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 June 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 July 31,
2000 is 24,755,503.
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
INDEX
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Page to Page
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2000
[Unaudited] ......................................................... 1-2
Consolidated Statements of Operations for the three months
ended June 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]
June 30, 2000
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $311,781
Accounts receivable 16,008
Inventory 230,902
--------
Total Current Assets $558,691
PROPERTY AND EQUIPMENT, Net 19,186
OTHER ASSETS
Goodwill - net of accumulated amortization
of $135,000 325,000
Security deposits 30,063
--------
Total Other Assets 355,063
--------
TOTAL ASSETS $932,940
========
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET [Unaudited]
June 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,847,283
Accrued expenses and taxes 2,789,335
Current portion of long-term debt 1,911,500
-----------
Total Current Liabilities 6,548,118
OTHER LIABILITIES
Long-term debt, less current portion 400,000
-----------
TOTAL LIABILITIES 6,948,118
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,
24,328,298 shares issued and outstanding 2,476
Common stock, $0.0001 par value, 3,244,888 shares subscribed 324
Additional paid-in capital 3,962,878
Accumulated deficit (9,981,065)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (6,015,178)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 932,940
===========
</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 Ended June 30, 2000, and 1999
--------------------------------------------------------------------------------
2000 1999
----------- -----------
SALES $ 196,440 $ 461,709
COST OF SALES 162,675 299,903
------------ ------------
GROSS PROFIT 33,765 161,806
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 726,610 841,822
------------ ------------
OPERATING LOSS (692,845) (680,016)
------------ ------------
OTHER EXPENSES
Interest expense (72,547) (33,135)
------------ ------------
TOTAL OTHER EXPENSE (72,547) (33,135)
------------ ------------
NET LOSS $ (765,392) $ (713,151)
============ ============
Weighted Average Common Shares Outstanding 20,884,282 14,645,456
============ ============
Net Loss Per Share (Basic and Diluted) $ (0.04) $ (0.05)
============ ============
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 Three Months Ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (765,392) $ (713,151)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock-based compensation 12,770 --
Depreciation and amortization 24,952 15,843
(Increase)decrease in accounts receivable 53,382 (173,351)
(Increase)decrease in inventory 103,724 (263,276)
Decrease in other current assets 33,804
Increase in security deposits 25,607
Increase in accounts payable 53,726 178,170
Increase in accrued expenses and taxes 136,991 354,000
Increase in current portion of long term debt 499,000 --
----------- -----------
TOTAL ADJUSTMENTS 884,545 170,897
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES 119,153 542,254
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
(Pay-down)Proceeds from long-term debt
Proceeds from issuance of capital stock 147,489 580,020
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 147,489 $ 580,020
----------- -----------
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 Years Ended June 30, 2000 and 1999
--------------------------------------------------------------------------------
2000 1999
-------- --------
NET INCREASE IN CASH $266,642 $ 37,766
CASH - Beginning 45,139 12,790
-------- --------
CASH - Ending $311,781 $ 50,556
======== ========
The accompanying notes are an integral part of these financial statements.
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 engaged in the distribution and sale of beverages. 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. Additionally, the Company has been
developing, acquiring, and exclusively licensing proprietary (patented and
patent-pending) technology of a nutraceutical, biotechnological, and/or
pharmaceutical nature.
The Company's current beverage line is sold under the McCoy's name and includes
ice teas, green teas, lemonade and fruit drinks. In June 2000, the Company
announced the introduction of 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 to
conduct the business of producing and selling McCoy's beverages. In August,
1999, the Company incorporated Phlo System, Inc. to conduct the Company's
biotechnology-related activities. The Company also has two subsidiaries which
were not operating entities during the fiscal quarter, X-Treem Products
Corporation ("X-Treem") and Quigley's Orchard, Inc.
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 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) to acquire 100% of the outstanding X-Treem capital
stock and outstanding warrants to purchase X-Treem common stock from the holders
thereof.
6
<PAGE>
As of March 31, 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 sufficient shares are authorized and 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.
In addition, as disclosed above and in Note 8, the Company has issued additional
shares of common stock which, after taking into consideration the total
outstanding stock warrants and options, would, if such warrants and options were
fully exercised, cause the overall outstanding shares to exceed the 25,000,000
shares the Company presently has authorized. As of June 30, 2000, there are
24,328,298 common shares issued and outstanding. In addition, options and
warrants to purchase 2,438,333 and 8,743,762 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. The Company is in the process of
amending 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. Once this has been accomplished, the Company
intends to replace the old Series A and C preferred stock certificates with
shares of preferred stock which are validly issued.
Contemporaneously with the filing of this Form 10-QSB, the Company is filing an
information statement with the Securities and Exchange Commission. Following a
brief comment period, a mailing of the information statement to shareholders,
and a waiting period of 20 days, the Company will file an amended certificate of
incorporation with the State of Delaware increasing the number of authorized
shares of common stock to accommodate the shares currently due under the terms
of the Stock Exchange Transaction.
7
<PAGE>
NOTE 2 - Summary of Significant Account Policies
Basis of Reporting
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 being amortized on a
straight-line basis over a five-year period. Amortization of goodwill
charged to operations for the years ended June 30, 2000 and June 30, 1999
amounted to $23,000 and $10,000 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.
Research and Development
Research and development costs of $0 and $0 are expensed as incurred during
the three months ended June 30, 2000 and June 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.
