UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 2000 Commission File Number 0-21079
PHLO CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 11-3314168
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 Park Avenue South
7th Floor
New York, New York 10016
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 447-1322
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities and 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 number of shares outstanding of the issuer's common stock, as of
October 31, 2000 is 24,755,503.
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
INDEX
--------------------------------------------------------------------------------
Page to Page
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2000
[Unaudited] ......................................................... 1-2
Consolidated Statements of Operations for the three months
and six months ended September 30, 2000 and 1999 [Unaudited]......... 3
Consolidated Statement of Cash Flows [Unaudited] .................... 4-5
Notes to Consolidated Financial Statements [Unaudited] .............. 6-22
Item 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations ........................... 23-24
Signature .............................................................. 25
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET [Unaudited]
September 30, 2000
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $29,304
Accounts receivable 14,886
Inventory 267,814
--------
Total Current Assets $312,004
PROPERTY AND EQUIPMENT, Net 29,951
OTHER ASSETS
Goodwill - net of accumulated amortization
of $135,000 302,000
Security deposits 30,063
--------
Total Other Assets 332,063
--------
TOTAL ASSETS $674,018
========
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET [Unaudited]
September 30, 2000
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,957,855
Accrued expenses and taxes 2,969,574
Current portion of long-term debt 2,486,500
-----------
Total Current Liabilities 7,413,929
OTHER LIABILITIES
Long-term debt, less current portion --
-----------
TOTAL LIABILITIES 7,413,929
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY Preferred stock, 15,000,000 authorized:
Series A convertible stock, $0.0001 par value, 500,000 Shares
authorized, issued and outstanding (liquidation preference $100,000) 50
Series B non-convertible stock, none issued and outstanding --
Series C convertible stock, $0.0001 par value, 3,000,000 shares
authorized, 1,592,909 shares subscribed 159
Common stock, $0.0001 par value, 25,000,000 shares authorized,
24,755,503 shares issued and outstanding 2,433
Common stock, $0.0001 par value, 3,853,223 shares subscribed 412
Additional paid-in capital 4,188,311
Accumulated deficit (10,931,276)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (6,739,911)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 674,018
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS [Unaudited]
For the Three Months and Six Months Ended September 30, 2000, and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $ 81,977 $ 327,670 $ 278,417 $ 789,379
COST OF SALES 54,763 256,052 217,438 555,955
------------ ------------ ------------ ------------
GROSS PROFIT 27,214 71,618 60,979 233,424
SELLING, GENERAL, ADMINISTRATIVE
EXPENSES 884,410 556,890 1,611,020 1,398,712
------------ ------------ ------------ ------------
OPERATING LOSS (857,196) (485,272) (1,550,041) (1,165,288)
------------ ------------ ------------ ------------
OTHER EXPENSES
Interest expense (93,016) (34,550) (165,563) (67,685)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE (93,016) (34,550) (165,563) (67,685)
------------ ------------ ------------ ------------
NET LOSS $ (950,212) $ (519,822) $ (1,715,604) $ (1,232,973)
============ ============ ============ ============
Weighted Average Common Shares
Outstanding 24,328,298 11,707,248 24,328,298 11,582,610
============ ============ ============ ============
Net Loss Per Share (Basic and
Diluted $ (0.04) $ (0.04) $ (0.07) $ (0.11)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS [Unaudited]
For the Six Months Ended September 30, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,715,604) $(1,232,973)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock-based compensation 96,557 --
Depreciation and amortization 50,573 31,687
Amortization of deferred debt discount 17,619 --
(Increase)decrease in accounts receivable 54,504 (160,421)
(Increase)decrease in inventory 66,812 (263,176)
Decrease in other current assets -- 45,471
Increase in fixed assets (13,386) --
Increase in accounts payable 164,298 23,139
Increase in accrued expenses and taxes 317,231 185,578
Increase in current portion of long term debt 774,000 354,000
----------- -----------
TOTAL ADJUSTMENTS 1,528,208 216,278
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (187,396) (1,016,695)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock 171,560 1,033,350
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 171,560 $ 1,033,350
----------- -----------
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS [Unudited], Continued
For the Six Months Ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999
----------- -----------
NET (DECREASE) INCREASE IN CASH $ (15,836) $ 16,655
CASH - Beginning 45,139 12,790
----------- -----------
CASH - Ending $ 29,303 $ 29,445
=========== ===========
The accompanying notes are an integral part of these financial statements.
Supplemental Dislosures of Non-Cash Investing and Financing Activities
2000 1999
----------- -----------
Conversion of debt into equity $ 100,000 --
----------- -----------
$ 100,000 $ --
=========== ===========
Non-Cash Investing and Financing Activities Disclosure:
During the three month period ended September 30, 2000, the holder of $100,000
of debt converted such debt into 454,545 shares of common stock subscribed.
