SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-33029
GFY FOODS, INC.
Incorporated pursuant to the Laws of the State of Nevada
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Internal Revenue Service - Employer Identification No. 87-0382438
601 Deerfield Parkway
Buffalo Grove, IL 60089
(847) 353-7554
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Address of principal executive offices and 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 [ ]
The total number of shares of the registrant's Common Stock, $.001 par value,
outstanding on August 12, 2004, was 216,399,537.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2004
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
2003 AND JUNE 30, 2004
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30,
2003 AND JUNE 30, 2004
STATEMENT OF SHAREHOLDERS DEFICIT FROM MARCH 31, 2003
THROUGH JUNE 30, 2004
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. CONTROLS & PROCEDURES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS FOR PERIOD ENDING JUNE 30, 2004.
GFY FOODS, INC.
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2004
(UNAUDITED)
ASSETS
JUNE 30, 2004
------------
CURRENT ASSETS:
Cash 518
Investment income receivable 1,200
Prepaid expenses 2,528,128
Inventory 1,550
------------
Total current assets 2,531,396
Property & equipment, net (Note 3) 37,708
Franchise fee, net of amortization of $4,567 49,558
Long-term portion of prepaid expenses 4,278,324
Oil & gas investments 75,000
------------
Total assets 6,971,986
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 181,035
Accrued expenses 42,852
Other payables 19,500
Notes payable, net of discounts of $106,965 245,399
Payable to former officers 54,799
Payable to current officers 112,676
------------
Total current liabilities 656,261
Long-term portion of notes 6,000
------------
Total liabilities 662,261
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, 50,000,000 shares
authorized, none outstanding --
Common stock, par value $0.001;
8,000,000,000 shares authorized,
32,399,537 shares outstanding 32,399
Additional paid-in capital 14,566,736
Accumulated deficit (8,289,410)
------------
Total stockholders' equity 6,309,725
------------
Total liabilities and stockholders' equity 6,971,986
============
The accompanying notes are an integral part of these
consolidated financial statements.
3
GFY FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
QUARTER ENDED QUARTER ENDED
JUNE 30, 2004 JUNE 30, 2003
------------ ------------
Net Revenues 27,395 --
Cost of Sales 13,322 --
------------ ------------
Gross Profit 14,303 --
General and administrative expenses 3,133,931 --
------------ ------------
Loss from operations (3,119,858) --
Investment Income 3,672 --
Loss from Discontinued Operations -- (179,186)
Interest Expense (718,374) (71,274)
------------ ------------
Loss before provision for income taxes (3,834,560) (250,460)
Provision for income taxes -- --
Net Loss (3,834,560) (250,460)
============ ============
Basic net loss per weighted share $ (0.23) $ (0.54)
Basic weighted average shares outstanding 16,658,616 459,747
The accompanying notes are an integral part of these
consolidated financial statements.
4
GFY FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2004 JUNE 30, 2003
----------- -----------
Cash flows from Operating Activities:
Net loss (3,834,560) (250,460)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 3,457 26,506
Amortization of discounts on notes payable
and deferred issuance costs 39,420 --
Increase in receivables 1,692 (475)
Increase in prepaid expenses (1,546,999) 45,101
Deferred expenses 0 5,411
Increase in payables (660,257) (37,670)
Decrease in accrued expenses (2,083) 6,206
Items paid with common stock 5,133,940 17,500
Interest paid with common stock 663,317 --
Accrued interest paid with common stock 21,683 --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (180,390) (187,881)
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposition of property and equipment 0 (557)
Acquisition of new restaurant (35,000) --
Inventory 350 --
Investment 0 (10,000)
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES (34,650) (10,557)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 110,000 152,297
Note repayment (15,204) (10,835)
Net proceeds from notes issued 43,600 --
Shareholder loans 75,666 12,727
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 214,062 154,189
----------- -----------
Net increase (decrease) in cash (978) (44,249)
Cash, at beginning of period 1,496 53,296
----------- -----------
Cash, at end of period 518 9,047
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 5,513 $ 8,026
Cash paid for taxes $ -- $ --
The accompanying notes are an integral part of these
consolidated financial statements.
5
GFY FOODS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK PREFERRED STOCK
--------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------- --------------- --------------- ---------------
Balance at March 31, 2002 9,851,910 $ 9,852 -- --
Value of Warrants issued in
conjunction with notes payable -- -- -- --
Stock Issued in
Private Placement 14,286 14 -- --
Stock sold under option
agreements in quarter ended
September 30, 2002 600,000 600 -- --
Stock Issued for Services from
April 1, 2002 through
December 2, 2002 2,841,000 2,841 -- --
Preferred Stock issued in
rescinded acquisition -- -- 4,200,000 4,200,000
Preferred Stock cancelled
upon rescission -- -- (3,800,000) (3,800,000)
Adjustment for 300 to 1 reverse
stock split (13,262,839) (13,263) -- --
Rounding for reverse stock split 713 1 -- --
Stock subscription receivable 10,000,000 10,000 -- --
Stock issued for services from
December 2002 through March
31, 2003 1,369,400 1,369 -- --
Stock issued to officer in
exchange for debt 2,000,000 2,000 -- --
Stock issued in exchange for debt 360,000 360 -- --
Conversion of Preferred stock
into common 600,000 600 (400,000) (400,000)
Proceeds of Stock Subscription
received (2,110,000) -- -- --
2,110,000 -- -- --
Net loss for period ended
March 31, 2003 -- -- -- --
--------------- --------------- --------------- ---------------
Balance at March 31, 2003 14,374,470 $ 14,374 $ -- $ --
Stock issued to retire options 500,000 500 -- --
Stock issued in exchange
for debt 422,385,000 422,385 -- --
Stock issued for services in
period ending March 31, 2004 1,844,974,000 1,844,974 -- --
Stock issued to officer in
exchange for debt 1,500,000 1,500 -- --
Proceeds of Stock Subscription
received (2,407,691) -- -- --
2,407,691 -- -- --
Cancellation of remaining
Regulation S Offering (5,482,309) (5,482) -- --
Cancellation of stock (1,000) (1) -- --
Stock issued for Purchase Option 15,000 15 -- --
Value of conversion feature
on debt issued -- -- -- --
Stock issued for acquisition
of GFY, Inc. 20,000,000 20,000 -- --
Net loss for period ended
March 31, 2004 -- -- -- --
--------------- --------------- --------------- ---------------
Balance at March 31, 2004 2,298,265,161 $ 2,298,265 $ -- $ --
Stock issued for exercise
of options 385,000,000 385,000 -- --
Stock issued for services in
three months ended June
30, 2004 4,615,000,000 4,615,000 -- --
Stock issued to retire debts 795,000,000 795,000 -- --
Stock issued for acquisition 6,000,000 6,000 -- --
Value of conversion feature
on debt issued -- -- -- --
