloon payment of $226,000 due by November 10, 2004;
Secured by equipment.
    
    
    446,907Highway Transport, Inc.  Notes payable; interest ranging from
6.25% to 14.95%; Monthly payments of approximately $42,000; due
at various dates between 2004 to 2006; Secured by equipment.
    
    
    1,326,730$
    2,173,931
    6.
    
    Other Equity Transactions
  9




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11




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7.
    
    Acquisitions
  Express Freight Systems, Inc.
       12




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o
    
    The mutual termination of the Master Equipment Lease Agreement (MELA).o
    
    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.o
    
    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 7,500,000 shares of the Registrants common stock. 3,750,000 shares of our common stock
was 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. This reduced the purchase
price from $5,041,000 to $3,066,000.o
    
    All six employment agreements were mutually terminated by the Company and the former EFS shareholders and
employees.o
    
    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.o
    
    XRG, Inc. (Carrier) and the former EFS shareholders (Agent) executed 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 the direction of the Agent. Under this agreement, Carrier is not
responsible for any expenses incurred for the operation of the Agents terminal. The term of the Terminal
Agreement is ongoing with severe penalties if Agent terminates or violates the default provisions with
damages of $2 million if occurring in the first year, and $400,000 less each year thereafter. The former EFS
shareholders are held personally, jointly and severally, liable for these damages upon termination or
default.
  Accounts receivable
    
    $
    1,609,474Other current assets
    
    
    99,031Other assets
    
    
    55,171Goodwill and other intangibles
    
    
    2,918,135Total assets acquired
    
    
    4,681,811
 13




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Accrued expenses and payables
    
    
    (114,682
    )Factorer line of credit
    
    
    (1,501,129
    )Total liabilities assumed
    
    
    (1,615,811
    )Total purchase price
    
    $
    3,066,000
 RSV, Inc.
   
 Highway Transport, Inc.
   14




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Other current assets
    
    $
    38,910Fixed assets
    
    
    1,355,200Goodwill and other intangibles
    
    
    393,793Total assets acquired
    
    
    1,787,903Accrued expenses and payables
    
    
    (96,000
    )Notes payable
    
    
    (1,593,903
    )Total liabilities assumed
    
    
    (1,689,903
    )Total purchase price
    
    $
    98,000
 Highbourne Corporation
   Goodwill and other intangibles
    
    $
    56,000Total assets acquired
    
    
    56,000Total liabilities assumed
    
    
    Total purchase price
    
    $
    56,000
 Carolina Truck Connection, Inc.
  15




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Fixed assets
    
    $
    556,500Goodwill and other intangibles
    
    
    304,500Total assets acquired
    
    
    861,000Notes payable
    
    
    (489,000
    )Total liabilities assumed
    
    
    (489,000
    )Total purchase price
    
    $
    372,000
   16




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For the three months ended
    
    
    For the six months endedSeptember 30,
    
    
    September 302004
    
    
    2003
    
    
    2004
    
    
    2003Revenues
    
    $
    10,105,147
    
    
    $
    9,078,380
    
    
    $
    20,442,010
    
    
    $
    18,028,900Net loss applicable to common
shareholders
    
    $
    (2,248,921
    )
    
    $
    (1,349,397
    )
    
    $
    (5,452,043
    )
    
    $
    (2,106,017
    )Basic loss per share
    
    $
    (0.01
    )
    
    $
    (0.08
    )
    
    $
    (0.03
    )
    
    $
    (0.11
    )
      17




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Debt/EquipmentStructure
    
    
    
    
    
    Common
    
    
    Leasesof
    
    Cash @
    
    
    Shares
    
    
    Assumed
    
    
    Type ofAcquisition
    
    Transaction
    
    Close
    
    
    Issued
    
    
    (Estimate)
    
    
    Equipment
    
    EquipmentExpress
Freight
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Van/Non-asset
    
    106 o/oSystems, Inc. *
    
    Merger
    
    $
    2,000,000
    
    
    