5
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
--------------------------------------------------------------------------------
NOTE 1 - Company Activities
Phlo Corporation, and its subsidiaries (hereinafter collectively referred to as
the "Company") is a manufacturer of beverages containing patented and
patent-pending biotechnologies. The Company sells its beverages to distributors,
who offer the beverages for sale in high volume chain stores, such as
supermarkets, and in small retail outlets, such as delicatessens and convenience
stores. The Company is positioned as a biotechnology company which is using the
high volume distribution segment of the beverage industry to commercialize a
portion of its technology. Central to the Company's strategic development plan
is the development, acquisition and/or exclusive licensing of proprietary
technology, nutraceutical, biotechnological and/or pharmaceutical in nature,
which the Company initlaly plans to convey to consumers through the use of
beverage systems. The Company is focusing its technology acquisition efforts on
those technologies related to preventing or ameliorating cancer, reducing the
effects of aging, assisting in weight loss, and enhancing sexual performance.
The Company's current beverage line has been sold under the McCoy's name and
includes ice teas, green teas, lemonade and fruit drinks. In October 2000, the
Company introduced its newest line of beverages, "ZO - Vital Cell Defense",
featuring its proprietary (patent-pending) composition with controlled-release
capability which is designed to protect cells from the oxidative stress of aging
and to stimulate cell repair. The launch of the Vital Cell Defense line marks
the successful commercialization of one of the Company's biotechnologies.
In July, 1999, the Company incorporated Phlo Beverage Products Company, a wholly
owned subsidiary, to conduct the business of producing and selling McCoy's
beverages. In August,1999, the Company incorporated Phlo System, Inc., a wholly
owned subsidiary. In October, 2000, Advanced Bio-Delivery, LLC., a limited
liability company formed in June, 2000, became a wholly-owned company of the
Company. Hereafter, the Company will conduct its biotechnology-related
activities through Phlo System, Inc. and Advanced Bio-Delivery, LLC. The Company
also has two subsidiaries which were not operating entities during the periods
reported upon, X-Treem Products Corporation ("X-Treem") and Quigley's Orchard,
Inc. In November 2000, X-Treem was formally dissolved. As a result, the
Company's assets, liabilities and stockholders' deficiency will no longer
reflect those of X-Treem. The estimated effect is to reduce liabilities by
approximately $4,300,000, decrease the Company's Stockholders' Deficiency by
approximately $4,010,000, and reduce assets by approximately $290,000. See Note
12 - Subsequent Events.
On October 22, 1998, the Company agreed to acquire the capital stock of a
beverage company, X-Treem, through an exchange of stock with the shareholders of
X-Treem (the "Stock Exchange Transaction"). On April 2, 1999, the agreement was
amended so as not to require Phlo's stock to be reverse-split, as initially
intended. As a result, the additional shares that would be issuable under the
amended agreement could not be issued at that time because Phlo did not have
enough authorized shares to do so. Based on the amendment, Phlo would be
required to issue a total of 156,877,611 shares of common stock (assuming the
conversion of all convertible securities and the exercise of all warrants in
connection with such exchange transaction) in order to acquire 100% of the
outstanding X-Treem capital stock and outstanding warrants to purchase X-Treem
common stock from the holders thereof. Subsequently, the Company authorized an
increase in the number of authorized shares sufficient to complete the stock
exchange transaction.
6
<PAGE>
As of September 30, 2000, 28,838 shares of X-Treem capital stock representing
96.47% of the total outstanding shares have been exchanged for Phlo shares which
have been issued out of authorized shares or are yet to be issued. In order to
complete the Stock Exchange Transaction with respect to those shareholders of
X-Treem who have elected to participate in the exchange transaction, the Company
is required to issue 941,160 additional shares of common stock and 1,112,010
shares of Series C Preferred Stock.
On June 1, 1999, 281,866 shares of the Series C Convertible Preferred Stock (the
"Series C Preferred") were issued to X-Treem shareholders, along with 2,608,316
shares of Phlo common stock, in exchange for such X-Treem shareholders'
tendering their shares of X-Treem stock. In addition, 731,683 shares of Series C
Preferred and 6,770,835 shares of common stock were also issued to three
shareholders who had previously tendered their X-Treem shares at the outset of
the Stock Exchange Transaction. These share issuances were intended as a partial
issuance until there were sufficient authorized shares to complete the Stock
Exchange Tranaction. When the Stock Exchange Transaction is completed, all
former X-Treem shareholders who participated in the Stock Exchange Transaction
will have received Phlo shares on a pro rata basis based on their ownership of
X-Treem stock.