Adjustment for 250:1 reverse
stock split (8,066,865,624) (8,066,866) -- --
Net loss for three months
ended June 30, 2004 -- -- -- --
--------------- --------------- --------------- ---------------
Balance at June 30, 2004 32,399,537 $ 32,399 $ -- $ --
=============== =============== =============== ===============
(CONTINUED)
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
--------------- --------------- ---------------
Balance at March 31, 2002 950,981 (813,640) 147,193
Value of Warrants issued in
conjunction with notes payable 86,559 -- 86,559
Stock Issued in
Private Placement 4,236 -- 4,250
Stock sold under option
agreements in quarter ended
September 30, 2002 (600) -- --
Stock Issued for Services from
April 1, 2002 through
December 2, 2002 277,571 -- 280,412
Preferred Stock issued in
rescinded acquisition (4,200,000) -- --
Preferred Stock cancelled
upon rescission 3,800,000 -- --
Adjustment for 300 to 1 reverse
stock split 13,263 -- --
Rounding for reverse stock split (1) -- --
Stock subscription receivable -- -- 10,000
Stock issued for services from
December 2002 through March
31, 2003 159,406 -- 160,775
Stock issued to officer in
exchange for debt 18,000 -- 20,000
Stock issued in exchange for debt 62,640 -- 63,000
Conversion of Preferred stock
into common 399,400 -- --
Proceeds of Stock Subscription
received 268,371 -- 268,371
(2,110) -- (2,110)
Net loss for period ended
March 31, 2003 -- (1,730,364) (1,730,364)
--------------- --------------- ---------------
Balance at March 31, 2003 $ 1,837,716 $ (2,544,004) $ (691,914)
Stock issued to retire options (500) -- --
Stock issued in exchange
for debt 303,457 -- 725,842
Stock issued for services in
period ending March 31, 2004 3,323,926 -- 5,168,900
Stock issued to officer in
exchange for debt 148,500 -- 150,000
Proceeds of Stock Subscription
received 505,466 -- 505,466
(2,408) -- (2,408)
Cancellation of remaining
Regulation S Offering -- -- (5,482)
Cancellation of stock 1 -- --
Stock issued for Purchase Option 1,485 -- 1,500
Value of conversion feature
on debt issued 90,686 -- 90,686
Stock issued for acquisition
of GFY, Inc. -- -- 20,001
Net loss for period ended
March 31, 2004 -- (1,910,846) (1,910,846)
--------------- --------------- ---------------
Balance at March 31, 2004 $ 6,208,329 $ (4,454,850) $ 4,051,745
Stock issued for exercise
of options 77,000 -- 462,000
Stock issued for services in
three months ended June
30, 2004 169,741 -- 4,784,741
Stock issued to retire debts -- -- 795,000
Stock issued for acquisition 1,200 -- 7,200
Value of conversion feature
on debt issued 43,600 -- 43,600
Adjustment for 250:1 reverse
stock split 8,066,866 -- (1)
Net loss for three months
ended June 30, 2004 -- (3,834,560) (3,834,560)
--------------- --------------- ---------------
Balance at June 30, 2004 $ 14,566,736 $ (8,289,410) $ 6,309,725
=============== =============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
6
F10 OIL & GAS PROPERTIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
NOTE 1 - OVERVIEW AND BASIS OF PRESENTATION
Overview
GFY Foods, Inc, formerly F10 Oil & Gas Properties, Inc., (hereinafter referred
to as "GFY" or the "Registrant"), is a company that owns and operates franchised
restaurants in Illinois and Indiana. Until January 12, 2004, the Registrant was
in the business of making investments in oil and natural gas exploration and oil
and natural gas producing properties.
The operations of the Registrant during the period in which it was solely
engaged in the investment in oil and gas opportunities is shown as discontinued
business operations in the consolidated financial statements. The Registrant
still holds oil and gas investments. The net income derived from these holdings
after January 12, 2004 is shown as investment income in the consolidated
financial statements.
The Registrant approved a two hundred and fifty for one reverse stock split on
June 15, 2004. The effective date of the reverse stock split was July 12, 2004.
The consolidated financial statements reflect the effects of this reverse stock
split.
Interim Financial Information
The financial statements presented in this report have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission for interim
reporting and include all adjustments which are, in the opinion of management,
necessary for fair presentation. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted pursuant to
such rules and regulations for interim reporting. These financial statements for
the three-month period ended June 30, 2004 are not necessarily indicative of the
results which may be expected for an entire fiscal year.
NOTE 2 - PER SHARE INFORMATION
Basic loss per common share for the three months ended June 30, 2004 and June
30, 2003 have been computed based on net income (loss) divided by the weighted
average number of common shares outstanding during the period. Dilutive net loss
per share is not reported since the effects are anti-dilutive and the Registrant
is in a net loss position. After accounting for the reverse stock split approved
on June 15, 2004, the weighted average number of shares outstanding for the
three months ended June 30, 2004 was 16,658,616. The weighted average number of
shares outstanding for the three months ended June 30, 2003 was 459,747 after
adjusting for the reverse stock split.
7
NOTE 3 - GOING CONCERN
As shown in the accompanying financial statements, the Registrant incurred a net
loss of $3,834,560 for the three months ended June 30, 2004. The Registrant has
incurred total losses of $8,289,410 since its inception. Therefore, the ability
of the Registrant to continue as a going concern is dependent on obtaining
additional capital and financing. The accompanying financial statements do not
include any adjustments that might be necessary if GFY is unable to continue as
a going concern.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of June 30, 2004:
Equipment $ 47,295
Less accumulated depreciation (9,587)
---------
$ 37,708
=========
NOTE 5 - NOTES PAYABLE
From December 2003 through June 30, 2004, the Registrant has issued promissory
notes to third parties totaling $162,500 under various private placements. The
notes carry interest rates from 15-25% per annum and have terms varying from 34
days to 12 months from the date of issuance. All of these notes are convertible
into common stock of the Registrant at a discount to the market price of the
stock. The discount rate upon conversion into common stock varies from 50% to
90% (a 90% discount rate would allow a $10,000 note holder to convert his note
into $100,000 worth of the Registrant's common stock). An aggregate value of
$153,929 was assigned to the conversion feature on the notes. This was accounted
for as a discount to the notes payable and is being amortized over the terms of
the notes. As of June 30, 2004, the discount on these notes payable is $94,952.
The Registrant had previously entered into note agreements with various third
parties prior to June 30, 2003. Many of these notes have been settled through
the issuance of restricted common stock of the Registrant. GFY continues to
negotiate settlements on these notes.
The principal balance on all of the remaining notes totals $358,364 as of June
30, 2004. The total discount on all notes payable as of June 30, 2004 is
$106,965.
