UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


(Mark one)


x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended February 28, 2011





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





Commission file number 0-17284





MERCARI COMMUNICATIONS GROUP, LTD.


(Exact name of registrant as specified in its charter)








Colorado

84-1085935(State or other jurisdiction

(IRS Employer Identification No.)of incorporation or organization)








135 Fifth Ave., 10thFloor, New York, NY 10010


(Address of principal executive offices)





(212) 739-7689


(Issuer’s telephone number)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes x  No  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes  ̈  No  ̈





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.


Large accelerated filer
 ̈

Accelerated filer
 ̈Non-accelerated filer
 ̈

Smaller reporting company
x





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


Yes x  No  ̈





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:  As of April 5, 2011, there were 45,411,400 shares of issuer’s common stock issued and outstanding.










MERCARI COMMUNICATIONS GROUP, LTD.


FORM 10-Q


February 28, 2011





INDEX








PageIntroductory Note. Cautionary Statement Regarding Forward-looking Information and Risk Factors
3Part I – Financial InformationItem 1.
Financial Statements
4Balance Sheets
4Statements of Operations
5Statements of Cash Flows
6Notes to Consolidated Financial Statements
7 – 13Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14Item 3.
Quantitative And Qualitative Disclosures About Market Risk
15Item 4(T).
Controls And Procedures
15Part II – Other InformationItem 1.
Legal Proceedings
16Item 1A.
Risk Factors
16Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
16Item 3.
Defaults Upon Senior Securities
16Item 4.
[Removed and Reserved]
16Item 5.
Other Information
16Item 6.
Exhibits
16Signatures
17





- 2 -


INTRODUCTORY NOTE. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION AND RISK FACTORS





This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 about Mercari Communications Group, Ltd. (the “Company,” “Mercari,” “we,” “us,” and “our”) that are subject to risks and uncertainties.  Forward-looking statements include information concerning future financial performance, business strategy, projected plans and objectives.  Statements preceded by, followed by or that otherwise include the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “may increase,” “may fluctuate” and similar expressions of future or conditional verbs such as “will,” “should,” “would,” and “could” are generally forward-looking in nature and not historical facts.  Actual results may differ materially from those projected, implied, anticipated or expected in the forward-looking statements.  Readers of this quarterly report should not rely solely on the forward-looking statements and should consider all uncertainties and risks throughout this report. The statements are representative only as of the date they are made.  The Company undertakes no obligation to update any forward-looking statement.





These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to the Company's beliefs, plans, objectives, goals, expectations, anticipations, estimates, financial condition, results of operations, future performance and business, including management's expectations and estimates with respect to revenues, expenses, return on equity, return on assets, asset quality and other financial data.





Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors, some of which are beyond the control of the Company. The following factors, among others, could cause the Company's results or financial performance to differ materially from its goals, plans, objectives, intentions, expectations and other forward-looking statements:





·
general economic and industry conditions;





·
limited resources and need for additional financing;





·
competition for suitable private companies with which to merge;





·
no definitive agreements or business opportunities identified;





·
substantial dilution to current shareholders if a merger occurs; and





·
our stock is thinly traded with limited liquidity.





For a discussion of these and other risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in Item 1A of the Company’s 2010 Annual Report filed on Form 10-K with the SEC, which is available on the SEC’s website at www.sec.gov.  All forward-looking statements are qualified in their entirety by this cautionary statement, and the Company undertakes no obligation to revise or update this Quarterly Report on Form 10-Q to reflect events or circumstances after the date hereof.  New factors emerge from time to time, and it is not possible for us to predict which factors, if any, will arise.  In addition, the Company cannot assess the impact of each factor on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


- 3 -


PART I - FINANCIAL INFORMATION





Item 1.  Financial Statements





MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


BALANCE SHEETS





(unaudited)
February 28,
2011


May 31,
2010Current AssetsCash

$
19,791


$
34,791Total Current Assets


19,791



34,791Total Assets

$
19,791


$
34,791Current Liabilities:Accounts Payable & Accrued Liabilities


2,199



425Total Liabilities

$
2,199


$
425Stockholders' Equity:Common Stock, Par value $.00001

Authorized 950,000,000 shares, Issued 45,411,400 shares at February 28, 2011 and at May 31, 2010