As of September 30, 2000, there are 24,755,503 common shares issued and
outstanding and 3,853,223 common shares subscribed. In addition, options and
warrants to purchase 2,438,333 and 9,293,762 shares of common stock are also
outstanding, respectively.
On December 22, 1999, the Company notified its transfer agent that its legal
counsel believed that no outstanding shares of preferred stock, including both
the Series A and C, had been validly issued, although the Company's prior
outside counsel had issued an opinion that all capital stock had been validly
issued and that the board of directors had authority to approve the issuance of
the classes and series of securities so issued. In November 2000, the Company
amended its Certificate of Incorporation to confer on the Board of Directors
blank check authority to create different classes and series of preferred stock
without further shareholder vote, and to enable the Company to issue all shares
that are subscribed.
7
<PAGE>
NOTE 2 - Summary of Significant Account Policies
Basis of Presentation and Reporting
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary in order to make the financial statements not misleading have
been included. Results for the six months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal
year ending March 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended March 31, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, collectively referred to as the "Company and
subsidiaries". All significant inter-company transactions and balances have
been eliminated in consolidation.
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.
Goodwill
Goodwill in connection with acquisitions is amortized on a straight-line
basis over a five-year period. Amortization of goodwill charged to
operations for the six months ended September 30, 2000 and September 30,
1999 amounted to $46,000 and $20,000 respectively.
Inventories
Inventories are stated at the lower of cost or market. Costs, which include
purchases, freight and packaging, raw materials, packing fees and finished
products, are determined on the first-in, first-out basis.
Advertising Expense
Advertising costs are expensed as incurred during the period.
Furniture and Equipment
Furniture and equipment is stated at cost. Maintenance and repair costs are
charged to expense as incurred, costs of major additions and betterments
are capitalized. When furniture and equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is reflected in income.
Depreciation and Amortization
The cost of furniture and equipment is depreciated using the straight-line
method over five years.
Revenue Recognition
Revenue is recognized at the time products are shipped and title passes.
Slotting Fees
Slotting fees are paid to individual supermarkets and supermarket chains to
obtain initial shelf space for new products. Fees vary from store to store,
however, their payment does not guarantee that a company's product will be
carried for any definite period of time. The Company pays for such fees by
issuing a check, providing free goods or issuing credits for previously
said goods. The cost of the slotting fees is valued at the amount of cash
paid or the cost to the Company of the goods provided. The Company expenses
slotting fees when the obligation is incurred.
Research and Development
Research and development costs of $85,621 and $0 are expensed as incurred
during the six months ended September 30, 2000 and September 30, 1999.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the consolidated financial statements and tax basis of
assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted laws and rates applicable to the periods in
which the differences are expected to affect taxable income. A valuation
allowance is established when necessary to reduce deferred tax assets to
the amount expected to be realized.
8
<PAGE>
Fair Value of Financial Instruments
The financial instruments of the Company are reported in the consolidated
balance sheet at market or fair values, or at carrying amounts that
approximate fair values because of the short maturity of the instruments.
Impairment of Long-Lived Assets
Certain long-term assets of the Company are reviewed at least annually as
to whether their carrying value has become impaired, pursuant to guidance
established in Statement of Financial Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Management considers assets to be impaired if
the carrying value exceeds the future projected cash flows from related
operations (undiscounted and without interest charges). If impairment is
deemed to exist, the assets will be written down to fair value or projected
discounted cash flows from related operations. Management also re-evaluates
the periods of amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.
Stock Issued to Employees
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for financial note disclosure purposes and will continue
to apply the intrinsic value method of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" for financial
reporting purposes.
Net (Loss) Per Share
The Company adopted the provision of SFAS No. 128, "Earnings Per Share".
Basic EPS is computed by dividing income (losses) available to common
stockholders by the weighted-average number of common shares outstanding
for the period adjusted retroactively to April 1, 1997 for the shares
issued in the recapitalization. Diluted EPS is based on the
weighted-average number of shares of common stock and common stock
equivalents outstanding during the year. Common stock equivalents have been
excluded from the calculation of diluted EPS for 2000 and 1999, as such
inclusion is anti-dilutive.
Reporting of Segments
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997, with reclassification of earlier periods
required for comparative purposes. The Company has determined that under
SFAS No. 131, it operates in one segment of business and its customers and
operations are within the United States.
9
<PAGE>
Accounting Developments
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning
after June 15, 1999, which has been deferred to June 30, 2000 by publishing
of SFAS No. 137. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative
instrument depends on its intended use and the resulting designation. The
Company does not expect that the adoption of this standard will have a
material impact on its financial statements.
