UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act
For the transition period from _____________ to _______________
Commission File Number 000-26887
BGR CORPORATION
(Exact name of small business issuer as specified in its charter)
Nevada 98-0353403
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5080 N. 40th Street, Suite 103
Phoenix, AZ 85018
(Address of principal executive offices)
(602) 443-2308
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's common equity outstanding as of
November 12, 2004 was 47,958,351 shares of common stock, par value $.0001.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
INDEX TO FORM 10-QSB FILING
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
Page
----
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheet as of September 30, 2004 (Unaudited) .................. 2
Statements of Operations for the quarters ended September 30, 2004
and September 30, 2004 (Unaudited) .................................. 3
Statements of Stockholders' Equity for the quarter ended
September 30, 2004 and the year Ended June 30, 2004 ................. 4
Statements of Cash Flows for the quarters ended September 30, 2004
and September 30, 2003 (Unaudited) .................................. 5
Notes to the Consolidated Financial Statements ...................... 7
Item 2. Management's Discussion and Analysis ............................. 20
Item 3. Controls and Procedures .......................................... 25
PART II.
OTHER INFORMATION
Item 2. Changes in Securities ............................................ 26
Item 6. Exhibits and Reports on Form 8-K ................................. 26
SIGNATURES ............................................................... 27
1
BGR CORPORATION
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2004 (UNAUDITED)
--------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 7,025
Accounts receivable 84,349
Deferred financing cost, net 3,333
Advance to officer 2,741
-----------
Total current assets 97,448
-----------
PROPERTY AND EQUIPMENT
Computers and equipment, net 4,638
-----------
OTHER ASSETS
Intangible assets 18,037
Goodwill 225,709
-----------
Total assets $ 345,832
===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 279,151
Unearned revenue 125,000
Due to shareholders 2,350
Notes payable - current portion 100,000
Debenture payable 127,500
-----------
Total current liabilities 634,001
-----------
NONCURRENT LIABILITIES
Notes payable - long-term 100,000
-----------
Total noncurrent liabilities 100,000
-----------
TOTAL LIABILITIES 734,001
-----------
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, Series A, $10.00 par value,
125,000 authorized, 0 shares issued and outstanding --
Convertible preferred stock, Series B, $.001 par value,
1,000,000 shares authorized, 10,000 shares issued and outstanding 3,800,000
Common stock, $0.0001 par value, 100,000,000 shares
authorized, 38,972,351 shares issued and outstanding 3,897
Additional paid-in capital 1,938,907
Deferred compensation (192,000)
Accumulated deficit (5,938,973)
-----------
Total stockholders' deficit (388,169)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 345,832
===========
The accompanying notes are an integral part of these financial statements.
2
BGR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
(UNAUDITED)
--------------------------------------------------------------------------------
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
----------- -----------
REVENUE $ 31,309 $ --
----------- -----------
COST OF REVENUE 5,504 --
----------- -----------
Gross profit 25,805 --
----------- -----------
COSTS AND EXPENSES:
General and administrative expenses 439,119 132,810
----------- -----------
Total costs and expenses 439,119 132,810
----------- -----------
INCOME (LOSS) FROM OPERATIONS (413,314) (132,810)
OTHER INCOME (EXPENSE)
Impairment of goodwill (44,836) --
Interest income 3,024 --
Financial and interest expense (4,352) --
Minority interest 2,510 --
----------- -----------
Total other expense (43,654) --
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (456,968) (132,810)
INCOME TAXES -- --
----------- -----------
NET (LOSS) $ (456,968) $ (132,810)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
Total basic and diluted $ (0.01) $ *
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC AND DILUTED) 35,833,889 34,625,974
=========== ===========
* - less than $0.01 per share
The accompanying notes are an integral part of these financial statements.
3
BGR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 AND THE YEAR ENDED JUNE 30, 2004
--------------------------------------------------------------------------------
CONVERTIBLE
COMMON STOCK PREFERRED STOCK SERIES B
----------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
BALANCE JUNE 30, 2003 34,573,800 $ 3,457 -- $ --
Cancellation of shares previously issued (16,660,000) (1,666)
Shares issued for cash 429,000 43 -- --
Shares issued for services 5,500,000 550
Shares issued for business acquisitions 850,000 85
Preferred Class B issued for services 10,000 3,800,000
Value of beneficial conversion feature
Shares issued for deferred compensation 2,000,000 200
Amortization of deferred compensation
Shares issued for stock dividend 7,959,600 796
Net Loss -- -- -- --
----------- -------- ------- ----------
BALANCE JUNE 30, 2004 34,652,400 3,465 10,000 3,800,000
Adjustment of shares for stock dividend (49) --
Shares issued for services 4,320,000 432
Amortization of deferred compensation
Net Loss
----------- -------- ------- ----------
BALANCE AT SEPTEMBER 30, 2004 38,972,351 $ 3,897 10,000 $3,800,000
=========== ======== ======= ==========
ADDITIONAL
DEFERRED PAID-IN ACCUMULATED
COMPENSATION CAPITAL DEFICIT TOTAL
------------ ------- ------- -----
BALANCE JUNE 30, 2003 $ -- $ 73,393 $ (76,875) $ (25)
Cancellation of shares previously issued 1,666 --
Shares issued for cash 89,957 90,000
Shares issued for services 1,059,192 1,059,742
Shares issued for business acquisitions 239,915 240,000
Preferred Class B issued for services 3,800,000
Value of beneficial conversion feature 21,212 21,212
Shares issued for deferred compensation (240,000) 239,800 --
Amortization of deferred compensation 32,000 32,000
Shares issued for stock dividend (796) --
Net Loss -- (5,405,130) (5,405,130)
--------- ----------- ----------- ----------
BALANCE JUNE 30, 2004 (208,000) 1,724,339 (5,482,005) (162,201)
Adjustment of shares for stock dividend -- --
Shares issued for services 214,568 215,000
Amortization of deferred compensation 16,000 16,000
Net Loss (456,968) (456,968)
--------- ----------- ----------- ----------
BALANCE AT SEPTEMBER 30, 2004 $(192,000) $ 1,938,907 $(5,938,973) $ (388,169)
========= =========== =========== ==========
The accompanying notes are an integral part of these financial statements.