In the quarter ended June 30, 2004, the Registrant issued 3,180,000
reverse-split adjusted shares (795,000,000 shares prior to the reverse stock
split approved on June 15, 2004) of its restricted common stock to settle total
debts of $131,683, including accrued interest. The Registrant also made a cash
payment to pay a $10,000 note that had accrued interest of $258.
8
As of June 30, 2004, GFY was in default on notes with a principal balance
totaling $235,433. The Registrant is actively involved in negotiating
settlements with the holders of some of these notes.
NOTE 6 - SUBSEQUENT EVENTS
After June 30, 2004, the Registrant entered into a settlement agreement with the
holder of a $50,000 note. This note was settled through the issuance of
20,000,000 shares of restricted common stock of the Registrant. GFY valued this
stock at $0.005 per share, or a total of $100,000.
On June 15, 2004 the Registrant approved a two hundred and fifty for one reverse
stock split. This stock split was effective on July 12, 2004. The Registrant has
accounted for this stock split as being effective as of June 30, 2004 in the
preparation of these consolidated financial statements.
The Registrant entered into an agreement to acquire a third Frullati Cafe
franchise in May of 2004. The acquisition of this franchise in Willowbrook,
Illinois was closed and became effective in July of 2004.
The Registrant entered into an agreement to acquire the Dionysus Greek
Restaurant in Worth, Illinois on August 1, 2004. The terms of the agreement call
for the Registrant to issue shares of its restricted common stock worth a total
of $450,000 to the owners of the Dionysus restaurant. This acquisition has yet
to be finalized.
On July 21, 2004, the Registrant issued 150,000,000 shares of its restricted
common stock to its President, Ed Schwalb. The stock was issued under the terms
of the Registrant's employment agreement with Mr. Schwalb. The stock was valued
at par value of $0.001 per share and the aggregate value of $150,000 will be
amortized over the remaining life of the employment agreement (approximately 4
1/2 years).
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Period Ending June 30, 2004)
Unaudited Financial Data
The discussion and analysis contained herein should be read in conjunction with
the preceding financial statements, the information contained in the
Registrant's Form 10-KSB and other filings with the SEC. Except for the
historical information contained herein, the matters discussed in this 10-QSB
contain forward looking statements that are based on management's beliefs and
assumptions, current expectations, estimates, and projections. Statements that
are not historical facts, including without limitation statements which are
preceded by, followed by or include the words "believes," "anticipates,"
"plans," "expects," "may," "should," or similar expressions are forward-looking
statements. Many of the factors that will determine the company's future results
are beyond the ability of the Registrant to control or predict. These statements
are subject to risks and uncertainties and, therefore, actual results may differ
materially. All subsequent written and oral forward-looking statements
attributable to the Registrant, or persons acting on its behalf, are expressed
qualified in their entirety by these cautionary statements. The Registrant
disclaims any obligation to update any forward-looking statements whether as a
result of new information, future events or otherwise.
Since the Registrant has changed its line of business as of January 12, 2004,
direct comparisons to the same period (quarter over quarter) have not been made
as the Registrant believes that they would not be meaningful.
Results of Operations -
Revenues
GFY reported total revenues of $27,395 from the operations of its two Frullati
Cafe franchises in the quarter ended June 30, 2004. The Buffalo Grove franchise
was in operation for the entire quarter. The revenues generated from this
franchise were $21,669. The Registrant closed on the acquisition of the Frullati
cafe in Elkhart, Indiana on May 1, 2004. The revenues from the Elkhart franchise
were $5,726 in May and June of 2004.
GFY was not involved in its current line of business in the same quarter of
2003. The Registrant had reported revenues from its oil and gas operations of
$1,593 in the quarter ended June 30, 2003. These revenues are included in the
loss from discontinued operations in the financial statements included in this
report.
Cost of Sales
GFY's cost of sales for the quarter ended June 30, 2004 was equal to $13,322.
The Registrant was not involved in its current line of business in the same
quarter of 2003. The Registrant had reported cost of sales of $331 from its oil
and gas operations in the quarter ended June 30, 2003. These revenues are
included in the loss from discontinued operations in the financial statements
included in this report.
10
General and Administrative Expenses
General and administrative expenses in the three-month period ended June 30,
2004 totaled $3,133,931. Of the expenses in the current quarter, amounts paid to
consultants and officer's salaries represented the largest portion of expenses.
The Registrant incurred professional fees of $2,440,412 in the current quarter.
This amount was primarily paid in stock and represented 77.9% of total general
and administrative expenses. The Registrant also accrued and paid $543,778 in
salaries to officers. This amount represented 17.4% of total general and
administrative costs. Nearly all of the officer's compensation was paid through
the issuance of common stock to Ed Schwalb, the President and sole officer and
director of the Registrant.
The general and administrative expenses for the three-month period ended June
30, 2003 are included in the net loss from discontinued operations in the
financial statements. General and administrative expenses in the three-month
period ended June 30, 2003 totaled $180,448. Of these expenses, amounts paid for
professional fees and consultants represented the largest portion of expenses.
The Registrant incurred professional fees of $81,702 in the quarter ended June
30, 2003. This amount was primarily paid in stock and represented 45.2% of total
general and administrative expenses. The Registrant also accrued and paid
$60,000 in salaries to officers. This amount represented 33.3% of total general
and administrative costs. (See Item 2, Changes in Securities).
Interest Expense
The Registrant incurred total interest expense of $718,374 in the quarter ended
June 30, 2004. The majority of this interest was incurred on the settlement of
two notes. The Registrant issued a total of 795,000,000 pre-reverse split shares
of its restricted common stock (3,180,000 shares of reverse split adjusted
shares) to settle two notes that totaled $110,000 and had accrued interest of
$21,683. The Registrant valued the stock issuance at par value, for a total
valuation of $795,000. The difference between the principal balance of the note
plus the accrued interest and the par value was recorded as additional interest
expense. This resulted in an additional $663,317 in interest expense in the
current quarter. The remaining interest expense was from the accrual of interest
on the Registrant's various notes payable.
The Registrant incurred interest expense of $71,274 in the quarter ended June
30, 2003.
The current quarter's interest expense represents an increase of 908% from the
interest expense incurred in the same quarter of 2003. This increase is
primarily due to the adjustment made on the settlement of notes with common
stock as described above. The average debt balance of the Registrant is
currently lower than it was in the previous quarter.
11
Net Loss
GFY incurred a net loss of $3,834,560 in the current quarter ended June 30,
2004. This represents a loss per share of $(0.23) after accounting for the
two-hundred and fifty to one reverse stock split approved on June 15, 2004.
The Registrant's net loss for the quarter ended June 30, 2003 was $250,460. This
represents a reverse split adjusted net loss per share of $(0.54) per share.