NOTE 3 - Going Concern
As shown in the accompanying financial statements, the Company incurred a
net loss of $1,715,604 during the six months ended September 30, 2000. As
of September 30, 2000, the Company's current liabilities exceeded its
current assets by $7,101,925 and its total liabilities exceeded its total
assets by $6,739,911. The Company is delinquent in connection with various
obligations including, but not limited to, trade payables, accrued payroll
taxes, and notes payable. These factors, as well as the uncertain
conditions that the Company faces in its day-to-day operations, create an
uncertainty as to the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. The continuation
of the Company as a going concern is dependent upon the success of future
financing and generating sufficient revenue through the expansion of its
beverage product lines.
Management has taken action and is formulating additional plans to
strengthen the Company's working capital position and generate sufficient
cash to meet its operating needs through September 30, 2001 and beyond. In
this regard, and as more fully described within Note 12 - Subsequent
Events, in November 2000, X-Treem was formally dissolved. As a result, the
Company's assets, liabilities and stockholders' deficiency will no longer
reflect those of X-Treem. The estimated effect is to reduce the excess
amount by which current liabilities exceeds current assets and the amount
by which total liabilities exceed total assets by approximately $4,300,000
and $4,010,000, respectively. On a proforma basis, the Company's current
liabilities will exceed its current assets by approximately $2,801,925 and
its total liabilities would exceed its total assets by $2,729,911. Among
other actions taken, the Company anticipates generating more revenue
through the expansion of its newest beverage line, "Zo - Vital Cell
Defense", which was introduced in October 2000, and the Company plans to
raise additional funds through the private placement of its securities. No
assurance can be made that the management will be successful in achieving
its plan.
NOTE 4 - Property and Equipment
Property and equipment consists of the following at September 30, 2000:
Furniture and fixtures $46,618
Less: Accumulated depreciation 16,667
-------
Net $29,951
=======
Depreciation expense for the six months ended September 30, 2000 and 1999
was $4,573 and $11,787, respectively.
10
<PAGE>
NOTE 5 - Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market value and consist of the following at September 30, 2000:
Raw materials $171,532
Finished goods 96,282
--------
Total $267,814
========
NOTE 6 - Income Taxes
No provision has been made in the accompanying consolidated financial
statements for income tax expense as a result of the current operating loss
and net operating loss ("NOL") carryforwards.
Differences between income tax benefits computed at the Federal statutory
rate (34%) and reported income taxes for 2000 and 1999 are primarily
attributable to the valuation allowance for the NOL and other permanent
differences.
As of September 30, 2000, the Company estimated the available NOL
carryforwards to be approximately $12,306,000, and the Company's total
deferred tax assets relating to the carryforwards amounted to approximately
$4,183,000 which expire though March 31, 2020. Of these amounts,
approximately $4,010,000 of the NOL carryforward will be eliminated as a
result of the dissolution of X-Treem. See Note 12 - Subsequent Events. The
Company has a valuation allowance for the full assessment of the deferred
tax assets at September 30, 2000 as management does not believe it is more
likely than not that the valuation of the asset is recoverable.
Further, the Company has not filed any federal, state or local income or
franchise tax returns. Such failure may have a material adverse effect on
the amount of any net operating loss carryforwards and may subject the
Company to fines.
NOTE 7 - Stock Options
1996 Stock Option Plan
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Option
Plan. The maximum number of shares of common stock with respect to which
awards may be granted pursuant to the 1996 Plan is initially 2,000,000
shares. No options are outstanding under this plan.
Options Granted Separate from the Stock Option Plan
In connection with an initial public offering, the Company granted to its
underwriter in July 1996 an option to purchase 58,333 shares of common
stock at a purchase price of $7.20 per share exercisable commencing July
1997 and expiring July 2001.
During the year ended March 31, 1998, the Company granted a total of
1,350,000 options to purchase common stock with an exercise price equal to
fair market value at time of issuance to certain officers, directors and
employees. In addition, the Company issued options to two consultants to
purchase 100,000 shares each of its common stock each for services rendered
during the year ended March 31, 1998. Accordingly, the Company recorded
compensation expense of $46,000 for options issued.
11
<PAGE>
In December 1998, the Company issued options to purchase an aggregate of
850,000 shares of its common stock to two officers in exchange for the
return of 450,000 shares of common stock from these officers. These options
have an exercise price of $0.05 per share and expire in December 2003.
In December, 1999, a former officer and director of the Company exercised
options to purchase 20,000 shares of common stock at an exercise price of
$0.05 per share.