4
BGR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
(UNAUDITED)
--------------------------------------------------------------------------------
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(456,968) $(132,810)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 3,738 --
Amortization of deferred financing cost 667 --
Amortization of deferred compensation 16,000 --
Impairment of goodwill 44,836 --
Minority interest (2,510) --
Common stock issued as consideration for services 215,000 99,966
Changes in assets and liabilities (net of business acquisition):
Accounts receivable (13,523) --
Franchise fees receivable (60,000) --
Prepaids (4,000) (24,963)
Interest receivable 1,414 --
Accounts payable and accrued liabilities (2,181) 4,509
Unearned revenue 125,000 (2,156)
--------- ---------
Net cash used in operating activities (132,527) (53,298)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to affiliate -- (1,000)
Advances to officer (2,741) --
--------- ---------
Net cash used in investing activities (2,741) (1,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of advances from shareholder (3,708) --
Proceeds from notes payable and convertible debenture 100,000 --
Common stock issued for cash -- 55,000
--------- ---------
Net cash provided from financing activities 96,292 55,000
--------- ---------
INCREASE IN CASH AND EQUIVALENTS (38,976) 702
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 46,001 --
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 7,025 $ 702
========= =========
The accompanying notes are an integral part of these financial statements.
5
BGR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003
(UNAUDITED)
--------------------------------------------------------------------------------
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
--------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued for business acquisitions
and franchise rights $ -- $ --
The accompanying notes are an integral part of these financial statements.
6
BGR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 (UNAUDITED)
--------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
BGR Corporation (the "Company") a Nevada corporation, was incorporated on
July 6, 2001. The Company was formerly named Cortex Systems, Inc. The Company
intends to develop and franchise casual dining restaurants. The Company is
seeking to acquire assets within this industry, has entered into agreements
with and acquired the rights to several casual dining concepts. During the
year ended June 30, 2004, the Company ceased to be a development stage
enterprise coinciding with its acquisition of Fathom Business Systems, Inc.,
an enterprise in the business of selling and installing point-of-sale
equipment and systems for restaurants.
The Company serves as a holding company for its wholly and majority owned
operating subsidiaries; Fathom Business Systems, Inc. ("Fathom"), Iceberg
Food Systems, Inc. ("IFS"), Pauli's Franchise Corporation, ("Pauli's"),
Kokopelli Mexican Grill Franchise Corporation, ("Kokopelli"), Cousin Vinnie's
Franchise Corporation ("CV"), and Kirby Foo's Asian Grill Franchise
Corporation ("Kirby"). The Company owns 100% of Fathom and IFS and has
ownership interests in Kirby of approximately 97.5%, 87% of IFS, 72.5% of
Pauli's, 50% of Kokopelli and 50% of CV.
The Company faces many operating and industry challenges. There is no
meaningful operating history to evaluate the Company's prospects for
successful operations. Future losses for the Company are anticipated. The
proposed plan of operations would include seeking an operating entity with
which to merge. Even if successful, a merger may not result in cash flow
sufficient to finance the continued expansion of a business.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred material
operating losses, has continued operating cash flow deficiencies and has
working capital deficit at June 30, 2004. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The Company
believes that it will be successful in franchising its restaurant concepts
which will result in up front franchise fees and ongoing monthly royalties.
However, the Company will likely require additional debt or equity capital in
order to implement its business plan. The accompanying consolidated financial
statements do not include any adjustments that might result from this
uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements contain the accounts of the Company and its wholly and majority
owned subsidiaries, Fathom, IFS, Pauli's, Kokopelli, CV and Kirby. All
material inter-company balances and transactions have been eliminated in
consolidation. The accompanying consolidated statement of operations includes
the operating activity of the subsidiaries from the respective dates of
acquisition through June 30, 2004. As noted above, minority interest exists
for five such subsidiaries.
7
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include all short-term
liquid investments that are readily convertible to known amounts of cash and
have original maturities of three months or less.
ACCOUNTS RECEIVABLE - Consists primarily of amounts due from customers of
Fathom's Point of Sale systems and implementation projects.
REVENUE RECOGNITION - Revenue is recognized on hardware and installation of
point-of-sale systems when the system has been installed and the Company has
received customer acceptance and there is no material ongoing commitment on
the part of the Company. Cost of revenues includes the cost of hardware items
and labor. Initial franchise fees are deferred until substantially all
services and conditions relating to the sale of the franchise have been
performed or satisfied (i.e. until the franchise is open for business).
PROPERTY AND EQUIPMENT - Is stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over the estimated useful
lives of the assets ranging from 3 to 5 years.
INCOME TAXES - The Company provides for income taxes based on the provisions
of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES, which among other things, requires that recognition of deferred income
taxes be measured by the provisions of enacted tax laws in effect at the date
of financial statements.
INCOME (LOSS) PER COMMON SHARE - Net loss per share is calculated using the
weighted average number of shares of common stock outstanding during the
year.
Warrants to purchase 2,777,500 shares of common stock were excluded from the
calculation for the year ended June 30, 2004, because inclusion of such would
be anti-dilutive. Also excluded from the calculation were 10,000 shares of
Series B Convertible Preferred Stock issued during the year ended June 30,
2004. These shares are convertible into 10,000,000 shares of common stock.
However, the Series B Convertible Preferred Stock is only convertible upon
the Company attaining certain operating milestones, none of which were met at
September 30, 2004.
The following presents the computation of basic and diluted loss per share
from continuing operations for the three months ended September 30:
8
2004 2003
------------------------------- --------------------------------
Per Per
Income Shares Share Income Shares share
------ ------ ----- ------ ------ -----
Net Loss $(456,968) $(132,810)
Preferred stock dividends (0) (0)
--------- ---------
Loss available to common
stockholders $(456,968) $(132,810)
========= =========
BASIC EARNINGS PER SHARE:
Income available to common
stockholders $(456,968) 35,833,889 $ (0.01) $(132,810) 34,625,794 *
========= ======= ========= ======
Effect of dilutive securities N/A N/A N/A N/A
DILUTED EARNINGS PER SHARE $(456,968) 35,833,889 $ (0.01) $(132,810) 34,625,794 *
========= ======= ========= ======
* - less than $0.01 per share
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires 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.
IMPAIRMENT OF LONG-LIVED ASSETS is assessed by the Company whenever there is
an indication that the carrying amount of the asset may not be recoverable.
Recoverability of these assets is determined by comparing the forecasted
undiscounted cash flows generated by those assets to the assets' net carrying
value. The amount of impairment loss, if any, is measured as the difference
between the net book value of the assets and the estimated fair value of the
related assets.
INTANGIBLE ASSETS at September 30, 2004 consist of goodwill associated with
the Company's acquisition of Fathom for the difference between the purchase
price of the acquired business and the fair value of the identifiable net
assets. The Company adopted Statement of Financial Accounting Standard
("SFAS") No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective July 1,
2002. As a result, the Company does not amortize goodwill, and instead
annually evaluates the carrying value of goodwill for impairment, in
accordance with the provisions of SFAS No. 142. During the quarter ended
September 30, 2004, intangible assets were reduced by $44,836 due to
additional information received regarding the net book value of Fathom as of
its acquisition date. This amount is reflected as impairment of goodwill. The
Company believes that there have been no additional impairments of the
carrying value of goodwill of $225,709 as of September 30, 2004.