Accounting Developments
9
<PAGE>
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 $765,392 during the three months ended June 30, 2000. As of
June 30, 2000, the Company's current liabilities exceeded its current
assets by $5,489,427 and its total liabilities exceeded its total assets by
$5,515,178. 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 March 31, 2001 and beyond. Among
the actions taken, the Company anticipates generating more revenue through
the expansion of its beverage lines, particularly through the introduction
of beverage products containing proprietary (patented and/or
patent-pending) biotechnology, and the raising of additional funds through
private placement offerings 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 June 30, 2000:
Furniture and fixtures $33,232
Less: Accumulated depreciation 14,046
-------
Net $19,186
=======
Depreciation expense for the years ended June 30, 2000 and 1999 was $1,952
and $5,843, 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 June 30, 2000:
Raw materials $ 62,176
Finished goods 168,726
--------
Total $230,902
========
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 June 30, 2000, the Company estimated the available NOL carryforwards
to be approximately $10,616,000 and the Company's total deferred tax assets
relating to the carryforwards amounted to approximately $3,609,000 which
expire though March 31, 2020. The Company has a valuation allowance for the
full assessment of the deferred tax assets at March 31, 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.
In July 1998, in connection with the acquisition of Leroux Creek applesauce
brand, the Company agreed to grant options to purchase of 750,000 shares of
its common stock to Leroux Creek and a former stockholder of Leroux Creek
with an exercise price of $0.10 per share. None of these options were
issued and the Company has been relieved of its obligation to issue any of
these options by agreement of all parties in June 1999 (see note 8).
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
Exercisable at June 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 6.25
years.
In June, 1999, the Company entered into a settlement agreement with Leroux
Creek Food Corporation and its President, which resulted in the Company
being relieved of its prior agreement to issue to Leroux Creek and its
President options to purchase an aggregate of 750,000 shares of Common
Stock at an aggregate purchase price of $75,000.
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 June 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 June 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 June 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.
Immediately subsequent to the filing of this Form 10-KSB, the Company is
filing an information statement with the SEC. Following a brief comment
period, a mailing of the information statement to shareholders, and a
waiting period of 20 days, the Company will file an amended certificate of
incorporation with the Secretary of State of Delaware increasing the number
of authorized shares of common stock to accommodate the shares currently
due to be issued under the terms of the Stock Exchange Transaction and to
confer on the board of directors blank check authority to issue classes and
series of stock without further shareholder action.
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 March 31, 2000.
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.
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, which warrant has not been
issued as of March 31, 2000.
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 March 31, 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 March 31, 2000 (See Note 1).
14
<PAGE>
NOTE 9 - Debt
Debt as of June 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. 400,000
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
----------
Total Long-Term Debt $2,311,500
Less: Current Portion $1,911,500
----------
Long-Term Debt, net of current portion $ 400,000
==========
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NOTE 10 - Commitments and Contingencies
Employment Agreement
The Company has one employment agreement with an executive of the Company
is 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
June 30, 2000 was approximately $65,000.
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 June 30, 2000.
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 June 30,
2000.
For the Year Ending
June 30, Amount
--------------------------------------------------------
2001 121,805
2002 121,805
2003 121,805
2004 30,450
---------
Total minimum lease payments $ 395,865
=========
Rent expense for the years ended June 30, 2000 and 1999 was $94,772 and
$70,410, respectively. In connection with the above lease, a refundable
security deposit in the amount of $30,063 is being held by the landlord.
NOTE 11 - Economic Dependency
Major Customers
The Company sells a substantial portion of its products to three customers.
During the three months ended June 30, 2000.
Major Suppliers
The Company purchased a substantial portion of its raw materials from one
supplier for the year ended June 30, 2000.
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Item 2:
PHLO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [Unaudited]
--------------------------------------------------------------------------------
For the three months ended June 30, 2000 compared with the three months ended
June 30, 1999.
The following discussion of the Company's financial condition as of June 30,
2000 and results of operations for the three months ended June 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 engaged
in the creation, distribution and sale of a complete line of new-age beverages.
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. Additionally, the Company
has been actively developing a proprietary product base the result of which
could dramatically increase the intrinsic value of the Company and its valuation
within the financial community and financial markets. 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 chain store 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 current beverage line is sold under the brand name "McCoy's" and
includes ice teas, green teas, lemonade and fruit drinks. In August 2000, the
Company announced the introduction of 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.
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 $765,392 for the three months ended June 30, 2000
as compared to a net loss of $713,151 for the three months ended June 30, 1999.
The loss from operations for the three months ended June 30, 2000 is primarily
due to the effect of increased selling costs including, but not limited to,
promotional programs related to distribution of the Company's products to chain
supermarkets and other costs related to the development of proprietary products.
The net sales for the Company for the three months ended June 30, 2000 was
$196,440 as compared to $461,709 for the three months ended June 30, 1999. The
Company had a gross profit of $33,765 or 17% as compared to a gross profit of
$161,806 or 35% for the three months ended June 30, 2000 and 1999, respectively.
The decrease in net sales is primarily due to the anticipation of the Company's
distributor's of the introduction of the Company's new ZO-Vital Cell Defense
beverage line and the discontinuance of a number of the McCoy's flavors which
are being replaced by ZO-Vital Cell Defense.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss for the year ended March 31, 2000 and the period
from April 1, 1999 through June 30, 1999 equal to $2,505,653 and $765,392,
respectively. In addition the Company has a working capital deficit at June 30,
2000 equal to $5,489,427, approximately $4,100,000 is attributable to a
non-operating subsidiary. Management anticipates that a significant portion of
the current deficit of the Company will ultimately be eliminated. Other steps
and actions are also expected to reduce or, possible, 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 peroid. 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
August 18, 2000 By: /s/ James B. Hovis
-------------------------------------
James B. Hovis
President and Chief Executive Officer
20