The net loss in the current quarter is 1431% more than the loss from the quarter
ended June 30, 2003. The Registrant has incurred substantial losses due to the
payment of employee compensation to Edward E. Schwalb and consulting fees with
its common stock and through the settlement of debts through the issuance of
common stock.
Liquidity and Capital Resources
During the quarter ended June 30, 2004 net cash used by the operating activities
of the Registrant was $187,881. This loss was primarily supported through the
issuance of notes payable and through the sale of common stock under option
agreements with two consultants.
During the quarter ended June 30, 2003 net cash used by operating activities was
$187,881. The Registrant supported this operating loss through the issuance of
restricted stock issued under an offering under Regulation S of the Securities
Exchange Act.
The Registrant's current assets as of June 30, 2004 were $2,531,396 and its
current liabilities equaled $656,261, generating net working capital of
$1,875,135. However, the vast majority of the Registrant's current assets are
prepaid expenses. Without giving consideration to these prepaid expenses, the
Registrant would have current assets of only $3,268 and a net working capital
deficit of $652,993.
The Registrant hopes to be able to fund future operations through private
placements of notes and common stock, although no assurances can be made that
additional funds will be received through these contemplated private placement
offerings. Further, the Registrant anticipates increasing its revenues through
the additional acquisition of Frullati franchises and other restaurants.
ITEM 3. CONTROLS & PROCEDURES
The Chief Executive Officer and the Chief Financial Officer, Edward E. Schwalb,
has, during the quarter ended June 30, 2004, made an evaluation of the company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Act of 1934, as amended). In his opinion, the disclosure
controls and procedures are adequate because the systems of controls and
procedures are designed to assure, among other items, that 1) recorded
transactions are valid; 2) valid transactions are recorded; and 3) transactions
are recorded in the proper period in a timely manner to produce financial
statements which present fairly the financial condition, results of operations
and cash flows for the respective periods being presented. The primary weakness
in GFY's disclosure controls and procedures is the fact that Edward E. Schwalb,
the CEO and CFO, has no accounting or financial experience. Nonetheless, GFY has
hired outside accountants, attorneys and consultants to assist in minimizing the
effect of this weakness.
12
There have been no significant changes in GFY's internal controls during this
quarter. However, in light of the fact that during the last fiscal year GFY
recorded a consulting agreement between its President and a consultant as an
obligation of GFY, when the agreement should not have been recorded as an
obligation of GFY, GFY is evaluating how to improve its controls and procedures,
which may include hiring an experienced chief financial officer to avoid such
errors in the future.
Due to the Certifying Officer's dual role as chief executive officer and chief
financial officer, the Company has no segregation of duties related to internal
controls.
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
GFY, Inc. acquired the Buffalo Grove, Illinois Frullati franchise from
an individual. GFY was required to make a balloon payment of $28,000 in December
of 2003 under the terms of that agreement. GFY failed to make the requisite
payment and, as a result, the entire balance of the note then due of
approximately $61,000 was immediately payable. GFY has continued to make monthly
payments on the note and, although the note holder has threatened legal action,
no formal proceedings have occurred. GFY believes that as long as it continues
to make monthly payments to the note holder, legal action or collection of the
note will be avoided. The current balance on the note is $51,263, including
accrued interest, as of June 30, 2004.
SEC v. David M. Wolfson, United States District Court, District of Utah, Central
- --------------------------------------------------------------------------------
Division, Case No. 2:03-CV-0914K.
- ---------------------------------
On October 16, 2003, the Securities and Exchange Commission through its Salt
Lake City, Utah, office filed a complaint in the United States District Court
for the District of Utah against 21 defendants including F10 Oil & Gas
Properties, Inc., Jon H. Marple, the former Chief Executive Officer of F10, Mary
E. Blake, the former President of F10, Jon R. Marple, a consultant to F10 and
Grateful Internet Associates, LLC, a Colorado limited liability company owed by
Jon R. Marple. The complaint alleges that overseas investors were defrauded by a
scheme organized by defendants David Wolfson, Gino Carlucci and Sukumo Ltd. to
sell securities in five United States-based issuers including F10. F10, with its
former officers Jon H. Marple and Mary E. Blake, are alleged to have made false
or incomplete filings with the SEC and to have manipulated the price of F10's
securities in violation of the antifraud provisions of Section 17(a) of the
Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder, the issuer reporting provision of Section
13(a) of the Exchange Act, and Rules 12b-20, 13a-1 and 13a-13 promulgated under
the Exchange Act.
The complaint seeks the entry of a preliminary and permanent injunction against
all defendants including F10 and its former officers, Jon H. Marple and Mary E.
Blake, including the return of "ill gotten" gains, and seeks asset freezes
against 16 of the defendants including F10 and its former officers.
13
Management of GFY is currently in negotiations with the Commission to settle the
complaint. A GFY bank account with a balance of $60,102 was frozen as part of
the SEC proceedings and remains frozen. GFY anticipates that these funds will be
used to settle the SEC complaint.
ITEM 2 - CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
- ---------------------------------------
GFY made the following sales of unregistered securities during the quarter ended
June 30, 2004:
In April 2004, GFY issued 10,000,000 shares of restricted common stock (40,000
shares adjusted for the July 12, 2004 reverse-split of GFY's common shares) to
DeVerl Byington for services rendered to the Registrant. The Registrant valued
this stock issuance at $10,000, or $.25 per reverse-split adjusted share. The
Company issued the shares pursuant to section 4(2) of the Securities Act of 1933
in an isolated private transaction by the Company, which did not involve a
public offering. The Company made this offering based on the following factors:
(1) The issuance was an isolated private transaction by the Company which did
not involve a public offering, being made to a single entity; (2) there was only
one offeree who was issued stock; (3) the offeree acquired the stock with
investment intent; (4) there were no subsequent or contemporaneous public
offerings of the stock; (5) the stock was not broken down into smaller
denominations; and (6) the negotiations for the issuance of the stock took place
directly between the offeree and the Company.
In April 2004, GFY issued 6,000,000 shares of restricted common stock (24,000
shares adjusted for the July 12, 2004 reverse-split of GFY's common shares) to
the owners of Dynasty CB Holdings, Inc. in consideration of the acquisition of a
Frullati Cafe franchise in Elkhart, Indiana. The Registrant valued this stock
issuance at $15,000, or $0.625 per reverse-split adjusted share. The Company
issued the shares pursuant to section 4(2) of the Securities Act of 1933 in an
isolated private transaction by the Company, which did not involve a public
offering. The Company made this offering based on the following factors: (1) The
issuance was an isolated private transaction by the Company which did not
involve a public offering, being made to a single entity; (2) there was only one
offeree who was issued stock; (3) the offeree acquired the stock with investment
intent; (4) there were no subsequent or contemporaneous public offerings of the
stock; (5) the stock was not broken down into smaller denominations; and (6) the
negotiations for the issuance of the stock took place directly between the
offeree and the Company.