    3,750,000
    
    
    
    0
    *
    
    basedHighway
Transport,
    
    Asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    Flatbed/Asset
    
    32 TractorsInc.
    
    Purchase
    
    
    0
    
    
    
    350,000
    
    
    
    1,594,000
    
    
    based
    
    12 o/oHighbourne
    
    Asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    Van/Non-assetCorporation(2)
    
    Purchase
    
    
    0
    
    
    
    200,000
    
    
    
    0
    
    
    based
    
    34 o/oCarolina Truck
    
    Asset
    
    
    
    
    
    
    
    
    
    
    
    
    
    Van/Asset
    
    7 Tractors,Connection, Inc.
    
    Purchase
    
    
    0
    
    
    
    1,200,000
    
    
    
    489,000
    
    
    based
    
    2 o/o$
    2,000,000
    
    
    
    5,500,000
    
    
    $
    2,083,000
 
 *
    
    On August 16, 2004, This Merger Agreement was amended which reduced the common shares
issued * to 3,750,000 and eliminated Long-Term Debt and Equipment Leases Assumed to $-0-.       19




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o
    
    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
us for the movement of our freight.o
    
    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.o
    
    3,750,000 shares of our common stock will be forfeited and returned to
us as part of the amendment. The additional $1,000,000 payment
to the former EFS shareholders was mutually terminated as part of
this amendment.o
    
    All six employment agreements were mutually terminated by us and the
former EFS shareholders and employees.o
    
    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.o
    
    XRG, Inc. (Carrier) and the former EFS shareholders (Agent)
executed a Terminal Agreement on August 16, 2004 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 the direction of the Agent.
Under this agreement, Carrier is not responsible for any expenses
incurred for the operation of the Agents terminal. The term of
the Terminal Agreement is ongoing with severe penalties if Agent
terminates or violates the default provisions with damages of $2
million if occurring in the first year, and $400,000 less each
year thereafter. The former EFS shareholders are held
personally, jointly and severally, liable for these damages upon
termination or default.
   20




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Headquarters
    
    
    
    Owner/Operators or
    
    
    
    ClosingCompany
    
    Location
    
    Carrier Type
    
    Owned Tractors
    
    Trailers
    
    DateJ. Bently Companies, Inc.*
    
    Sweetwater, TN
    
    Van
    
    17 Owner Operators,
46 Fleet Contracted
Tractors, 7 Company
tractors
    
    
    209
    
    
    September
1, 2003*R&R Express Intermodal, Inc.
    
    Pittsburgh, PA
    
    Intermodal
    
    34 Owner Operators
    
    
    
    
    
    January 1,
2004Highbourne Corporation
    
    Champaign, IL
    
    Van
    
    34 Owner Operators
    
    
    46
    
    
    April 2,
2004Highway Transport
    
    Evergreen, AL
    
    Flatbed
    
    32 Tractors, 12
Owner Operators
1 Company tractor
    
    
    47
    
    
    April 1,
2004Express Freight Systems
    
    Chattanooga, TN
    
    Van
    
    106 Owner Operators
    
    
    242
    
    
    April 21,
2004Carolina Truck Connection
    
    Fletcher, NC
    
    Van
    
    7 Tractors, 2 Owner
Operators, 7 Company
Tractors
    
    
    40
    
    
    April 28,
2004
 
 *
    
    Began operating under a Fleet Owner and Independent Contractor Agreement on this date.  22




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
    
    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.
        30




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Legal Proceedings
   31




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Change in Securities and Use of Proceeds
      32




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Defaults Upon Senior Securities
  
 Other Information
 
 Exhibits and Reports on Form 8-K
   33




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XRG, Inc.Dated: December 16, 2005/s/
    
    Richard FrancisRichard FrancisPresident, CEO,CFO & Director/s/
    
    Jay OstrowJay OstrowPrincipal Accounting Officer, Controller
 34