454



454Paid-In Capital


158,722



158,722Deficit accumulated during the development stage since March 1, 2004 in connection with quasi reorganization


(141,584
)


(124,810
)Total Stockholders' Equity


17,592



34,366Total Liabilities and Stockholders' Equity

$
19,791


$
34,791








The accompanying notes are an integral part of these financial statements.


- 4 -


MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


STATEMENTS OF OPERATIONS





CumulativesinceMarch 1,(unaudited)


(unaudited)


2004For the three months ended


For the nine months ended


Inception ofFebruary 28,


February 28,


development2011


2010


2011


2010


stageRevenues:

$
-


$
-


$
-


$
-


$
-Expenses:General and administrative


3,290



6,652



16,774



17,019



140,114Other Income (Expense):Interest expense


-



-



-



(621
)


(1,470
)Net Income (Loss)

$
(3,290
)

$
(6,652
)

$
(16,774
)

$
(17,640
)

$
(141,584
)Basic & Diluted Loss Per Share


(0.0001
)


(0.0001
)


(0.0004
)


(0.0009
)Weighted Average Shares


45,411,400



45,411,400



45,411,400



19,407,136





The accompanying notes are an integral part of these financial statements.


- 5 -


MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


STATEMENTS OF CASH FLOWS





(unaudited)

For the nine months ended February 28,


Cumulative

Since

March 31, 2004 Inception of Development2011


2010


StageCASH FLOWS FROM OPERATING ACTIVITIES:Net Loss

$
(16,774
)

$
(17,640
)

$
(141,584
)Increase (Decrease) in Accounts Payable


1,774



3,297



(16,767
)Increase (Decrease) in Accrued Interest


-



621



1,470Net Cash Used in operating activities


(15,000
)


(13,722
)


(156,881
)CASH FLOWS FROM INVESTING ACTIVITIES:Net cash provided by investing activities


-



-



-CASH FLOWS FROM FINANCING ACTIVITIES:Payments on shareholder loans


-



-



(610
)Proceeds from shareholder loans


-



4,000



33,350Proceeds from notes payable


-



-



20,000Proceeds from sale of stock


-



43,822



68,822Cash contributed by shareholders


-



-



55,000Net Cash Provided by financing activities


-



47,822



176,562Net (Decrease) Increase in Cash and Cash Equivalents


(15,000
)


34,100



19,681Cash and Cash Equivalents at Beginning of Period


34,791



6,250



110Cash and Cash Equivalents at End of Period

$
19,791


$
40,350


$
19,791SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for:Interest

$
-


$
-


$
-Franchise and income taxes

$
-


$
-


$
-








The accompanying notes are an integral part of these financial statements.


- 6 -


MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


NOTES TO FINANCIAL STATEMENTS





NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





This summary of accounting policies for Mercari Communications Group, Ltd. (a development stage company) is presented to assist in understanding the Company's financial statements. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.





Interim Reporting





The unaudited financial statements as of February 28, 2011 and for the three and nine months then ended reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and results of operations for the three and nine months. Operating results for interim periods are not necessarily indicative of the results which can be expected for full years.





Nature of Operations and Going Concern





The accompanying financial statements have been prepared on the basis of accounting principles applicable to a “going concern”, which assume that Mercari Communications Group, Ltd. will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations.





Several conditions and events cast doubt about the Company’s ability to continue as a “going concern.” The Company has incurred net losses of approximately $141,584 for the period from March 1, 2004 (inception of development stage) to February 28, 2011, has no revenues and requires additional financing in order to finance its business activities on an ongoing basis. The Company’s future capital requirements will depend on numerous factors including, but not limited to, continued progress in finding a merger candidate and the pursuit of business opportunities. The Company is actively pursuing alternative financing and has had discussions with various third parties, although no firm commitments have been obtained. In the interim, shareholders of the Company have been contributing capital to the Company to meet its ordinary and normal operating expenses. Management believes that actions presently being taken to revise the Company’s operating and financial requirements provide them with the opportunity to continue as a “going concern”.





These financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a “going concern”. While management believes that the actions already taken or planned, will mitigate the adverse conditions and events which raise doubt about the validity of the “going concern” assumption used in preparing these financial statements, there can be no assurance that these actions will be successful. If the Company were unable to continue as a “going concern,” then substantial adjustments would be necessary to the carrying values of assets, the reported amounts of its liabilities, the reported revenues and expenses, and the balance sheet classifications used.





- 7 -


MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


NOTES TO FINANCIAL STATEMENTS


(continued)





NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Organization and Basis of Presentation





The Company was incorporated under the laws of the State of Colorado on December 30, 1987. From 1988 until early in 1990, the Company was engaged in the business of providing educational products, counseling, seminar programs, and publications such as newsletters to adults aged 30 to 50. The Company financed its business with private offerings of securities, obtaining shareholder loans, and with an underwritten initial public offering of securities registered with the Securities and Exchange Commission (“SEC”). The Company’s business failed in early 1990. The Company ceased all operating activities during the period from June 1, 1990 to November 30, 2001 and was considered dormant. During this period that the Company was dormant, it did not file required reports with the SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”). From November 30, 2001 to March 1, 2004, the Company was in the development stage. On August 3, 2004, the stockholders of the Company approved a plan of quasi reorganization which called for a restatement of accounts to eliminate the accumulated deficit and related capital accounts on the Company’s balance sheet. The quasi reorganization was effective March 1, 2004. Since March 1, 2004, the Company is in the development stage, and has not commenced planned principal operations.





Nature of Business





The Company has no products or services as of February 28, 2011. The Company is seeking merger or acquisition candidates. The Company intends to acquire interests in various business opportunities, which in the opinion of management will provide a profit to the Company.





Cash and Cash Equivalents





For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents to the extent the funds are not being held for investment purposes.





Pervasiveness of Estimates





The preparation of financial statements in conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





Income Taxes





The Company accounts for income taxes under the provisions of ASC 740-10 & 740-30 (formerly SFAS No.109, “Accounting for Income Taxes”).  ASC 740 requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets and liabilities.





Loss per Share





Basic loss per share has been computed by dividing the loss for the year applicable to the common shareholders by the weighted average number of common shares during the years. There are no outstanding common stock equivalents for February 28, 2011 and 2010 and are thus not considered.


- 8 -


MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


NOTES TO FINANCIAL STATEMENTS


(continued)





NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Concentration of Credit Risk





The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements.





Fair Value of Financial Instruments





The carrying value of the Company's financial instruments, including cash, accounts payable and accrued liabilities at February 28, 2011 and May 31, 2010 approximates their fair values due to the short-term nature of these financial instruments.





NOTE 2 - INCOME TAXES





As of May 31, 2010, the Company had a net operating loss carry forward for income tax reporting purposes of approximately $125,000 that may be offset against future taxable income through 2029.  Current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs.  Therefore, the amount available to offset future taxable income may be limited.  No tax benefit has been reported in the financial statements, because the Company believes there is a 50% or greater chance the carry-forwards will expire unused.  Accordingly, the potential tax benefits of the loss carry-forwards are offset by a valuation allowance of the same amount.





2010


2009Net Operating Losses

$
18,750


$
15,750Valuation Allowance


(18,750
)


(15,750
)$
-


$
-





The provision for income taxes differs from the amount computed using the federal US statutory income tax rate as follows:





2010


2009Provision (Benefit) at US Statutory Rate

$
(3,000
)

$
(3,099
)Increase (Decrease) in Valuation Allowance


3,000



3,099$
-


$
-





The Company evaluates its valuation allowance requirements based on projected future operations.  When circumstances change and causes a change in management's judgment about the recoverability of deferred tax assets, the impact of the change on the valuation is reflected in current income.