In April 2004, GFY issued 295,000,000 shares of restricted common stock
(1,180,000 shares adjusted for the July 12, 2004 reverse-split of GFY's common
shares) to Benny Brown in settlement of a $50,000 note that he held with the
Registrant. The note had accrued and unpaid interest of $4,933 at the time of
settlement. The Registrant valued this stock issuance at par value at the time
of issuance of $295,000, or $0.25 per reverse-split adjusted share. The Company
issued the shares pursuant to section 4(2) of the Securities Act of 1933 in an
isolated private transaction by the Company, which did not involve a public
offering. The Company made this offering based on the following factors: (1) The
issuance was an isolated private transaction by the Company which did not
involve a public offering, being made to a single entity; (2) there was only one
offeree who was issued stock; (3) the offeree acquired the stock with investment
intent; (4) there were no subsequent or contemporaneous public offerings of the
stock; (5) the stock was not broken down into smaller denominations; and (6) the
negotiations for the issuance of the stock took place directly between the
offeree and the Company.
14
In May 2004, GFY issued 2,500,000,000 shares of restricted common stock
(1,180,000 shares adjusted for the July 12, 2004 reverse-split of GFY's common
shares) to Edward Schwalb under the terms of his employment contract with GFY.
The total value of the stock was booked at par value of $2,500,000, or $0.25 per
reverse-split adjusted share. The Company issued the shares pursuant to section
4(2) of the Securities Act of 1933 in an isolated private transaction by the
Company, which did not involve a public offering. The Company made this offering
based on the following factors: (1) The issuance was an isolated private
transaction by the Company which did not involve a public offering, being made
to a single entity; (2) there was only one offeree who was issued stock; (3) the
offeree acquired the stock with investment intent; (4) there were no subsequent
or contemporaneous public offerings of the stock; (5) the stock was not broken
down into smaller denominations; and (6) the negotiations for the issuance of
the stock took place directly between the offeree and the Company.
In May 2004, GFY issued 23,000,000 shares of restricted common stock (92,000
shares adjusted for the July 12, 2004 reverse-split of GFY's common shares) to
Devang Shah for services rendered to the Registrant. The total value of the
stock was booked at $23,000, or $0.25 per reverse-split adjusted share. The
Company issued the shares pursuant to section 4(2) of the Securities Act of 1933
in an isolated private transaction by the Company, which did not involve a
public offering. The Company made this offering based on the following factors:
(1) The issuance was an isolated private transaction by the Company which did
not involve a public offering, being made to a single entity; (2) there was only
one offeree who was issued stock; (3) the offeree acquired the stock with
investment intent; (4) there were no subsequent or contemporaneous public
offerings of the stock; (5) the stock was not broken down into smaller
denominations; and (6) the negotiations for the issuance of the stock took place
directly between the offeree and the Company.
In May 2004, GFY issued 23,000,000 shares of restricted common stock (92,000
shares adjusted for the July 12, 2004 reverse-split of GFY's common shares) to
Jayesh Patel for services rendered to the Registrant. The total value of the
stock was booked at $23,000, or $0.25 per reverse-split adjusted share. The
Company issued the shares pursuant to section 4(2) of the Securities Act of 1933
in an isolated private transaction by the Company, which did not involve a
public offering. The Company made this offering based on the following factors:
(1) The issuance was an isolated private transaction by the Company which did
not involve a public offering, being made to a single entity; (2) there was only
one offeree who was issued stock; (3) the offeree acquired the stock with
investment intent; (4) there were no subsequent or contemporaneous public
offerings of the stock; (5) the stock was not broken down into smaller
denominations; and (6) the negotiations for the issuance of the stock took place
directly between the offeree and the Company.
15
In May 2004, GFY issued 500,000,000 shares of its reverse-split adjusted shares
of restricted common stock (2,000,000 shares adjusted for the July 12, 2004
reverse-split of GFY's common shares) to Travis Cook in settlement of a $50,000
note that he held with the Registrant. The note had accrued and unpaid interest
of $16,750 at the time of settlement. The Registrant valued this stock issuance
at par value at the time of issuance of $500,000, or $0.25 per reverse-split
adjusted share. The Company issued the shares pursuant to section 4(2) of the
Securities Act of 1933 in an isolated private transaction by the Company, which
did not involve a public offering. The Company made this offering based on the
following factors: (1) The issuance was an isolated private transaction by the
Company which did not involve a public offering, being made to a single entity;
(2) there was only one offeree who was issued stock; (3) the offeree acquired
the stock with investment intent; (4) there were no subsequent or
contemporaneous public offerings of the stock; (5) the stock was not broken down
into smaller denominations; and (6) the negotiations for the issuance of the
stock took place directly between the offeree and the Company.
NOTES PAYABLE
On April 1, 2004, GFY entered into a $20,000 note agreement with Patricia Fish.
The terms of the note are for a one-year term at an interest rate of 15%. The
note, including principal and accrued interest, is convertible into shares of
common stock of the Registrant at a 50% discount to the market price of GFY's
common stock at any time during the term of the note.
Through April and May of 2004, GFY entered into note agreements with Kevin Mahar
totaling $8,600. The terms of the note are for a one-year term at an interest
rate of 15%. The note, including principal and accrued interest, is convertible
into shares of common stock of the Registrant at a 50% discount to the market
price of GFY's common stock at any time during the term of the note.
On June 2, 2004, GFY entered into a $15,000 note agreement with SolutionStream,
LLC. The terms of the note are for a one-year term at an interest rate of 15%.
The note, including principal and accrued interest, is convertible into shares
of common stock of the Registrant at a 50% discount to the market price of GFY's
common stock at any time during the term of the note.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2004, GFY was in default on notes with a principal balance
totaling $235,433. The accrued interest on these notes as of June 30, 2004 was
$22,272. The Registrant is actively involved in negotiating settlements on some
of these notes and a note with a principal balance of $50,000 was settled in
July of 2004 through the issuance of 20,000,000 reverse-split adjusted shares of
restricted common stock of the Registrant.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 20, 2004, the Registrant amended its Articles of Incorporation by vote
of its majority shareholder and increased its number of authorized shares of
$0.001 par value common stock from 4,000,000,000 to 8,000,000,000. The Board of
Directors and the majority shareholder of the Registrant approved this matter.
GFY did not file a Schedule 14C prior to taking this action. Nevada law allows
such action to be taken by a majority shareholder without notice to
shareholders. This neglect may have resulted in a potential violation of Section
14 of the Securities Act of 1933. The Company did file a Form 8-K on April 21,
2004, which disclosed this action. The notice required by Rule 10b-17 was timely
given to the National Association of Securities Dealers.
16
The Company recognizes that it has failed to timely file required Forms 14C. The
Company is taking steps to remedy this problem so that it does not occur in the
future.
