Part 3 out, I expected worstGFY FOODS, INC. (OTCBB: GFYF) - FAIR SHARES
May 27, 2004
GFY Foods, Inc. (OTCBB: GFYF) has been busy since a reverse-merger in January 2004 transformed it from a troubled oil and gas investment business into an aspiring restaurant operation. GFY, whose business consisted of a Frullati Café in Buffalo Grove, Illinois at the time of the reverse-merger, has since announced two more Frullati acquisitions, and plans for more restaurants and food products.
As we pointed out in the earlier installments of this series, however, there were signs that GFY was faced with financial strains prior to the reverse-merger. As of December 31, 2003, it was in default on more than $60,000 of the $70,000 purchase price for the Buffalo Grove restaurant. See GFY Foods, Inc. - Healthy Food For Thought and Part II - Frullati Frenzy.
The Company's financial status raises serious concerns, particularly in light of its increasing financial obligations - including payment for the franchises, operation of those restaurants, and a generous payment package for its sole officer and director, Edward Schwalb.
As we discovered, cash may be king, but it is not the only form of payment available - not when a company has access to a stock ledger.
Schwalb's Sweet Deal
No one may be relishing GFY's new public company status more than its president, Ed Schwalb. On January 16, 2004, shortly after the reverse-merger was concluded, the Company entered into a five year Employment Agreement with Schwalb - with Schwalb signing for both himself and GFY. Under the Agreement, Schwalb was awarded a generous package that included the following:
cash compensation "to be determined by the Board of Directors based upon performance and available capital;"
250 million shares of GFY common stock - with the promise that he would, at all times during the term of his employment, own at least 70% of the outstanding shares;
an annual bonus, to be determined by the Company's Board of Directors, payable in cash or stock - with the caveat that the Board is not obligated to pay a bonus.
The promise to maintain Schwalb's 70% ownership interest in the Company for the next five years had substantial implications. After all, GFY had embarked on an aggressive strategy that, so far at least, had required it to issue millions of shares in payment for acquisitions. If that trend were to continue, Schwalb's holdings would balloon to massive proportions, while the interest of individual shareholders would be continually diluted.
Was Schwalb concerned that the Board of Directors might not award a fair salary or annual bonus? Probably not, since he was, and is, the Company's sole director.
Despite that seemingly comfortable scenario, however, nothing was left to chance. On May 5th the Employment Agreement was amended, with Schwalb once again signing for both parties.
The Amendment enumerated Schwalb's monthly salary and added a significant new wrinkle. First, it provided that Schwalb would receive $25,000 per month, retroactive to the date of the original Employment Agreement, payable either in cash or in shares of stock which had been registered on Form S-8 or another permissible Registration Statement.
A Form S-8 Registration may be used by a Company to register certain shares issued to employees, officers, directors and consultants pursuant to employee benefit plans. Form S-8 has been a uniquely convenient way to flood the marketplace with registered stock since it becomes effective immediately upon filing and without SEC review. To stem the potential for abuse, the SEC recently proposed new rules that would prevent shell companies from utilizing Form S-8 and restrict former shell companies from using Form S-8 after a reverse-merger until appropriate material information is made available to the public.
GFY's commitment to pay Schwalb a fixed monthly salary was a marked departure from the original agreement to pay a salary based upon "available capital." There has been no public information to suggest that GFY has yet developed cash flow sufficient to support a $25,000 monthly salary.
The Amendment to the Employment Agreement also created a new open-ended revenue stream for President Schwalb by promising to pay him an additional $70,000 for every acquisition that he initiated for GFY. Here, again the Company had the option of paying Schwalb's fee by issuing him registered shares of its common stock.
GFY shareholders, who might already have been uneasy about the commitment to maintain Schwalb's 70% ownership interest in GFY, now had further reason to be uneasy about the value of their own holdings, which could be diluted even further every month and with each acquisition. And they certainly could be wondering why Schwalb should reap an additional reward for identifying potential business opportunities, which, logically, should be his responsibility to shareholders as president of GFY.
And, if they have been focusing on these issues, they may have calculated that Schwalb had already earned as much as $265,000 in registered shares since the reverse-merger - five months of compensation at $25,000 per month and two acquisitions (assuming both new Frullati franchises were attributable to Schwalb's efforts) at $70,000 each.
In the case of the Elkhart, Indiana Frullati Café, that $70,000 fee seems particularly generous since it is twice the amount - $35,000 - that GFY paid to buy the franchise.
No wonder GFY has its sights set on eight to ten more acquisitions before the end of 2004. Every time it issues shares as part of a deal, Schwalb's holdings are slated to be adjusted upward and he stands to earn another $70,000 fee. Not a bad start for the sole officer and director of a small public company with no meaningful revenue history.
Bringing on the Shares
As of December 31, 2003, barely two weeks before its reverse-merger with GFY (the private company), F10 (the public company) had 75 million authorized shares, of which just 12,916,161 were outstanding.