- 9 -





MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


NOTES TO FINANCIAL STATEMENTS


(continued)





NOTE 3 - DEVELOPMENT STAGE COMPANY





The Company has not begun principal operations and as is common with a development stage company, the Company has had recurring losses during its development stage. The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company does not have significant cash or other material assets, nor does it have an established source of revenues sufficient to cover its operating costs and to allow it to continue as a going concern. In the interim, shareholders of the Company have been contributing capital to the Company to meet its ordinary and normal operating expenses.





NOTE 4 - COMMITMENTS





As of February 28, 2011 all activities of the Company are conducted on a rent free basis at the corporate offices of Diversified Private Equity Corporation (“DPEC”), the major shareholder of the Company.  Currently, there are no outstanding debts owed by the Company for the use of these facilities.





NOTE 5 - COMMON STOCK TRANSACTIONS





On August 3, 2004, the Company authorized a 900 to 1 reverse stock split of the Company’s common stock. On May 29, 2008, the Company authorized a 3.5 to 1 reverse stock split of the Company’s common stock. All references to the Company’s common stock in the financial statements have been restated to reflect the reverse stock splits.





On December 17, 2001, the Board of Directors approved the cancellation of 64,524 shares of common stock. During the year ended May 31, 2003, these shares were cancelled.





On December 17, 2001, the Board of Directors authorized the sale of 240,945 restricted common shares at par value to three directors of the Company. The directors paid $7,590 in cash consideration for those shares. During the year ended May 31, 2003, these shares were issued.





On January 19, 2007, the Company issued two promissory notes for $10,000 each to two nonaffiliated lenders. The notes were payable by the Company only at the time, and in the event, the Company became current in reporting obligations under the Securities Exchange Act of 1934, as amended. At the time when the notes became payable, the Company agreed to issue and deliver to each of the two lenders 285,714 shares of the Company’s unregistered common stock. On March 9, 2007, the Company issued 571,428 shares of stock as payment for the notes payable.





On June 18, 2007, the Company sold 142,857 shares of its common stock to Kanouff, LLC (“KLLC”), a Colorado limited liability company, for $5,000 in cash, and sold 142,857 shares of its common stock to Underwood Family Partners, Ltd. (“Partnership”), a Colorado limited partnership, for $5,000 in cash. John P. Kanouff, a former officer and director of the Company, is the sole owner and member of KLLC; and L. Michael Underwood, a former officer and director of the Company, is the general partner of the Partnership. The Company sold such shares to KLLC and the Partnership in order to obtain working capital. The Registrant relied upon Section 4(2) of the Securities Act of 1933 as providing the exemption from registration under such Act for such transactions.


- 10 -


MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


NOTES TO FINANCIAL STATEMENTS


(continued)





NOTE 5 - COMMON STOCK TRANSACTIONS (continued)





On November 27, 2007, the Company sold 214,286 shares of its common stock to Kanouff, LLC for $7,500 in cash and sold 214,286 shares of its common stock to Underwood Family Partners, Ltd. for $7,500 in cash. The Company sold such shares to KLLC and the Partnership in order to obtain working capital. The Registrant relied upon Section 4(2) of the Securities Act of 1933 as providing the exemption from registration under such Act for such transactions.





In connection with the 3.5 to 1 reverse stock split approved on May 29, 2008, an additional 5,729 shares of common stock were issued due to rounding provisions included in the terms of the reverse stock split. On June 4, 2008, the Company cancelled 5,729 of its outstanding shares of common stock. These shares were surrendered for cancellation by the then majority shareholders of the Company in order to offset shares issued by the Company in rounding up transactions in connection with the 3.5 to 1 reverse stock split approved on May 29, 2008.