ITEM 5 - OTHER INFORMATION
Stock Issued to Consultants
- ---------------------------
The Registrant has engaged the services of various consultants to assist the
Registrant and perform various duties for the Registrant. The consultants have
been paid through the issuance of free-trading common stock of the Registrant.
Some of the consultants have retained the services of subcontractors. The
consultants may pay their subcontractors with cash, some of their GFY stock, or
other consideration. GFY has also made payments to its president in the form of
free trading common stock issued pursuant to its S-8 Registration Statement on
file with the Securities and Exchange Commission. In the quarter ended June 30,
2004, the Registrant issued a total of 2,444,400,000 shares of stock that was
registered under an S-8 filing made on January 20, 2004 (a total of 9,777,600
shares adjusted for the July 12, 2004 reverse-split of GFY's common shares).
These shares were valued at the bid price of the stock on the date of issuance.
The total value of these shares was recorded at $2,682,940. Of these shares,
75,000,000 shares were issued to the Registrant's president at a value of
$82,000 (300,000 shares adjusted for the July 12, 2004 reverse-split of GFY's
common shares). The remaining 2,369,400,000 shares were issued to consultants at
a value of $2,600,940 (9,477,600 shares adjusted for the July 12, 2004
reverse-split of GFY's common shares).
During the quarter ended June 30, 2004, Edward E. Schwalb sold shares of GFY
common stock, as disclosed in his filings of Form 4. While Mr. Schwalb believes
that such sales are allowed due to the registration of the shares pursuant to a
current S-8 Registration Statement being on file with the Securities and
Exchange Commission. Mr. Schwalb has been advised that if such is not the case,
a claim might arise that such sales were in violation of Federal Securities Laws
or the Rules and Regulations adopted pursuant thereto.
The following describes the services performed and compensation for each of the
consultants who received more than $5,000 in free-trading common stock of the
Registrant during the quarter ended June 30, 2004. The stock was registered
under S-8 registrations made on January 19, 2004 and April 27, 2004. To the
extent that the Registrant was aware of subcontractors performing services for
the consultants that is disclosed below as well.
On January 28, 2004, the Registrant retained the services of Jorge Castro
("Castro") to act as a consultant to GFY Foods, Inc. Under the agreement with
Castro, Castro is to act as GFY's exclusive strategic advisor for business
combinations and is to arrange the introduction to strategic partners and supply
consulting services to GFY's management. GFY was to pay Castro a non-refundable
payment of $2,000,000 in common stock to compensate Consultant for time, fees
and expenses. Under the terms of the Agreement, Castro may hire subcontractors
and negotiate contracts with them to provide services to GFY under this
17
Agreement. Castro is also due a payment of $1,000,000 in cash or free-trading
common stock of GFY if and when the Company enters into an agreement to acquire,
in any manner, any business, assets or otherwise, introduced by Castro. Castro
and GFY signed an addendum to their agreement on the date of execution to expand
the Castro's duties to the development of a coffee import/export strategy.
During the quarter ended June 30, 2004, the Registrant issued a total of
1,768,000,000 shares of its common stock to Castro (7,072,000 shares adjusted
for the July 12, 2004 reverse-split of GFY's common shares). This stock was
valued at $1,918,000.
Jorge Castro has sub-contracted both Agennoria Continental, A.C., Ltd. and
Francisco Chacon as strategic partners to build our business internationally.
The company is unaware of the amount of the sub-contractors' compensation from
Castro.
The Registrant engaged the services of Sunil Aghi to provide the Registrant with
strategic planning and marketing consulting services. In the quarter ended June
30, 2004, GFY issued 10,000,000 shares of its free trading common stock to Aghi
(40,000 shares adjusted for the July 12, 2004 reverse-split of GFY's common
shares). This stock was valued at $10,000.
The Registrant engaged the services of White Rhino Consultants, Inc. to perform
various accounting services for the Registrant. White Rhino subcontracted these
services to J.R. Marple and directed the Registrant to pay Marple directly for
these services. In the quarter ended June 30, 2004, GFY issued 25,000,000 shares
of its common stock, registered under its S-8 Registration Statement on file
with the Securities and Exchange Commission, to Marple (100,000 shares adjusted
for the July 12, 2004 reverse-split of GFY's common shares). This stock was
valued at $27,000.
The Registrant engaged the services of Lee Traupel to design and develop the
Registrant's website as well as assist the Registrant in investor relations and
distribution of press releases. In the quarter ended June 30, 2004, GFY issued
15,000,000 shares of its common stock, registered under its S-8 Registration
Statement on file with the Securities and Exchange Commission to Traupel (60,000
shares adjusted for the July 12, 2004 reverse-split of GFY's common shares).
This stock was valued at $16,200.
The Registrant engaged the services of Edward T. Wells to perform legal services
for the Registrant. In the quarter ended June 30, 2004, GFY issued 150,000,000
shares of its common stock, registered under its S-8 Registration Statement on
file with the Securities and Exchange Commission to Wells (600,000 shares
adjusted for the July 12, 2004 reverse-split of GFY's common shares). This stock
was valued at $150,000.
The Registrant engaged the services of Devang Shah to provide the Registrant
with various consulting services. In the quarter ended June 30, 2004, GFY issued
6,700,000 shares of its common stock, registered under its S-8 Registration
Statement on file with the Securities and Exchange Commission to Shah (26,800
shares adjusted for the July 12, 2004 reverse-split of GFY's common shares).
This stock was valued at $7,370.
18
The Registrant engaged the services of Jayesh Patel to provide the Registrant
with various consulting services. In the quarter ended June 30, 2004, GFY issued
6,700,000 shares of its common stock, registered under its S-8 Registration
Statement on file with the Securities and Exchange Commission to Patel (26,800
shares adjusted for the July 12, 2004 reverse-split of GFY's common shares).
This stock was valued at $7,370.
Under the terms of a consulting agreement dated April 13, 2004, Tad Gygi was to
provide the Registrant with business services related to management, strategic
planning and marketing. Under the terms of the consulting agreement, Gygi was
granted options to purchase 185,000,000 shares of common stock of the Registrant
for an aggregate price of $45,000. These options were exercised during the
quarter ended June 30, 2004.
Under the terms of a consulting agreement dated April 19, 2004, Solution
Stream, LLC was to provide the Registrant with business services related to
management, strategic planning and marketing. Under the terms of the consulting
agreement, Gygi was granted options to purchase 200,000,000 shares of common
stock of the Registrant for an aggregate price of $65,000. These options were
exercised during the quarter ended June 30, 2004.