Additionally, the Company acquired the franchise rights of Pauli's and Kirby
during the year ended June 30, 2004. These franchise rights are recorded at
cost and are being amortized on a straight-line basis over the estimated
useful life of 10 years. Amortization expense for these assets was not
material for the quarter ended September 30, 2004.
9
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transaction and Disclosure, which provides alternative methods
of transition for a voluntary change to fair value based method of accounting
for stock-based employee compensation as prescribed in SFAS 123, Accounting
for Stock-Based Compensation. Additionally, SFAS No. 148 requires more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The provisions of this statement are
effective for fiscal years ending after December 15, 2002, with early
application permitted in certain circumstances. The Company presently does
not intend to adopt the fair value based method of accounting for its stock
based compensation.
In June 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
SFAS No. 150 requires certain instruments, including mandatorily redeemable
shares, to be classified as liabilities, not as part of shareholders' equity
or redeemable equity. For instruments that are entered into or modified after
May 31, 2003, SFAS No. 150 is effective immediately upon entering the
transaction or modifying the terms. For other instruments covered by
Statement 150 that were entered into before June 1, 2003, Statement 150 is
effective for the first interim period beginning after June 15, 2003. The
Company has evaluated the provisions of SFAS No. 150 and implementation of
such was not material.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires a company, at
the time it issues a guarantee, to recognize an initial liability for the
fair value of obligations assumed under the guarantees and elaborates on
existing disclosure requirements related to guarantees and warranties. The
initial recognition requirements are effective for the Company during the
third quarter ending March 31, 2003. The adoption of FIN 45 did not have an
impact on the Company's financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
is effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The adoption of FIN
46 did not have an impact on the Company's financial position or results of
operations.
10
3. ACCOUNTS RECEIVABLE
Accounts receivable principally result from sales of hardware, installation
of point-of-sale systems, fees from franchisees, the sale of area development
agreements, the sale of corporate owned stores and certain related expenses
paid for on behalf of the Company's franchisees.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2004:
Computer equipment $ 16,338
Less accumulated depreciation (11,700)
--------
Property and equipment, net $ 4,638
========
Depreciation expense was $3,738 and $-0- for the quarters ended September 30,
2004 and 2003, respectively.
5. BUSINESS ACQUISITIONS
In the year ended June 30, 2004, the Company entered into an agreement to
acquire all of the outstanding voting shares of Fathom Business Systems, Inc.
("Fathom"). Fathom specializes in the sale, installation and service of
restaurant `Point-of-Sale' equipment. Fathom was a single employee business.
The Company issued 750,000 shares of its common stock to acquire all of the
outstanding shares of Fathom. On the basis of the trading price of the
Company's common stock at the time of the acquisition, the purchase price was
$225,000. The purchase price was allocated as follows:
Cash $ 3,619
Accounts receivable 10,232
Inventory 13,567
Accounts payable (72,963)
Intangible assets 270,545
---------
$ 225,000
=========
In connection with this acquisition, the Company allocated the purchase price
in excess of the tangible assets and liabilities acquired as goodwill. The
Company determined that the excess purchase price was not specifically
connected with such things as tradenames, customer lists or existing
contracts. During the quarter ended September 30, 2004, the intangible assets
were reduced by $44,836 due to additional information received regarding the
net book value of Fathom as of its acquisition date. This amount is reflected
as impairment of goodwill in the financial statements for the quarter ended
September 30, 2004.
11
All revenue recognized in the accompanying statement of operations for the
quarter ended September 30, 2004, relates to sales and services provided by
the Fathom subsidiary.
In the year ended June 30, 2004, the Company entered into an agreement to
acquire all of the outstanding voting shares of Deville, Inc., a developer of
"LUCKY LOU'S" restaurants. The terms of the purchase agreement, required the
issuance of 1,000,000 of the Company's common shares and a note payable with
a face amount of $400,000. The note was discounted at 8% on the basis of its
repayment terms resulting in a principal amount of $349,805. The terms also
called for an ongoing payment to the seller based on royalty revenues
generated from "LUCKY LOU'S" restaurants. The total purchase price of Deville
was $649,805. There were no tangible assets or liabilities acquired in the
purchase. In March, 2004, the Company and Deville, Inc., agreed to rescind
the transaction. Accordingly, the shares were returned to the Company, the
note payable and the net assets of Deville were reversed and removed from the
balance sheet at June 30, 2004.
In the year ended June 30, 2004, the Company entered into various agreements
with American Restaurant Development Corp. ("ARDC"), an entity controlled by
a significant shareholder of the Company. As of September 30, 2004 the
shareholder held a beneficial interest in the Company totaling approximately
10%. The Company contracted with ARDC to provide restaurant concepts for
franchising. For each concept introduced to the Company, ARDC is to receive
500,000 shares of the Company's common stock and $125,000, $75,000 of which
is paid immediately and the $50,000 balance as cash is received by the
Company for franchise fees realized by the Company on such concepts. In
addition, ARDC is to receive 50% of all non-refundable payments received by
the Company for new franchise and area developer agreements. Additionally,
ARDC will receive royalties equal 1% of the system wide revenues of each
concept. During the year ended June 30, 2004, a total of 2,000,000 shares of
the Company's common stock was issued to ARDC and the Company incurred
$300,000 in fees for the four franchise concepts brought to the Company by
ARDC. As of 6/30/04 no franchise units had been sold. There were no
additional shares issued under these agreements in the quarter ended
September 30, 2004. As of 9/30/04 ARDC had sold 5 units of the Kokopelli
franchise for franchise fees of $25,000 each (total $125,000). Accordingly,
as of the quarter ended September 30, 2004, the Company owed ARDC 50% of the
franchise fees ($62,500) and the remaining balance ($50,000) on the franchise
concept. The franchise fee revenue is deferred until the stores are opened.
In the year ended June 30, 2004, the Company entered into operating
agreements for three of the concepts (Pauli's, Kokopelli, and CV) with the
owners of the exclusive rights to the names, trademarks, menus, operating
systems and recipes for the concepts. The Company will provide the monies
needed to start the sale of the franchises and other operating services for
its 72.5% interest in Pauli's, 50% interest in Kokopelli and 50% interest in
CV. There was no change in the interests held in the quarter ended September
30, 2004.