On November 9, 2009, pursuant to the Stock Purchase Agreement described under Note 9, Mercari offered and sold 43,822,001 shares of its common stock to DPEC. The offer and sale by the Company of the common stock to DPEC was exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof. The Company made this determination based on the representations of DPEC which included, in pertinent part, that DPEC was an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, that DPEC was acquiring the common stock for investment purposes for its own account and not as nominee or agent, and not with a view to the resale or distribution thereof, and that DPEC understood that the common stock may not be sold or otherwise disposed of without registration under the Securities Act or an applicable exemption therefrom.





NOTE 6 - RELATED PARTY TRANSACTIONS





On May 19, 2008, the Company received a loan for $5,500 from Kanouff, LLC and a loan for $5,500 from Underwood Family Partners, Ltd. On November 18, 2008, the Company received a loan for $5,000 from KLLC and a loan for $5,000 from the Partnership. On May 29, 2009, the Company received a loan for $3,000 from KLLC and a loan for $3,000 from the Partnership. On October 13, 2009, the Company received a loan for $2,000 from KLLC and a loan for $2,000 from the Partnership. These loans were due on demand and carried an interest rate of 5% per annum. On November 9, 2009, in connection with the Stock Purchase Agreement described in Note 9, the Company, KLLC and the Partnership entered into Debt Forgiveness Agreements, whereby all loans mentioned above, including accrued interest, was forgiven and reclassified as paid-in capital. KLLC and the Partnership did not receive any shares of stock or other interest in the Company in connection with the foregoing contribution. As of November 30, 2009, no loans are outstanding.





On November 9, 2009, we entered into and closed a Stock Purchase Agreement with DPEC, Kanouff, LLC and Underwood Family Partners, Ltd., the two entities which, immediately prior to closing, where the majority shareholders of the Company and which are controlled by the then officers and directors of the Company.  Please refer to Note 9 for additional details regarding the Stock Purchase Agreement and related transactions.




- 11 -


MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


NOTES TO FINANCIAL STATEMENTS


(continued)





NOTE 7 - QUASI REORGANIZATION





On August 3, 2004, the Company approved and authorized a plan of quasi reorganization and restatement of accounts to eliminate the accumulated deficit and related capital accounts on the Company’s balance sheet. The quasi-reorganization became effective March 1, 2004. The quasi reorganization resulted in the elimination of $919,100 of retained deficit at the effective date of the reorganization, the elimination of $34,123 of deficit accumulated since the November 30, 2001 inception of development stage, and a decrease in additional paid-in capital of $953,223.





NOTE 8 - UNCERTAIN TAX POSITIONS





Effective June 1, 2007, the company adopted the provisions of ASC 740-10 (formerly FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”)). ASC 740-10 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The adoption of the provisions of ASC 740-10 did not have a material impact on the company’s condensed consolidated financial position and results of operations. At June 1, 2007, the company had no liability for unrecognized tax benefits and no accrual for the payment of related interest.





Interest costs related to unrecognized tax benefits are classified as “Interest expense, net” in the accompanying consolidated statements of operations. Penalties, if any, would be recognized as a component of “Selling, general and administrative expenses”. The Company recognized $0 of interest expense related to unrecognized tax benefits for the year ended May 31, 2010. In many cases the company’s uncertain tax positions are related to tax years that remain subject to examination by relevant tax authorities. With few exceptions, the company is generally no longer subject to U.S. federal, state, local or non-U.S. income tax examinations by tax authorities for years before 2006. The following describes the open tax years, by major tax jurisdiction, as of May 31, 2010:





United States (a)

2006 – Present(a)  Includes federal as well as state or similar local jurisdictions, as applicable.