RISK FACTORS
You should carefully consider the following risks before making an investment in
our Company. In addition, you should keep in mind that the risks described below
are not the only risks that GFY faces. The risks described below are all the
risks that GFY currently believes are material to our business. However,
additional risks not presently known to us, or risks that we currently believe
are not material, may also impair our business operations. You should also refer
to the other information set forth in this Annual Report on Form 10-KSB/A,
including the discussions set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as our
financial statements and the related notes. GFY's business, financial condition,
or results of operations could be adversely affected by any of the following
risks. If we are adversely affected by such risks, then the trading of our
common stock could decline, and you could lose all or part of your investment.
GFY's auditor's report on our financial statements includes an explanatory
paragraph with respect to substantial doubt existing about our ability to
continue as a going concern. As of March 31, 2004, GFY had incurred a loss from
operations and had an accumulated deficit resulting from losses in prior years.
As a result, our financial statements include a note stating that these
conditions raise substantial doubt about our ability to continue as a going
concern, but the financial statements do not include any adjustments that might
result from this uncertainty.
GFY faces significant competition. There are numerous businesses, corporations,
individuals and firms that are engaged in the food service industry and carry on
the type of business activities in which GFY is presently engaged. Many of those
entities are more experienced and possess significantly greater financial and
personnel resources than are possessed by GFY. In almost all markets in which
the Company presently does business there has been a significant increase in
competition in the food and beverage business and management expects this trend
to continue. Although competition in the food and beverage market is currently
fragmented, a major competitor with substantially greater financial, marketing
and operating resources could enter this market at any time and compete directly
19
against the Company. The Company faces intense competition for suitable sites
for new stores and qualified personnel to operate both new and existing stores.
There can be no assurance that GFY will be able to continue to secure adequate
sites at acceptable rent levels or that the Company will be able to attract a
sufficient number of qualified workers. GFY also faces significant competition
from established food and beverage retailers, most of who have greater financial
and marketing resources than the Company. While GFY intends to be competitive
with those entities, there can be no assurance that such will be the case.
Due to the limited resources available to GFY, our ability to obtain other
restaurant locations or other business opportunities has been limited. GFY's
future success is dependent upon our ability to operate our existing restaurants
and obtain additional business opportunities with those limited resources.
GFY is subject to compliance with securities law, which exposes it to potential
liabilities, including potential rescission rights. GFY has periodically offered
and sold our common stock to investors pursuant to certain exemptions from the
registration requirements of the Securities Act of 1933, as well as those of
various state securities laws. The basis for relying on such exemptions is
factual; that is, the applicability of such exemptions depends upon GFY's
conduct and that of those persons contacting prospective investors and making
the offering. GFY has not received a legal opinion to the effect that any of our
prior offerings were exempt from registration under any federal or state law.
Instead, it has relied upon the operative facts as the basis for such
exemptions, including information provided by investors themselves. If any prior
offering did not qualify for such exemption, an investor would have the right to
rescind its purchase of the securities if it so desired. It is possible that if
an investor should seek rescission, such investor would succeed. A similar
situation exists under state law in those states where the securities may be
offered without registration in reliance on the partial exemption from the
registration or qualification provisions of such state statutes under the
National Securities Markets Improvement Act of 1996. If investors were
successful in seeking rescission, we would face severe financial demands that
could adversely affect our business and operations. Additionally, if we did not
in fact qualify for the exemptions upon which we have relied, the Company could
be found to have violated provisions of state and federal securities laws and
regulations and incur penalties for such violations which would adversely affect
the Company. As a result of any such violations which may have occurred, we
could possibly become subject to significant fines and penalties imposed by the
SEC and state securities agencies.
Additional capital may be necessary to implement GFY's business plans. GFY
believes that it may not have sufficient cash, cash equivalents and operating
income to carry out its business plan of acquiring additional restaurants or
other food service operations in the coming fiscal year ending March 31, 2005.
GFY may require significant new capital in order to execute its business plan
and believes that this capital may only be available through an offering of
shares of its common stock. GFY's success in raising this capital will depend
upon its ability to access equity capital markets and we may not be able to do
so or to do so on acceptable terms. If we fail to obtain funds on acceptable
terms, we will not be able to execute our strategic plan and would have to delay
or abandon some or all of our plans for growth. If we are able to obtain funds,
we believe that the terms of such arrangement will result in an offering that is
highly dilutive to existing holders of shares of our common stock because of the
price at which we would have to issue those shares and the large number of
shares we would have to issue at those prices.
20
Although GFY's management is committed to the business and continued development
and growth of the business, the addition of specialized key personnel and
persons to assist management in the expansion of GFY's operations will be
necessary. There can be no assurance that GFY will be able to locate and hire
such specialized personnel on acceptable terms.
The Company intends to pursue an aggressive growth strategy, the success of
which will depend in part upon its ability to obtain new stores and to operate
existing and new stores profitably. The Company has grown from one Company-owned
store, owned by its subsidiary, which was obtained when the subsidiary was
acquired on January 12, 2004 to a total of three stores as of the date of the
filing of this report. One of the Company's stores is owned by its subsidiary,
GFY, Inc. The Company plans, at some future date, to open new stores in
Continental North America and hopes at some future date to operate stores
outside of the North American Continent. GFY's expansion will present numerous
operational and competitive challenges to the Company's management and employees
and will place significant pressure on the Company's operating systems. In
addition, consumer tastes vary from region to region, and there can be no
assurance that consumers located in the regions in which the Company intends to
expand its restaurant operations will be as receptive to the Company's products
as consumers in existing markets. The achievement of the Company's expansion
plans will depend in part upon its ability to (i) obtain additional restaurants;
(ii) select, and compete successfully in, new markets; (iii) obtain suitable
sites at acceptable costs; (iv) hire, train, and retain qualified personnel; (v)
integrate new stores into existing distribution, inventory control, and
information systems; (vi) expand distribution capabilities; and (vii) maintain
quality control. The Company may incur significant start-up costs in connection
with obtaining new locations, obtaining additional franchises, and entering new
markets. In addition, if the Company were to obtain additional stores in
proximity to current markets it could have the effect of cannibalizing sales at
some of the Company's existing stores. There can be no assurance that the
Company will achieve its planned expansion goals, manage its growth effectively,
or operate its existing or any new stores profitably, and the failure of the
Company in any of these areas could have an adverse effect on the Company's
business, financial condition and results of operations.
There is no established, stable market for GFY's common stock. GFY's common
stock is quoted on the Over-the-Counter Electronic Bulletin Board ("OTCBB") and
traded sporadically. A large number of shares of outstanding common stock are
restricted and are not freely tradeable. An established public trading market
for our common stock may never develop or, if developed, it may not be able to
be sustained. The OTCBB is an unorganized, inter-dealer, over-the-counter market
that provides significantly less liquidity than other markets. Purchasers of
GFY's common stock may therefore have difficulty selling their shares should
they desire to do so.