A summary of stock option activity is as follows:
Weighted Average
Number Exercise Price
of Options Common Stock
--------- ------
Balance - April 1, 1997 58,333 $ 7.20
Options granted 1,550,000 0.46
Options exercised --
Options cancelled --
---------
Balance - March 31, 1998 1,608,333 0.48
Option granted 1,600,000 0.075
Option cancelled --
Option exercised --
---------
Balance - March 31, 1999 3,208,333 $ 0.26
---------
Options granted --
Options exercised 20,000 0.05
Options cancelled 750,000 0.10
=========
Balance - March 31, 2000 2,438,333 0.33
Balance - June 30, 2000 2,438,333 0.33
Balance - September 30, 2000 2,438,333 0.33
Exercisable at September 30, 2000 2,438,333 0.33
----------
The options issued to officers, directors and employees expire in four (4)
to nine (9) years and may be exercised at anytime. The options issued to
consultants to purchase 200,000 shares of its common stock, at an exercise
price of $0.875, have a weighted average remaining contractual life of
approximately 6 years.
NOTE 8 - Stockholders' Equity
Preferred Stock
The Company has 15,000,000 shares of preferred stock, $0.0001 par value,
authorized.
Series A Convertible Preferred Stock
At September 30, 2000, the Company has 500,000 shares of Series A
Convertible Preferred Stock ("Series A Preferred") issued and outstanding.
The Series A Preferred holders are entitled to one vote per share on all
matters presented to the stockholders with certain exceptions as defined in
the Certificate of Designation. In addition, the Series A Preferred is
subject to certain conversion, redemption and liquidation provisions, as
defined.
12
<PAGE>
Series B Non-Convertible Preferred Stock
At September 30, 2000, none of Series B Non-Convertible Preferred Stock
("Series B Preferred") was issued and outstanding. The Series B Preferred
holders are entitled to one vote per share on all matters presented to the
stockholders with certain exceptions as defined in the Certificate of
Designation. In addition, the Series B Preferred is subject to certain
redemption and liquidation provisions, as defined.
Series C Convertible Preferred Stock
At September 30, 2000, none of Series C preferred was issued and
outstanding and 1,592,869 shares were subscribed in connection with the
private placement offering (see below). The Series C Preferred is subject
to certain conversion, redemption and liquidation provisions, as defined.
In addition, each share of Series C Preferred is convertible into 100
shares of the Company's common stock.
Common Stock
Phlo has 25,000,000 authorized shares of common stock, par value of $0.0001
per share (the "Common Stock"), of which 24,328,255 shares were issued and
outstanding at September 30, 2000. Subsequently, the Company authorized an
increased the number of authorized shares of common stock to 250,000,000.
See Note 12 - Subsequent Events.
3) In April and May, 2000, in consideration of $147,500, the Company issued an
aggregate of 98,333 shares of common stock.
4) In June, 2000, the Company issued an aggregate of 22,250 shares of common
stock and warrants to purchase an aggregate of 84,166 shares of common
stock in consideration for services rendered, including legal services,
advertising and marketing services, and financial services. Additionally,
the Company is obligated, pursuant to various existing agreements, to issue
550,000 shares of common stock (or equivalents) in connection with the
provision of services to the Company.
5) In September, 2000, the Company is obligated to issue 365,000 shares of
common stock in consideration for financial and accounting services
rendered.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its warrants under the fair value method of SFAS 123. The
weighted-average fair value of warrants granted was $0.12 per share. The
fair market value for these warrants was estimated at the date of grant
using a Black-Scholes warrant-pricing model with the following
weighted-average assumptions for the year ended March 31, 2000:
ASSUMPTIONS
---------------------------------------------------------------------------
Risk-free rate 5.00%
Dividend yield --
Volatility factor of the expected market price 182.70%
Average life 5 Years
13
<PAGE>
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options and warrants which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options and
warrants have characteristics significantly different from those of traded
options and warrants, and because changes in the subjective input
assumptions can materially affect the fair value estimated, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options and warrants.
For purposes of pro forma disclosures, the estimated fair value of the
warrants is amortized to expense over the vesting period of the warrants.
The Company's pro forma information for the year ended March 31, 2000 is as
follows:
Net Loss - As reported $(2,831,579)
Net Loss - Pro forma $(3,482,030)
Pro forma net loss per share:
- Basic $(0.14)
- Diluted $(0.14)
The warrants issued during the year ended March 31, 2000, have a weighted
average remaining contractual life of 4.5 years. All existing warrants are
exercisable as of June 30, 2000.
Unit Offerings
1) On March 30, 1999, the Company completed the sale, as part of a private
placement offering, of 984,364 units of securities for an aggregate
purchase price of $0.46 per unit (the "Unit Offering"). Each unit consists
of two shares of the common stock, par value $0.0001, 0.216 of a share of
the Series C Preferred and the right to purchase one (1) additional share
of the common stock and 0.108 of additional share of Series C Preferred.