NOTE 9 – STOCK PURCHASE AGREEMENT





On November 9, 2009, we entered into and closed a Stock Purchase Agreement with Diversified Private Equity Corporation, a privately-held Delaware corporation, and Kanouff, LLC and Underwood Family Partners, Ltd., the two entities which, immediately prior to closing, were the majority shareholders of the Company and which are controlled by the officers and directors of the Company, which resulted in a change in control of the Company (the “Stock Purchase”).  In connection with the Stock Purchase, DPEC purchased, and the Company sold, an aggregate of 43,822,001 shares of common stock for a purchase price of $43,822, or $0.001 per share.  In addition, DPEC purchased 200 shares of common stock from KLLC and 200 shares of common stock from Partnership for a purchase price of $180,000 payable to each selling shareholder, of which $105,000 was paid at closing and $75,000 was previously paid in connection with a letter of intent and related amendments.  Immediately following the closing of the Stock Purchase Agreement, there were 45,411,400 shares of common stock issued and outstanding.  Immediately following the closing of the Stock Purchase Agreement, DPEC owned an aggregate of 43,822,401 shares of the Company’s common stock out of the total of 45,411,400 shares of common stock issued and outstanding at the closing, or approximately 96.5% of the Company’s issued and outstanding shares.




- 12 -


MERCARI COMMUNICATIONS GROUP, LTD.


(A Development Stage Company)


NOTES TO FINANCIAL STATEMENTS


(continued)





NOTE 9 – STOCK PURCHASE AGREEMENT (Continued)





The Stock Purchase Agreement contains post-closing covenants whereby Mercari and DPEC agree to utilize their commercially reasonable efforts to cause Mercari to (i) remain a Section 12(g) reporting company in compliance with and current in its reporting requirements under the Exchange Act; and (ii) cause all of the assets and business or equity interest of DPEC, its subsidiaries and affiliated companies to be transferred to Mercari and, in connection with such transactions, cause Mercari’s stock to be distributed by DPEC to DPEC’s stockholders and the holders of equity interests in the affiliated companies (“Reorganization Transaction”).  In connection with and contemporaneously with the Reorganization Transaction, it is anticipated that Mercari and/or DPEC will seek to obtain at least $10 million in gross proceeds from a financing (the “Financing”).  If the gross proceeds from the Financing exceed $15 million at the time of the last closing of such financing, Mercari will issue additional shares of common stock to DPEC at a purchase price of $.001 per share as follows:  (i) 18,164,560 additional shares if the amount of the Financing is at least $15 million and less than $20 million; or (ii) 34,058,550 additional shares if the amount of the Financing is $20 million or more.  After consummation of the Financing, Mercari will seek to register for resale all of the shares issued in the Financing and shares of common stock issued by Mercari from and after December 1, 2001 and prior to the date of the Stock Purchase Agreement.  Mercari will use its commercially reasonable efforts to file the registration statement within 60 days after consummation of the Reorganization Transaction (“Filing Date”) and to have the registration statement become effective within 180 days after the Filing Date.  If the SEC requires Mercari to reduce the number of shares included under such registration statement, any such reduction will first be made from the shares issued in the Financing.  The post-closing obligations of DPEC and Mercari discussed herein are contingent upon DPEC’s good faith determination that, after taking commercially reasonable efforts, the transactions are feasible.  Such determination shall take into account all relevant material factors, including without limitation, then-current economic, financial and market conditions.





Upon closing of the Stock Purchase, Mercari experienced a change in control and a change in all the members of the Board of Directors and executive officers.





Pursuant to the Stock Purchase Agreement, we made the following changes to our Board of Directors and executive officers:





·
Immediately prior to the consummation of the Stock Purchase, we increased the size of our Board of Directors from two to five, and L. Michael Underwood and John P. Kanouff, our current directors, appointed Scott L. Mathis, Julian Beale and Peter Lawrence, as directors of the Company, effective at the closing.  After such new directors were appointed, Messrs. Underwood and Kanouff resigned as members of our Board of Directors.





·
Mr. Underwood resigned as President and Mr. Kanouff resigned as Secretary and Treasurer, and our Board of Directors appointed Scott L. Mathis as Chief Executive Officer and President, Ronald S. Robbins as Executive Vice President and Chief Operating Officer, and Tim Holderbaum as Executive Vice President, Chief Financial Officer, Treasurer and Secretary.