6. INTANGIBLE ASSETS
In connection with the Company's acquisition of Fathom and sale of franchise
rights to the Pauli's and Kirby franchises, intangible assets were recorded.
12
The Company allocated $270,545 of its purchase price of Fathom to goodwill.
The Company does not amortize goodwill, and instead annually evaluates the
carrying value of goodwill for impairment. During the quarter ended September
30, 2004, the Company determined that the carrying value of the goodwill was
impaired and recorded an impairment write-down of $44,836. This amount is
reflected as impairment of goodwill in the financial statements for the
quarter ended September 30, 2004.
The Company acquired its interests in Pauli's and Kirby through the issuance
of 100,000 shares valued at approximately $15,000. As a result of these
transactions, Pauli's and Kirby have capitalized the $18,037 cost of
intangible assets such as tradenames, franchise rights, menus, etc. The
Company is amortizing these assets on a straight line basis over the
estimated useful lives of ten years. Amortization expense for these assets
was not material during the quarter ended September 30, 2004.
The aggregate amortization expense for the five years succeeding June 30,
2004, is estimated to be approximately:
2005 $ 1,804
2006 1,804
2007 1,804
2008 1,804
2009 1,804
Thereafter 9,017
--------
$ 18,037
========
13
7. NOTES PAYABLE
Notes payable as of September 30, 2004 was comprised of the following:
Loan from an individual maturing June 30, 2007 Note payable
$50,000, interest at 12% per annum, Interest due quarterly. $ 50,000
Loan from an individual maturing June 30, 2007 Note payable
$50,000, interest at 12% per annum, Interest due quarterly. 50,000
Loan from a related party maturing January 21, 2005 Note
payable $50,000, interest at 8% per annum, Interest due on
maturity. 50,000
Loan from an individual maturing February 28, 2005 Note
payable $50,000, interest at 20% per annum, Interest of
$5,000 due on maturity. 50,000
--------
Total 200,000
Less Current portion (100,000)
--------
Long-term portion $100,000
========
Principal payaments due as follows:
Years ended June 30: 2005 $100,000
2006 --
2007 100,000
--------
$200,000
========
8. CONVERTIBLE DEBENTURE
During the year ended June 30, 2004, the Company issued a 2-year 7.5%
convertible debenture amounting to $85,000 with interest payable monthly and
due June 9, 2006. The debenture also included non-detachable warrants for
2,500,000 shares of common stock.
The debenture may be converted at the option of the holder into common shares
of the Company. The conversion price is the lesser of $0.25 or 80% of the
average of the five lowest volume weighted average price during the 20
trading days prior to the election to convert. Upon conversion, the holder
must simultaneously purchase shares of the Company's common stock in a dollar
amount equal to 10 times the dollar amount of the debenture converted. The
purchase price for such shares shall be the same as the debenture conversion
price. The value of the beneficial conversion feature of $21,212 was recorded
as a discount to the principal balance of the debenture and amortized
immediately as interest expense because the debenture is convertible at any
time at the option of the holder.
14
The Company defaulted on the interest payment provisions in the debenture.
Consequently, the principal amount due under the debenture of $85,000 became
immediately due and payable in cash plus a default penalty of $42,500 (150%
of the principal amount) resulting in a total obligation of $127,500 plus any
and all accrued interest. The per diem interest is $26.04. The default
penalty of $42,500 was expensed as interest and financing costs in the
financial statements for the year ended June 30, 2004. The effective annual
interest rate on the debenture is approximately 24% when the beneficial
conversion feature is considered and approximately 48% when the beneficial
conversion feature and the penalty interest are considered. On October 14,
2004 a lawsuit was filed by the debenture holder against the Company. The
debenture holder seeks to recover $130,026.04 ($127,500 plus accrued interest
of $2,526.04) plus interest at the rate of $26.04 per day for each day after
September 30, 2004 and additional damages of $15,000 through October 23, 2004
and an additional $15,000 for each 30 day period after October 23, 2004 that
the amount due under the debenture is not paid. Subsequent to December 23,
2004 the amount increases to $20,000 for each 30 day period plus attorney and
court costs.
9. STOCKHOLDERS' EQUITY
In July 2003, the Company amended it Articles of Incorporation to reflect
100,000,000 authorized shares of Common Stock having a par value of $0.001
and 1,125,000 shares of Preferred Stock having a $10.00 par value for
Preferred A and $0.001 par value for Preferred B. The authorized number of
Class A Preferred Stock authorized to be issued is 125,000 shares with voting
rights equivalent to five votes per share of Class A Preferred Stock. The
Class A Preferred Stock is cumulative, with an annual dividend of 6%.
Additionally, Class A Preferred Stock shall be convertible into five shares
of common stock of the Company for every one Class A Preferred share. The
authorized number of Class B Preferred Stock authorized to be issued is
1,000,000 shares. Each share of Class B Preferred Stock shall be entitled to
voting rights equivalent to one vote. Additionally, 50% of the Class B
Preferred Stock may be converted after 50 franchise units are sold and the
remaining 50% may be converted after 50 additional franchise units are sold.
On November 8, 2004, the Company approved the conversion of the 10,000
outstanding shares of Series B Preferred Stock into shares of the Company's
Common Stock at the ratio of 1,000 shares for every 1 share held.
Accordingly, 9,500,000 shares of Common Stock were approved to be issued in
exchange for the 10,000 shares of Series B Preferred Stock.
In August 2003, the Company sold 275,000 common shares, plus warrants to
purchase 137,500 shares at a price of $0.50 per share for a total price of
$55,000.
In September 2003, the Company approved a 2003 Stock Compensation Plan for
1,000,000 shares to compensate employees and consultants. In addition, the
Company entered into an agreement with a consultant whereby the consultant
received 350,000 shares of the Company's common stock for services rendered.
15
In October 2003, the Company entered into an agreement to acquire all of the
outstanding shares of "ICEBERG FOOD SYSTEMS,CORP." ("IFSC"). IFSC was owned
by a former officer and director of the Company. The only holdings of IFSC
were 30,000,000 shares of the Company's common stock. As part of the
agreement, IFSC distributed 14,465,000 shares of the Company's common stock
to its shareholder. IFSC then became a wholly owned subsidiary of the Company
with its only holdings being the remaining 15,535,000 shares of the Company's
common stock. Effectively, the transaction was an acquisition of treasury
stock by the Company. In exchange, the Company assumed a commitment to raise
capital and develop the Iceberg Drive-In concept. The rights to develop that
concept were previously held by IFSC. The Company was to assist IFSC in
providing up to $1,130,000. The Company accounted for this transaction as an
acquisition of treasury stock through the issuance of a note payable of
$1,130,000. Subsequently, the note payable and an additional 1,125,000 shares
were cancelled for a total of 16,660,000 shares of common stock returned to
the Company.