Total proceeds from the sale of these units amounted to $453,031. None of
the rights to purchase additional shares of common stock and Series C
Preferred Stock was exercised prior to the expiration of such rights. As of
June 30, 2000, such common stock and Series C Preferred Stock have not been
issued. Accordingly, these common stock and Series C Preferred are
presented as shares subscribed but not yet issued on the accompanying
balance sheet.
In connection with the Unit Offering, the Company has agreed to issue a
cashless warrant providing for the purchase of 9,606,682 shares of Common
Stock at an exercise price of $0.01 per share.
2) In June 1999, in consideration for $500,000, the Company sold 2,312,872
shares of Common Stock and 238,051.5 shares of Series C Preferred. All of
the Common Stock and none of shares of the Series C Preferred have been
issued as of September 30, 2000 (See Note 1).
3) In April and May, 1999, in consideration for $80,000, the Company sold
units representing an aggregate of 173,913 shares of Common Stock and
18,782 shares of Series C Preferred. All of the shares of Stock and no
shares of the Series C Preferred issuable in connection with this
transaction have been issued as of September 30, 2000 (See Note 1).
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NOTE 9 - Debt
Debt as of September 30, 2000 consists of the following:
Term note payable with interest due monthly at a rate of 12%
per annum. The note matured on March 31, 1998 when principal
and unpaid interest was due. The note is currently in
default. No action has been taken or threatened against the
Company to enforce the note. The Company continues to accrue
interest on this note. $600,000
Term note payable with interest at a rate of 12% per annum.
Principal and accrued interest are payable at the note's
maturity date on February 12, 2001. The Company continues to
accrue interest on this note. 50,000
Note payable with principal plus an interest payment of
$10,000 are payable at the note's maturity on June 27, 1997.
The holder of the note has initiated an action to enforce
the note. 100,000
Note payable with interest at a rate of 12% per annum.
Principal and interest are payable at the note's maturity
date on November 24, 2000. The Company continues to accrue
interest on this note. 100,000
Note payable with principal plus an interest payment of
$5,000 were payable at the loan's maturity date on March 31,
1998. The parties agreed to convert this debt into equity,
however, this conversion has not taken place to date, and
therefore, the note is in default. The Company continues to
accrue interest on this note. The holder has agreed
informally to extend the date of maturity in order to
consummate the conversion. 45,000
Note payable with principal plus an interest payment of
$5,000 was payable on the note's maturity date on March 30,
1998. The parties agreed to revise the terms of the note to
provide for an increase in interest payable from $5,000 to
$10,000 and a maturity date of December 31, 1998. The note
is currently in default. No action has been taken or
threatened against the Company to enforce the note. The
Company continues to accrue interest on this note. 45,000
Note payable with interest at a rate of 14% per annum. The
Note matured on December 31, 1999, when principal and unpaid
interest was due. The holder has obtained a summary judgment
against the Company. The Company believes that the holder
engaged in intentional conduct which resulted in damage to
the Company and has filed an action against the holder in
federal court which is currently pending. In connection with
the note, the Company issued warrants to the holder and
another individual to purchase an aggregate of 500,000
shares of common stock at an exercise price of $0.20 per
share upon issuance of the note and warrants to the holder
to purchase an aggregate of 200,000 shares of the common
stock in connection with its option to extend the maturity
date of the note to December 31, 1999. In addition, to
secure repayment of the note, the Company issued to a
trustee of the holder 105,875 shares of common stock and
11,441 shares of Series C Convertible Preferred Stock. 250,000
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Note payable with interest at a rate of 10%. Principal and
interest are payable at the note's maturity date of December
31, 2000. In consideration of this loan and two prior bridge
loans, the Company agreed to issue shares of the Company's
common and convertible preferred stock to the holder
representing approximately 200,000 shares of common stock on
a fully converted basis. 104,000
Note payable in the original principal amount of $25,000
with interest at a rate of 10% per annum. The Note matured
on July 2, 1999, when principal and unpaid interest was due.
The the note is currently in default, although partial
payment has been made subsequent to the maturity date. No
action has been taken against the Company to enforce the
note. The Company continues to accrue interest on this note.