The deluge was about to begin.
On January 12, 2004, the day of the reverse-merger, the public company - now called GFY - increased its authorized shares to 2 billion. Schwalb received 250 million shares under his original Employment Agreement and another 20 million shares as part of the reverse-merger.
It only took one week for the Company to start registering shares that could flood the marketplace. On January 20th the Company filed a Form S-8 Registration Statement, registering 750 million shares to be issued under something called "The 2004 Benefit Plan of GFY Foods, Inc" (the "Plan").
The Company did not say who would be receiving those shares, but the Plan provided that they could be issued to employees, consultants and advisors who rendered services to GFY. Presumably, this would include Edward Schwalb, who remained the Company's sole officer and director. Indeed, a series of Forms 4 (Declarations of Beneficial Ownership) filed by Schwalb with the SEC on April 9th indicated that 38,250,000 of the shares issued to Schwab were included in this Form S-8 registration.
That was just the beginning. On March 22, 2004, GFY doubled the number of authorized shares from 2 billion to 4 billion. Two days later, on March 24th, the Company issued another 1 billion shares to Schwalb, giving him 60.5% of the outstanding shares, a step toward its commitment to maintain Schwalb's 70% ownership interest.
The Company issued some of its newly authorized shares as part of the Elkhart, Indiana transaction. According to a Form 8-K filed by GFY on April 8, 2004, after completion of that acquisition, 2,593,265,161 shares of GFY common stock were outstanding - although it did not say how many shares had been handed to the Elkhart sellers or whether any additional shares had been issued to Schwalb for arranging that transaction.
In any event, according to an amended Form 13 D filed by Schwab with the SEC on April 9, 2004, as of March 31st he owned 1,302,250,000 shares of GFY stock.
There was more to come. First, however, on April 20, 2004 GFY doubled its authorized shares once again, from 4 billion to 8 billion. Then, on April 27th, the Company filed another Form S-8, this time registering an additional 1 billion shares to be issued to unidentified employees and consultants under GFY's 2004 Benefit Plan.
Again, Schwalb benefited from the Form S-8 registration - it included 30 million shares that had been issued to him, according to a Form 4 filed by Schwalb with the SEC on May 7th.
On May 7th, the same day Schwalb filed that Form 4, he received yet another bundle of GFY shares - an additional 2.5 billion shares, to be exact, giving him total holdings of 3,782,250,000 GFY shares as of that date, or 62.77%, of the 6,025,265,161 shares outstanding.
Just how many shares had been issued to Schwalb as of May 7, 2004? The Forms 4 that he filed with the SEC reveal the following:
January 12 20 million
January 16 250 million
January 22 250,000
February 25 1 million
March 1 1 million
March 4 3 million
March 10 3 million
March 12 20 million
March 19 5 million
March 23 5 million
March 24 1 billion
April 1 5 million
April 7 10 million
April 27 15 million
And that does not include the 2.5 billion shares issued to Schwalb on May 7th.
As it turns out, Schwalb was not only acquiring GFY stock, he was selling it as well. In fact, between March 8, 2004 and April 23, 2004 he sold 41 million GFY shares for reported proceeds of $86,900.
The timing of those sales is also worth noting. Schwalb sold 2 million shares on March 8th, the day before the Company first announced plans to acquire the Elkhart Frullati franchise and another 3 million shares on March 31st, the day the Company announced that the deal was "moving forward" (as well as an additional 10.5 million shares between those two dates). He sold another 6 million shares on April 20th, the day the Company issued a press release declaring plans to move forward with additional acquisitions and product development.
Schwalb has not been the only one selling GFY shares. The Company has appeared among the most actively traded OTC Bulletin Board issues in recent weeks - frequently trading over 100 million shares a day, with volume exceeding 1 billion shares on two trading days in mid-April.
Not surprisingly, much of that volume also coincided with the Company's press releases. On March 9th, the day the Elkhart deal was first disclosed, almost 99 million shares were traded. On March 24th, when the Company revealed it had retained Intelective Communications to develop a national brand, more than 488 million shares changed hands. Another 371 million shares traded over the next two days. On April 1st, the day before the Elkhart transaction was declared final, 126 million shares changed hands. 100 million shares were traded on April 2nd.
High volume coincided with other press releases. Volume reached almost 1.2 billion shares when the Company released its operational "update" on April 20th; 1.6 billion shares were traded the day before. The May 4th announcement of GFY's plan to acquire the Frullati franchise in Willowbrook was greeted with trading volume of 458 million shares.
In other words, news from GFY seemed to precipitate trading interest - even when that news contained few details and little basis for predicting the Company's future financial prospects. In other words, there was considerable trading activity for a business that has not yet released a post-merger financial report or indicated the projected revenues for its Frullati franchises.
So who's been buying - and why?
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http://stockpatrol.com/schlock/articles/gfyfoods3.html
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