In November 2003, the Company acquired Fathom Business Systems in exchange
for 750,000 shares of the Company's restricted common stock valued at
$225,000. Other stock transactions in November 2003 included the issuance of
10,000 shares of Class B Convertible Preferred stock valued at $3,800,000 to
18 of the Company's existing shareholders, employees and consultants for
services rendered; an agreement with a non-affiliate to acquire rights to a
restaurant concept in return for 1,000,000 shares of the Company's common
stock and a note payable for $400,000; and agreements with consultants
whereby the consultants were issued 600,000 shares (100,000 and 500,000
respectively) of the Company's common stock for services to be rendered. The
agreement for the rights to the restaurant concept and the agreement with the
consultant for 500,000 shares was later rescinded, the shares were returned
and the note payable was cancelled.
In January 2004, the Company approved a Company Qualified Stock Option Plan
for 4,000,000 shares of common stock to compensate employees. As of the year
ended June 30, 2004 no stock options had been granted under the Plan.
Subsequent to June 30, 2004, the Company approved increasing the total number
of shares of common stock under the Plan to 15,000,000 with 5,000,000 of
those shares to be registered immediately. Other stock transactions in
January 2004 included an agreement with a consultant whereby the consultant
received 650,000 shares of the Company's common stock for services rendered
and a consulting agreement with a related party whereby the Company will
receive six restaurant concepts in exchange for 500,000 shares of the
Company's common stock for each concept. As of June 30, 2004 four concepts
had been delivered to the Company and the Company had issued 2,000,000 shares
of common stock to the related party valued at $375,000.
In February 2004, the Company sold 140,000 common shares, plus warrants to
purchase 140,000 shares at a price of $0.50 per share for a total price of
$35,000 and the Company entered into an agreement with a consultant to assist
in raising capital for the Company. The Company will pay the consultant 10%
of all funds raised, in cash, and 10% of all stock issued to investors. As of
June 30, 2004 the Company had issued 14,000 shares of common stock to the
consultant and owed finder's fees totaling $3,500.
16
In March 2004, the Company entered into consulting agreements in exchange for
a total of 900,000 shares of common stock. Additionally, the Company entered
into an employment agreement in which part of the compensation was paid in
stock. The employee received 1,000,000 shares of common stock. The 1,000,000
shares must be returned if the employee leaves within 90 days or 800,000
shares must be returned if the employee leaves within one year of the date of
the agreement.
In April 2004, the Company approved the issuance of a stock dividend to
shareholders of record on May 15, 2004. The stock dividend provided the
Common Stock shareholders with one share for every three shares held. In
addition, the Company entered into a marketing consultant agreement with ARDC
whereby the Company will pay a stock fee of 3,000,000 restricted shares for
every 50 franchise units sold. The agreement is for 5 years with a cumulative
total of 500 units. If ARDC meets its performance requirements they will be
issued a total of 30,000,000 shares of stock. As of September 30, 2004 ARDC
had sold 5 units of the Kokopelli franchises. The shares are not payable to
ARDC until they have sold the 50th, 100th, etc. Other stock transactions in
April 2004 included the issuance of 200,000 shares of common stock in
exchange for advisory services rendered; the issuance of 100,000 shares of
common stock valued at $15,000 for additional interests in Pauli's and Kirby;
and an agreement with a related party for consulting services. As part of the
related party agreement the affiliate would receive 30,000 shares of the
Company's Series B Convertible Preferred Stock. The agreement for the
issuance of the Series B stock was rescinded subsequent to June 30, 2004. The
30,000 shares were never issued
In June 2004, the Company entered into an employment agreement in which part
of the compensation is paid in stock. The employee received 1,000,000 shares
of common stock. The 1,000,000 shares must be returned if the employee leaves
within 90 days or 800,000 shares must be returned if the employee leaves
within one year of the date of the agreement. Additionally, a second employee
received 500,000 shares of common stock for their services to the Company.
There were no restrictions on these shares. Other stock transactions in June
2004 included an agreement with an attorney for legal services in exchange
for 800,000 shares of the common stock.
As of June 30, 2004 the Company was in default on a convertible debenture. In
accordance with the default remedies the convertible debenture was
accelerated. The fair value of the beneficial conversion feature is reflected
in Additional Paid-in Capital in the amount of $21,212.
In August 2004, the Company entered into a six month consulting agreement for
business development and marketing services. The consultant was issued
2,000,000 shares of common stock. The shares were valued at $0.05 based on
the trading value of the stock. As a result of this contract , a total of
$100,000 was expensed in the accompanying statement of operations for the
three month period ended September 30, 2004. In addition, the Company issued
100,000 shares, valued at $0.04 per share based on the trading value of the
stock, to an individual as an incentive to lend the Company $50,000. As a
result of this contract , a total of $3,333 (net of $667 of amortization) was
capitalized as deferred financing cost in the accompanying balance sheet and
$667 was amortized as expense in the accompanying statement of operations for
the three month period ended September 30, 2004.
17
In September 2004, the Company entered into a consulting agreement for
business development and marketing services. The consultant was issued
2,000,000 shares of common stock. The shares were valued at $0.05 based on
the trading value of the stock. As a result of this contract , a total of
$100,000 was expensed in the accompanying statement of operations for the
three month period ended September 30, 2004.
In September 2004, the Company entered into a 3 month minimum consulting
agreement that called for the either cash or stock payments for the services.
The company chose to issue 120,000 shares of common stock for the September
payment but intends to pay cash for any future payments. The shares were
valued at $0.05 based on the trading value of the stock. As a result of this
contract , a total of $6,000 was expensed in the accompanying statement of
operations for the three month period ended September 30, 2004.
In September 2004, the Company entered into a 4 month consulting agreement
that requires payment of 200,000 shares of common stock. The Company issued
100,000 shares of common stock and is withholding the additional 100,000
shares as a performance bonus on the agreement. The shares were valued at
$0.05 based on the trading value of the stock. As a result of this contract ,
a total of $5,000 was expensed in the accompanying statement of operations
for the three month period ended September 30, 2004.
Warrants - During the year ended June 30, 2004, the Company granted warrants
to purchase 2,777,500 shares of common stock (275,000 granted at a price of
$0.50 per share, expiring 2 years after issuance and 2,500,000 granted June
9, 2004 at a price of $1.00 per share, expiring June 9, 2007).