In connection with the note, the Company issued a warrant to
purchase 5,000 shares of common stock at an exercise price
of $0.04 per share. 17,500
Convertible notes payable with interest accruing at a rate
of one percentage point (1%) above the prime rate. Principal
and interest are payable at the notes' maturity dates which
fall within May and June, 2001. After December 31, 1999, the
principal under the notes is convertible, at the option of
the holder, into shares of the Company's common stock at a
conversion price of $0.22 per share. 300,000
Bridge notes with interest at a rate of one percentage point
(1%) above the prime rate. The notes matured on March 31,
2000, when principal and unpaid interest was due. The notes
are currently in default. No action has been taken or
threatened against the Company to enforce the notes. The
Company continues to accrue interest on these notes. 100,000
In June, 2000, a Senior Subordinated Note in the principal
amount of $500,000 was entered into with simple interest
accruing at an annual rate of six percent (6%) and payable
of the note's mauturity date of December 22, 2000. Principal
and interest are payable in stock at the option of the
Company. In connection therewith, the Company agreed to
issue to the holders of the notes warrants to purchase an
aggregate of 1,000,000 shares of common stock at an exercise
price of $0.50 per share. 500,000
In August, 2000, a Note in the principal amount of $100,000
was entered into with interest of 10% per annum, payable
February 2001. In conjunction with this financing, the Company
issued a warrant to purchase 200,000 shares of common stock
at a exercise price of $0.50 per share. 100,000
In September, 2000, a Note in the principal amount of
$150,000 was entered into with interest of 10% per annum,
payable November 2000. In conjunction with this financing,
the Company issued a warrant to purchase 300,000 shares of
common stock at a exercise price of $0.50 per share. The
Company, at its option, may pay the Note in common stock
or equivalents. 150,000
In September, 2000, a Note in the principal amount of
$25,000 was entered into with interest of 10% per annum,
payable February 2001. In conjunction with this financing,
the Company issued a warrant to purchase 50,000 shares of
common stock at a exercise price of $0.50 per share. The
Company, at its option, may pay the Note in common stock
or Equivalents 25,000
----------
Total Long-Term Debt $2,486,500
Less: Current Portion $2,486,500
----------
Long-Term Debt, net of current portion $ --
==========
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NOTE 10 - Commitments and Contingencies
Employment Agreement
The Company has one employment agreement with a former executive of the
Company that expires in the year 2001. The annual commitment for
compensation is approximately $150,000 each year.
Loan Guarantee
The Company is a guarantor of loan obtained by an unrelated party in
connection with a purchase agreement. In addition, payments of the loan are
secured by the Company's assets. Total outstanding balance of the loan at
September 30, 2000 was approximately $89,000.
Litigation
The Company is involved in litigation through the normal course of
business. The Company believes that the resolution of these matters will
not have a material adverse effect on the financial position of the
Company.
On February 12, 1999, a judgment in the amount of $1,064,616 was entered
against X-Treem. Such amount has been accrued and included in accrued
expenses at September 30, 2000. In November, 2000, as more fully described
in Note 12 - Subsequent Events, X-Treem was formally dissolved.
Payroll Taxes
The Company has unpaid payroll taxes since the fourth quarter 1997. The
Company is in the process of filing all unfiled returns and has accrued
estimated penalties and interest of $220,500.
Lease
The Company occupies its premises subject to a noncancelable lease
agreement expiring in March 2004. The Company will pay a fixed monthly rent
plus real estate taxes.
Future minimum payments under an operating lease are as follows at
September 30, 2000.
For the Year Ending
September 30, Amount
----------------------------------------------------------
2001 121,805
2002 121,805
2003 121,805
2004 30,450
---------
Total minimum lease payments $ 395,865
=========
Rent expense for the six months ended September 30, 2000 and 1999 was
$61,108 and $70,410, respectively. In connection with the lease, a
refundable security deposit of $30,063 is held by the landlord.
NOTE 11 - Economic Dependency
Major Customers
The Company sells a substantial portion of its products to three customers
for the six months ended September 30, 2000.
Major Suppliers
The Company purchased a substantial portion of its raw materials from one
supplier for the six months ended September 30, 2000.
NOTE 12 - Subsequent Events
A) On November 9, 2000, the Company filed an Amended and Restated Certificate
of Incorporation which increased the number of authorized shares of common
stock from 25,000,000 to 250,000,000 and conferred on the board of
directors blank check authority to issue classes and series of stock
without further shareholder action.
B) On November 13, 2000, X-Treem was formally dissolved in accordance with the
General Corporation Law of the State of Delaware. As a result, the
Company's assets, liabilities and stockholders' deficiency will no longer
reflect those of X-Treem. The estimated effect is to reduce the Company's
liabilities by approximately $4,300,000, reduce the Stockholders'
Deficiency by approximately $4,010,000, and reduce the assets by
approximately $290,000. Because X-Treem has been inactive for approximately
two years and had no revenues, its dissolution will have no impact on
future revenues of the Company.
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Item 2:
PHLO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [Unaudited]
--------------------------------------------------------------------------------
For the six months ended September 30, 2000 compared with the six months ended
September 30, 1999.