21
The trading price of GFY's Common Stock has in the past and may in the future be
subject to significant fluctuations. In addition, the stock market in general
has experienced extreme price and volume fluctuations that have affected the
market price for many companies in industries similar to or related to that of
GFY and which have been unrelated to the operating performance of these
companies. These market fluctuations may adversely affect the market price of
GFY's Common Stock. Penny stock regulations may impair GFY's shareholders'
ability to sell their stock. GFY's common stock is deemed a "penny stock." Penny
stocks generally are equity securities with a price of less than $5.00 per
share, other than securities registered on certain national securities
exchanges. Penny stocks are subject to rules and regulations that impose
additional sales practice requirements on broker-dealers who sell the securities
to persons other than established customers and accredited investors, and these
additional requirements may restrict the ability of broker-dealers to sell a
penny stock. Any acquisitions that GFY undertakes could be difficult to
integrate, disrupt its business, dilute shareholder value and significantly harm
its operating results. GFY expects to review opportunities to buy other business
or technologies that would complement its current business, expand the breadth
of its markets, or that may otherwise offer growth opportunities. If we make any
future acquisitions, we could issue stock that would dilute existing
stockholders' percentage ownership, incur substantial debt or assume contingent
liabilities. Potential acquisitions also involve numerous risks, including:
problems assimilating the purchased operations, technologies or products;
unanticipated costs associated with the acquisition; diversion of management's
attention from our core business; adverse effects on existing business
relationships with suppliers and customers; risks associated with entering
markets in which we have no or limited prior experience; and potential loss of
the purchased organization's or our own key employees. GFY cannot assure that it
would be successful in overcoming problems encountered in connection with such
acquisitions and its inability to do so could significantly harm its business.
The Registrant's plan to continue to acquire additional Frullati franchises and
other restaurants will most likely be effectuated through the issuance of
substantial amounts of the Registrant's common stock. The Registrant also has a
history of issuing substantial amounts of shares of its common stock to its
officers, directors, attorneys and consultants. Either the consummation of any
future acquisitions for common stock or the continuation of the Company's
current practice of paying employees, attorneys and consultants with common
stock will continue to substantially dilute current shareholders' ownership
percentage in the Registrant.
Limited Market for Common Shares
There is currently a limited trading market for our shares of common stock, and
there can be no assurance that a more substantial market will ever develop or be
maintained. Any market price for shares of common stock of GFY is likely to be
very volatile, and numerous factors beyond our control may have a significant
adverse effect. In addition, the stock markets generally have experienced, and
continue to experience, extreme price and volume fluctuations which have
affected the market price of many small capital companies and which have often
been unrelated to the operating performance of these companies. These broad
market fluctuations, as well as general economic and political conditions, may
also adversely affect the market price of our common stock. Further, there is no
correlation between the present limited market price of our common stock and our
revenues, book value, assets or other established criteria of value. The present
limited quotations of our common stock should not be considered indicative of
the actual value of GFY Foods, Inc. or our common stock.
22
Risks of "Penny Stock"
GFY Foods Inc.'s common stock (OTC BB: GFYI) is deemed to be "penny stock" as
that term is defined in Rule 3a51-1 of the Securities and Exchange Commission.
Penny stocks are stocks (i) with a price of less than $5.00 per share; (ii) that
are not traded on a "recognized" national exchange; (iii) whose prices are not
quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must still
meet requirement (i) above); or (iv) in issuers with net tangible assets less
than $2,000,000 (if the issuer has been in continuous operation for at least
three years) or $5,000,000 (if in continuous operation for less than three
years), or with average sales of less than $6,000,000 for the last three years.
While our stock has traded at an adjusted price between $300.30 and $$0.0014 per
share over the past two years, there is no assurance that this price level will
continue. Section 15(g) of the Securities Exchange Act of 1934, as amended, and
Rule 15g-2 of the Securities and Exchange Commission require broker/dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed and dated
written receipt of the document before effecting any transaction in a penny
stock for the investor's account. Potential investors in our common stock are
urged to obtain and read such disclosure carefully before purchasing any shares
that are deemed to be a "penny stock." Moreover, Rule 15g-9 of the Securities
and Exchange Commission requires broker/dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stocks to that investor. This procedure requires the broker/dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker/dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for investors in our common stock to resell their shares to third
parties or to otherwise dispose of them.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 Consulting Agreement by and between GFY Foods, Inc. and
Tad Gygi dated April 13, 2004
Exhibit 10.2 Consulting Agreement by and between GFY Foods, Inc. and
Solution Stream, LLC dated April 19, 2004
Exhibit 10.3 Consulting Agreement by and between GFY Foods, Inc. and
Sunil Aghi dated June 1, 2004
Exhibit 31.1 Certification of the Chief Executive Officer of GFY
Foods, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of the Chief Financial Officer of GFY
Foods, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of the Chief Executive Officer and Chief
Financial Officer of GFY Foods, Inc. pursuant to Section
906 of the Sarbanes Oxley Act of 2002
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(b) Reports on Form 8-K
On April 8, 2004, the Registrant filed an 8-K to disclose that on April 1, 2004
it had closed on an acquisition of a Frullati Cafe and Bakery in Elkhart,
Indiana. The Registrant had originally entered into the Purchase Agreement (the
"Agreement") with Dynasty CD Holdings to acquire the business on March 18, 2004.
Under the terms of the Agreement, the Registrant was to pay a sum of Thirty-five
thousand dollars ($35,000) payable as twenty thousand dollars ($20,000) in cash
over a four-month term with the balance due through the issuance of fifteen
thousand dollars ($15,000) worth of shares of restricted common stock. The
Registrant made the stock payment and a payment of $500 in cash, but is
delinquent and has not made any of the remaining cash payments due under this
Agreement.
On April 20, 2004 the Registrant filed an 8-K to disclose that it had amended
its Articles of Incorporation to increase its number of authorized shares of
$0.001 par value common stock from 4,000,000,000 to 8,000,000,000.
On May 12, 2004, the Registrant filed an 8-K to disclose that it had amended its
employment agreement with Ed Schwalb. The amendment to this agreement including
adding a monthly salary of $25,000 per month and a bonus of $70,000 for each
acquisition that he initiates and the Registrant closes during the term of the
employment agreement. This same 8-K disclosed that the Registrant had issued 2.5
billion shares of post-reverse split common stock to Ed Schwalb (10,000,000
shares after accounting for the effects of the reverse stock split approved on
June 15, 2004) under the terms of the employment agreement. Under the terms of
the Registrant's employment agreement with Mr. Schwalb, Mr. Schwalb is
authorized to maintain an ownership percentage of seventy percent (70%) of the
outstanding shares of the Registrant. After this stock issuance, Mr. Schwalb
owned 3,782,250,000 shares, or 62.77%, of the Registrant's 6,025,265,161 shares
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GFY Foods, Inc.
Dated: August 23, 2004 /s/ Edward Schwalb
----------------------
President
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