11. RELATED PARTY TRANSACTIONS
The Company's former officers, directors and majority shareholders made
advances to the Company in order for the Company to pay its operating
expenses. Repayments of advances were $2,000 and $0 in the quarters ended
September 30, 2004 and 2003, respectively.
In the year ended June 30, 2004, the Company entered into various agreements
with American Restaurant Development Corp. ("ARDC"), an entity controlled by
a significant shareholder of the Company. As of June 30, 2004 the shareholder
held a beneficial interest in the Company totaling 11%. The Company
contracted with ARDC to provide restaurant concepts for franchising. For each
concept introduced to the Company, ARDC is to receive 500,000 shares of the
Company's common stock and $125,000, $75,000 of which is paid immediately and
the $50,000 balance as cash is received by the Company for franchise fees
realized by the Company on such concepts. In addition, ARDC is to receive 50%
of all non-refundable payments received by the Company for new franchise and
18
area developer agreements. Additionally, ARDC will receive royalties equal 1%
of the system wide revenues of each concept. During the year ended June 30,
2004, a total of 2,000,000 shares of the Company's common stock was issued to
ARDC and the Company incurred $300,000 in fees for the four franchise
concepts brought to the Company by ARDC.
In addition, the Company reimburses ARDC for monthly rent expense of $1,374
incurred for office rent and $850 for housing provided to the Company's
President. The office lease agreement is on a month-to-month basis. The lease
term for the employee housing is one year expiring June 30, 2005. Total rent
expense was $5,148 and $0 for the quarters ended September 30, 2004 and 2003,
respectively.
During the year ended June 30, 2004, the Company entered into an operating
agreement with ALEXIS GROUP, LLC "ALEXIS" to operate a franchise company.
ALEXIS is owned by the Company's Chairman of the Board. Pauli's Franchise
Company, LLC was formed to provide an entity that is equally controlled by
ALEXIS and the Company. ALEXIS will provide the exclusive rights of the
Pauli's name, trademarks, menu, and recipes. The Company will provide the
funds for start-up and operating services. At June 30, 2004 the Chairman of
the Board held a 25% interest in Pauli's Franchise Company, LLC, the Company
held a 72.5% interest and an unrelated party held the remaining 2.5%
interest. There was no change in the interests owned in the quarter ended
September 30, 2004.
12. SUBSEQUENT EVENTS
On October 13, 2004, the Company negotiated a consulting agreement with
Javelin Holdings, Inc. The agreement with Javelin provides for $15,000 upon
execution of the agreement, $15,000 cash and a $30,000 60 day Convertible
Note upon successful filing of requisite SEC docs. In addition, Javelin
receives 5% of any Preferred Class of stock created for the benefit of the
Company, 10% of any bridge financing and 5% of any subsequent financing.
During October 2004, Javelin earned finders fee of $5,000 from the Company
for two short-term convertible debentures in the amount of $25,000 each.
On October 15, 2004, Kokopelli entered into an agreement with franchisees for
the franchise rights to five Kokopelli stores. The term of the agreement is
for 20 years. The INITIAL FRANCHISE FEE for the first store of $25,000 is
payable upon execution of the Franchise Agreement. The INITIAL FRANCHISE FEES
of $25,000 for the second, third, fourth and fifth stores are payable in two
installments of $5,000 upon execution of the development agreement and the
balance on the earlier of the date a lease agreement is executed or 90 days
prior to the scheduled opening of the store. In addition to the franchise
fees, the franchisees will pay a ROYALTY FEE to Kokopelli of 5% of the gross
sales of the stores.
On November 1, 2004, the Company negotiated a public relations consulting
agreement with Javelin for $1,500 per month.
On November 8, 2004, the Company approved the conversion of the 10,000
outstanding shares of Series B Preferred Stock into shares of the Company's
Common Stock at the ratio of 1,000 shares for every 1 share held.
Accordingly, 9,500,000 shares of Common Stock were approved to be issued in
exchange for the 10,000 shares of Series B Preferred Stock.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
For a description of our significant accounting policies and an
understanding of the significant factors that influenced our performance during
the three months ending September 30, 2004, this "Management's Discussion and
Analysis" should be read in conjunction with the Consolidated Financial
Statements, including the related notes, appearing in Item 1 of this Quarterly
Report.
EXECUTIVE OVERVIEW
The Company was formed as a Nevada corporation on July 6, 2001 under the
name Cortex Systems, Inc. We were originally a development stage company that
intended to establish memory clinics in several different locations in North
America. We were unable to successfully execute this business plan. As a result,
in July of 2003, we changed the Company's name to BGR Corporation, replaced or
reconstituted the management and board of directors and changed our business
focus. The Company's focus is now on acquiring new innovative fast-casual
restaurant concepts, develop them into a profitable working design, and
franchise them across the United States. On January 20, 2003, we entered into an
agreement with American Restaurant Development Corporation, or ARDC, to grow
restaurant concepts into a fully viable franchise system and to expand each
restaurant concepts nationwide. The controlling shareholder of ARDC is our
largest shareholder. To date, we have formed four joint ventures with different
restaurant concepts under this model.
On November 4, 2003, we acquired Fathom Business Systems, or Fathom. Fathom
is a company specializing in restaurant point of sales equipment. Fathom
generates additional revenue by providing its customers with the supplies and
service needed for the equipment.
On February 2, 2004, we executed an agreement with AZTECA Wrap Foods, LLC,
or AZTECA. AZTECA is the owner and operator of KoKopelli's Mexican Grill.
KoKopelli's is a fast casual Mexican restaurant specializing in made-to-order
Mexican-style food. Per the agreement, we own 50% of the joint venture entity,
while the other 50% is owned by AZTECA. Additionally, we are required to provide
the funding to initiate the franchising of KoKopelli's through ARDC. AZTECA will
provide exclusive rights to the "KoKopelli" name, trade marks, trade dress,
operating system and recipes. In October of this year we sold five locations in
the Phoenix area.
In April 2004, we entered into a shareholders agreement with Alexis Group,
LLC, or ALEXIS. ALEXIS is the owner and operator of Pauli's Home of the
SteakBurger. Per the agreement, we own 72.5% of the joint venture entity, while
the other 27.550% is owned by ALEXIS. Additionally, we are required to provide
the funding to initiate the franchising of Pauli's through ARDC. ALEXIS will
provide exclusive rights to the "Pauli's" name, trade marks, trade dress,
operating system and recipes.
20
In April 2004, we executed a shareholders agreement with Brian Ruggiero,
the owner and operator of Cousin Vinnie's Italian Diner. The Cousin Vinnie's
concept was brought to BGR Corporation by American Restaurant Development
Corporation ("ARDC"). Per the agreement, we own 50% of the joint venture entity,
while the other 50% is owned by Ruggiero. Additionally, we are required to
provide the funding to initiate the franchising of Cousin Vinnie's through ARDC.