The following discussion of the Company's financial condition as of September
30, 2000 and results of operations for the six months ended September 30, 2000
and 1999 includes Phlo Corporation and its subsidiary (collectively, the
"Company") and should be read in conjunction with the consolidated financial
statements and notes appearing elsewhere in this 10-QSB.
OVERVIEW
General
Phlo Corporation, a Delaware corporation incorporated in December, 1995, and its
subsidiaries (hereinafter collectively referred to as the "Company") is a
manufacturer of beverages containing patented and patent-pending
biotechnologies. The Company sells its beverages to distributors, who offer the
beverages for sale in high volume chain stores, such as supermarkets, and in
small retail outlets, such as delicatessens and convenience stores. Central to
the Company's strategic development plan is the development, acquisition and/or
exclusive licensing of proprietary (patented or patent-pending) technology of a
nutraceutical, biotechnological, and/or pharmaceutical nature, which the Company
initially plans to convey to consumers through beverages.
The Company is positioned as a biotechnology company which is using the
high-volume distribution segment of the beverage industry to commercialize a
portion of the technology. The Company is focusing its technology acquisition
and development efforts of those technologies related to reducing the effects of
aging, preventing or ameliorating cancer, assisting in weight loss, and
enhancing sexual performance.
The Company's beverage line is sold under the brand name "McCoy's" and includes
ice teas, green teas, lemonade and fruit drinks. In October 2000, the Company
introduced its newest line of beverages, "ZO - Vital Cell Defense", featuring
its proprietary (patent-pending) composition with controlled-release capability
which protects cells from the oxidative stress of aging and stimulates cell
repair. The launch of the Vital Cell Defense line marks the successful
commercialization of one of the Company's biotechnologies.
Note Regarding Forward Looking Information
Certain statements contained in this Annual Report constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Sections
21E of the Exchange Act. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, levels of activity, performance or achievements of the Company, or
industry results, to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; the ability of the Company to
implement its business strategy; the ability of the Company to obtain financing
for general corporate purposes; competition; availability of key personnel; and
changes in, or the failure to comply with, governmental regulations. As a result
of the foregoing and other factors, no assurance can be given as to the future
results, levels of activity and achievements, and neither the Company nor any
person assumes responsibility for the accuracy and completeness of these
statements.
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RESULTS OF OPERATIONS
The Company had a net loss of $1,550,041 for the six months ended September 30,
2000 as compared to a net loss of $1,165,288 for the six months ended September
30, 1999. The increase in net loss is the result of a decrease in sales, which
for the same periods decreased from $789,379 to $278,417, while selling, general
and administrative costs increased from $1,398,712 to $1,611,020.
The decrease in sales resulted from the discontinuance of all of the fruit
beverages and lemonades of the McCoy's line of beverages in preparation for the
substitution thereof by "ZO-Vital Cell Defense" beverage line. In conjuction
therewith, the finished goods inventory pertaining to this portion of the
McCoy's line to be discontinued was depleted to levels insufficient to satisfy a
significant portion of the orders from the Company's distributors. ZO was first
produced in October 2000, and sales immediately followed. The launch of the
Vital Cell Defense line of beverages marks the successful commercialization of
one of the Company's biotechnologies, and is expected to lead to significantly
higher future sales. At this time the Company plans to immediately produce its
complete line of "ZO-Vital Cell Defense" in order to satisfy demand by its
existing distributors and new distributors waiting to launch the "Vital Cell
Defense" line of beverages.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss for the year ended March 31, 2000 and the period
from April 1, 2000 through September 30, 2000 equal to $2,505,653 and
$1,550,041, respectively. In addition the Company has a working capital deficit
at September 30, 2000 equal to $7,101,925, approximately $4,010,000 of which is
attributable to X-Treem which has been formally dissolved (see Note 11). As a
result of the dissolution of X-Treem, the Company's assets, liabilities and
stockholders' deficiency will no longer reflect those of X-Treem. The estimated
effect is to reduce liabilities by approximately $4,300,000, reduce
stockholders' deficiency by approximately $4,010,000, and reduce assets by
approximately $290,000. Other steps and actions are also expected to reduce or
eliminate the current deficit, including plans to raise additional capital
involving private placement of securities and plans for reducing losses from
operations and ultimately realizing profitability by increasing sales.
Although the Company believes it will raise additional funding and make strides
towards achieving profitable operations by the latter part of the fiscal year
ending March 31, 2001, there can be no assurance that such additional funding
will be successfully completed or that profitable operations will be achieved or
achieved within the necessary time period. These conditions raise doubt about
the Company's ability to continue as a going concern.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Phlo Corporation
November 17, 2000 By: /s/ James B. Hovis
-----------------------------------
James B. Hovis
President and Chief Executive Officer
20