NOTE 10 – SUBSEQUENT EVENTS





The Company adopted ASC 855, and has evaluated all events occurring after February 28, 2011, the date of the most recent balance sheet, for possible adjustment to the financial statements or disclosures through April 5, 2011, which is the date on which the financial statements were issued.  The Company has concluded that there are no significant or material transactions to be reported for the period from March 1, 2011 to April 5, 2011.




- 13 -


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





General





This discussion should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's annual report on Form 10-K for the year ended May 31, 2010. Also, persons reading this Report should read and consider the Risk Factors included in Item 1A of the Company’s annual report on Form 10-K for the year ended May 31, 2010.





Results of Operations





The Company is a development stage business, which intends to acquire a United States or foreign based business which is privately owned and wishes to become a publicly owned business. The Company was inactive and did not file reports required under the Exchange Act from 1990 through 2000, and has not conduced any material business operations since 1990. The Company was reactivated in 2001 and is now current in its state and United States internal revenue filing obligations and the Company has filed all reports required to be filed by it with the SEC under the Securities Exchange Act, during the past seven years. The Company is now actively seeking one or more acquisition candidates.





During each of the years since the Company was reactivated, the Company has had no revenue and has had losses approximately equal to the expenditures made to reactivate and meet filing and reporting obligations. We do not expect any revenue unless and until a business acquisition transaction is completed. Our expenses have been paid from capital contributions and advances from the directors of the Company.





Liquidity and Capital Resources





The Company requires working capital principally to fund its current activities. There are no commitments from banks or other lending sources for lines of credit or similar short-term borrowing, but the Company has been able to obtain additional capital required from its officers, directors and principal shareholders or other related entities.





In order to complete any acquisition, the Company may be required to supplement its available cash and other liquid assets with proceeds from borrowings, the sale of additional securities, including the private placement of restricted stock and/or a public offering, or other sources. There can be no assurance that any such required additional funding will be available or favorable to the Company.





The Company’s business plan requires substantial funding from a public or private offering of its common stock in connection with a business acquisition, for which the Company has no commitments. The Company may actively pursue other financing or funding opportunities at such time as a business acquisition opportunity becomes available.





During February of 2008, shares of the common stock of the Company were cleared for quotation on the OTC Bulletin Board and the Pink Sheets under the symbol of “MCAR.”




Off Balance Sheet Arrangements





We have no off balance sheet financing or similar arrangements and we do not expect to initiate any such arrangement.


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Item 3.  Quantitative and Qualitative Disclosures About Market Risk.





As a smaller reporting company, the Company is not required to provide the information required by this Item.





Item 4T.   Controls and Procedures.





Disclosure Controls and Procedures





We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.





Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of such date to provide assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.





Changes in Internal Control over Financial Reporting





There have been no changes in internal controls over financial reporting during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.




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PART II – OTHER INFORMATION





Item 1.  Legal Proceedings





There is no pending litigation to which the Company is presently a party or to which the Company’s property is subject and management is not aware of any litigation which may arise in the future.





Item 1A.  Risk Factors





As a smaller reporting company, the Company is not required to provide the information required by this Item.





Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds





During the quarter ended February 28, 2011, we did not have any sales of securities in transactions that were not registered under the Securities Act of 1933, as amended, that have not been previously reported in a Form 8-K.





Item 3.   Defaults Upon Senior Securities





None.





Item 4.   [Removed and Reserved]





Item 5.  Other Information





None.





Item 6.   Exhibits





Exhibits.


31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended*31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended*32.1
Certification of Chief Executive Officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*32.2
Certification of Chief Financial Officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*____________________

* Filed herewith





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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





MERCARI COMMUNICATIONS GROUP, LTD.DATE:
April 5, 2011

By:/s/ Scott L. MathisScot L. Mathis, Chief Executive OfficerDATE:
April 5, 2011

By:/s/ Tim F. HolderbaumTim F. Holderbaum, Chief Financial Officer