Ruggiero will provide exclusive rights to the "Cousin Vinnie's" name, trade
marks, trade dress, operating system and recipes.
In April 2004, the purchase agreement for us to acquire Deville, Inc. was
mutually cancelled. The agreement called for us to pay $700,000 in stock and
cash for the exclusive rights to the Lucky Lou's fast casual restaurant concept.
Stock that had been issued per the agreement has been returned to the Company's
treasury.
On April 15, 2004, our Board of Directors approved a stock dividend for all
shareholders of record as of May 15, 2004. Under he terms of the dividend
distribution, for every three shares held by a shareholder they will receive one
additional share. No fractional shares are to be issued.
RESULTS OF OPERATIONS
The Company had revenue of $31,309 for the three months ending September
30, 2004. This revenue relates to services provided by the new Fathom business
unit.
Total general and administrative operating expenses for the three months
ending September 30, 2004 were $439,119 as compared to the three months ending
September 30, 2003 which were $132,810. This increase from the prior year was
due to a significant increase in consulting fees, which were primarily paid
through the issuance of the Company's common stock.
The Company recorded a net loss for the three months ending September 30,
2004 of $456,968 as compared to the three months ending September 30, 2004 which
were $132,810. This loss was primarily due to the expense related to the
issuance of stock to various consultants. The consultants provide such services
and advice to the Company in business development, business strategy and
corporate image.
The Company has allocated the excess of the purchase price of Fathom over
the amounts allocated to tangible assets acquired and liabilities assumed as
intangible assets. The Company is in the process of analyzing that amount to
determine what amounts are to be allocated to intangible assets that can be
identified and recognized as assets apart from goodwill. Consequently, there
will likely be a reallocation of the amount reported as intangible assets on the
accompanying balance sheet as of three months ending September 30, 2004.
21
LIQUIDITY AND CAPITAL RESOURCES
The Company experienced a cash outflow of $132,527 from continuing
operations during the three months ending September 30, 2004, as compared to a
net of $53,298 during the three months ending September 30, 2003.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires our
management to make certain 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. As such, in accordance with
the use of accounting principles generally accepted in the United States of
America, our actual realized results may differ from management's initial
estimates as reported. A summary of our significant accounting policies are
detailed in the notes to the financial statements which are an integral
component of this filing.
The following summarizes critical estimates made by management in the
preparation of the financial statements:
Management evaluates the probability of the utilization of the deferred
income tax asset related to the net operating loss carry forwards. The Company
has estimated a $2,178,000 deferred income tax asset related to net operating
loss carry forwards and other book tax differences at September 30, 2004.
Management determined that because the Company has yet to generate taxable
income and that the generation of taxable income in the short term is uncertain,
it was appropriate to provide a valuation allowance for the total deferred
income tax asset.
Goodwill was recognized in the Company's acquisition of Fathom. The Company
does not have much operating history but believes that Fathom will increase its
profitability and cash flow. During the quarter ended September 30, 2004, the
Company determined that the carrying value of the goodwill was impaired and
recorded an impairment write-down of $44,836. This amount is reflected as
impairment of goodwill in the financial statements for the quarter ended
September 30, 2004.
CERTAIN RISK FACTORS AFFECTING OUR BUSINESS
Our business involves a high degree of risk. Potential investors should
carefully consider the risks and uncertainties described below and the other
information in this report before deciding whether to invest in shares of our
common stock. If any of the following risks actually occur, our business,
financial condition, and results of operations could be materially and adversely
affected. This could cause the trading price of our common stock to decline,
with the loss of part or all of an investment in the common stock.
WE HAVE A LIMITED OPERATING HISTORY AND THERE IS NO ASSURANCE THAT OUR COMPANY
WILL ACHIEVE PROFITABILITY. Until recently, we have had no significant
operations with which to generate profits or greater liquidity. Although we have
recently established joint ventures with various fast-casual dining restaurants
22
in keeping with our proposed business model, we have not generated a meaningful
amount of operating revenue and we have a very limited current operating history
on which investors can evaluate our potential for future success. Our ability to
generate revenue is uncertain and we may never achieve profitability. Potential
investors should evaluate our company in light of the expenses, delays,
uncertainties, and complications typically encountered by early-stage
businesses, many of which will be beyond our control. These risks include the
following:
* lack of sufficient capital,
* unanticipated problems, delays, and expenses relating to acquisitions
of other businesses, concepts, or product development and
implementation,
* licensing and marketing difficulties,
* competition, and
* uncertain market acceptance of our products and services.
As a result of our limited operating history, our plan for growth, and the
competitive nature of the markets in which we may compete, our company's
historical financial data are of limited value in anticipating future revenue,
capital requirements, and operating expenses. Our planned capital requirements
and expense levels will be based in part on our expectations concerning
potential acquisitions, capital investments, and future revenue, which are
difficult to forecast accurately due to our company's current stage of
development. We may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in revenue. Once we acquire new
restaurant concepts, product development and marketing expenses may increase
significantly as we expand operations. To the extent that these expenses precede
or are not rapidly followed by a corresponding increase in revenue or additional
sources of financing, our business, operating results, and financial condition
may be materially and adversely affected.
WE MAY NEED SIGNIFICANT INFUSIONS OF ADDITIONAL CAPITAL. Based upon our current
cash reserves and forecasted operations, we believe that we will need to obtain
outside funding. We may require significant additional financing in the future
in order to further satisfy our cash requirements. Our need for additional
capital to finance our business strategy, operations, and growth will be greater
should, among other things, revenue or expense estimates prove to be incorrect.
If we fail to arrange for sufficient capital in the future, we may be required
to reduce the scope of our business activities until we can obtain adequate
financing. We cannot predict the timing or amount of our capital requirements at
this time. We may not be able to obtain additional financing in sufficient
amounts or on acceptable terms when needed, which could adversely affect our
operating results and prospects. Debt financing must be repaid regardless of
whether or not we generate profits or cash flows from our business activities.
Equity financing may result in dilution to existing shareholders and may involve
securities that have rights, preferences, or privileges that are senior to our
common stock.
WE WILL FACE A VARIETY OF RISKS ASSOCIATED WITH ESTABLISHING AND INTEGRATING NEW
JOINT VENTURES. The growth and success of our company's business will depend to
a great extent on our ability to find and attract appropriate restaurant
concepts with which to form joint ventures in the future. We cannot provide
assurance that we will be able to:
* identity suitable restaurant concepts,
* form joint ventures on commercially acceptable terms,
* effectively integrate the operations of any joint ventures with our
existing operations,
* manage effectively the combined operations of the businesses,
* achieve our operating and growth strategies with respect to the new
joint ventures, or
* reduce our overall selling, general, and administrative expenses
associated with the new joint ventures.
23
The integration of the management, personnel, operations, products, services,
technologies, and facilities of any businesses that we associate ourselves with
in the future could involve unforeseen difficulties. These difficulties could
disrupt our ongoing businesses, distract our management and employees, and
increase our expenses, which could have a material adverse affect on our
company's business, financial condition, and operating results.
WE DEPEND ON OUR CURRENT MANAGEMENT TEAM. Our company's success will depend to a
large degree upon the skills of our current management team and advisors and
upon our ability to identify, hire, and retain additional senior management,
sales, marketing, technical, and financial personnel. We may not be able to
retain our existing key personnel or to attract and retain additional key
personnel. The loss of any of our current executives, employees, or advisors or
the failure to attract, integrate, motivate, and retain additional key employees
could have a material adverse effect on our company's business. We do not have
"key person" insurance on the lives of any of our management team.
OUR COMPANY MAY NOT BE ABLE TO MANAGE ITS GROWTH. We anticipate a period of
significant growth. This growth could cause significant strain on our company's
managerial, operational, financial, and other resources. Success in managing
this expansion and growth will depend, in part, upon the ability of our senior
management to manage effectively the growth of our company. Any failure to
manage the proposed growth and expansion of our company could have a material
adverse effect on our company's business.
THERE IS NO ASSURANCE THAT OUR FUTURE PRODUCTS AND SERVICES WILL BE ACCEPTED IN
THE MARKETPLACE. Our products and services may not experience broad market
acceptance. Any market acceptance for our company's products and services may
not develop in a timely manner or may not be sustainable. New or increased
competition may result in market saturation, more competitive pricing, or lower
margins. Further, overall performance and user satisfaction may be affected by a
variety of factors, many of which will be beyond our company's control. Our
company's business, operating results, and financial condition would be
materially and adversely affected if the market for our products and services
fails to develop or grow, develops or grows more slowly than anticipated, or
becomes more competitive or if our products and services are not accepted by
targeted customers even if a substantial market develops.
WE MAY FACE STIFF COMPETITION. There are existing companies that offer or have
the ability to develop products and services that will compete with those that
our company may offer in the future. These include large, well-recognized
companies with substantial resources and established relationships in their
respective industries. Their greater financial, technical, marketing, and sales
resources may permit them to react more quickly to emerging technologies and
changes in customer requirements or to devote greater resources to the
development, promotion, and sale of competing products and services. Emerging
companies also may develop and offer products and services that compete with
those offered by our company.
OUR COMMON STOCK MAY BE SUBJECT TO THE "PENNY STOCK" RULES AS PROMULGATED UNDER
THE EXCHANGE ACT. In the event that no exclusion from the definition of "penny
stock" under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") is available, then any broker engaging in a transaction in our company's
common stock will be required to provide its customers with a risk disclosure
24
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker-dealer and its sales person in the transaction, and
monthly account statements showing the market values of our company's securities
held in the customer's accounts. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must be
contained on the customer's confirmation of sale. Certain brokers are less
willing to engage in transactions involving "penny stocks" as a result of the
additional disclosure requirements described above, which may make it more
difficult for holders of our company's common stock to dispose of their shares.
ITEM 3. CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed with an objective of
ensuring that information required to be disclosed in our periodic reports filed
with the Securities and Exchange Commission, such as this Quarterly Report on
Form 10-QSB, is recorded, processed, summarized and reported within the time
periods specified by the Securities and Exchange Commission. Disclosure controls
are also designed with an objective of ensuring that such information is
accumulated and communicated to our management, including our chief executive
officer and chief financial officer, in order to allow timely consideration
regarding required disclosures.
The evaluation of our disclosure controls by our principal executive
officer and principal financial officer included a review of the controls'
objectives and design, the operation of the controls, and the effect of the
controls on the information presented in this Quarterly Report. Our management,
including our chief executive officer and chief financial officer, does not
expect that disclosure controls can or will prevent or detect all errors and all
fraud, if any. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Also, projections of any evaluation of the disclosure
controls and procedures to future periods are subject to the risk that the
disclosure controls and procedures may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Based on their review and evaluation as of the end of the period covered by
this Form 10-QSB, and subject to the inherent limitations all as described
above, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective
as of the end of the period covered by this report. They are not aware of any
significant changes in our disclosure controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses. During the period covered by this Form 10-QSB, there have
not been any changes in our internal control over financial reporting that have
materially affected, or that are reasonably likely to materially affect, our
internal control over financial reporting.
25
PART II -- OTHER INFORMATION
Items 1 and 3-5 are not applicable and have been omitted.
ITEM 2. CHANGES IN SECURITIES
In the quarter ended September 30, 2004, the Company issued 4,320,000
shares of its common stock as compensation for services. These shares were
valued at an average of $0.05 per share.
The foregoing-described issuances of securities were exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) of that act as a transaction not involving a public offering. This
exemption was available in connection with the issuances because (i) the shares
were issued only to persons or parties who the Company believed were "accredited
investors" within the meaning of Regulation D under that act; (ii) no form of
general solicitation or general advertising was used in connection with the
transactions; and (iii) the persons or parties receiving the securities had
access to complete information concerning our company, acquired the securities
for investment and not with a view to the distribution thereof, and otherwise
were not underwriters within the meaning of Section 2(11) of the Securities Act.
There were no underwriters involved in these transactions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are either attached hereto or incorporated
herein by reference as indicated:
Exhibit
Number Description
------ -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302
of The Sarbanes-Oxley Act Of 2002 Exhibit
31.2 Certification of Chief Financial Officer pursuant to Section 302
of The Sarbanes-Oxley Act Of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of The Sarbanes-Oxley Act Of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906
of The Sarbanes-Oxley Act Of 2002
(b) The Registrant has not filed any Current Reports on Form 8-K during the
three-month period covered by this Quarterly Report.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 17, 2004 /s/ Bradford Miller
-------------------------------------
Bradford Miller, President and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 17, 2004 /s/ Janet Crance
-------------------------------------
Janet Crance, Chief Financial Officer
(Principal Accounting Officer)
27
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302
of The Sarbanes-Oxley Act Of 2002 Exhibit
31.2 Certification of Chief Financial Officer pursuant to Section 302
of The Sarbanes-Oxley Act Of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of The Sarbanes-Oxley Act Of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906
of The Sarbanes-Oxley Act Of 2002