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, 1999 Commission File Number 0-21079
PHLO CORPORATION
(Exact name of registrant 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 each of the issuer's classes of common
stock, as of June 30, 1999 was 20,734,255.
<PAGE>
PHLO CORPORATION
INDEX
- ------------------------------------------------------------------------------
Page to Page
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 1999
[Unaudited] ......................................................... 1-2
Consolidated Statements of Operations for the three months
ended June 30, 1999 and 1998 [Unaudited] ............................ 3
Notes to Consolidated Financial Statements [Unaudited] .............. 6-17
Item 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations ........................... 18-19
Signature .............................................................. 20
2
<PAGE>
Item 1:
PHLO CORPORATION CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999.
[UNAUDITED]
- --------------------------------------------------------------------------------
Assets:
Current Assets:
Cash $ 213,475
Accounts Receivable - Net 173,351
Inventory 263,176
Subscription Receivable 46,665
-----------
Total Current Assets
$ 696,667
-----------
Property and Equipment - Net 19,871
-----------
Other Assets:
Goodwill - [Net of Accumulated Amortization of $60,000] 1,403,567
Security deposits 30,063
-----------
Total Other Assets 1,433,630
TOTAL ASSETS $ 2,150,168
===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,317,776
Accrued Expenses and Taxes 2,321,147
Current portion of long-term debt 807,901
-----------
Total Current Liabilities $ 4,446,824
OTHER LIABILITIES
Long-term debt, less current portion 397,448
-----------
Total Liabilities 4,844,272
-----------
PREFERRED STOCK OF SUBSIDIARY
No par value, 20,000 shares Series A convertible
Preferred stock authorized, 2,247 shares issued
and outstanding 700,000
STOCKHOLDERS' DEFICIENCY
Preferred stock, 15,000 authorized:
Series A convertible stock, $0.001 par value,
500,000 shares issued and outstanding (liquidation
preferences $100,000) 50
Series B non-convertible stock, none issued and outstanding --
Series C convertibile stock, $0.0001 par value, 212,623
shares subscribed 21
Common Stock, $0.0001 pavalue, 25,000,000 sharer
Authorized, 11,333,335 shares issued and outstanding 1,133
Common stock, $0.0001 par value, 1,968,728 shares
Subscribed 197
Additional paid in capital 3,630,971
Accunulated deficit (7,026,476)
-----------
TOTAL STOCKHOLDERS DEFICIENCY (3,394,104)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,150,168
===========
3
<PAGE>
PHLO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- --------------------------------------------------------------------------------
Three months ended
June 30,
--------------------------
1999 1998
---------- ----------
Sales - Net $ 461,709 $ 435,509
Cost of Goods Sold 299,903 344,826
---------- ----------
Gross Profit 161,896 90,683
Selling, General and
Administrative Expenses: 500,417 560,851
NET OPERATING LOSS (338,611) (470,168)
Weighted Average Number of Shares 3,333,335 3,783,335
========== ==========
Net [Loss] Per Share $ (.10) $ (.12)
========== ==========
4
<PAGE>
PHLO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] Organization and Nature of Business
The Company is positioned as a technology company which is using the high
volume chain-store 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 initially plans to convey to consumers through the use of beverage
systems. During the first half of this fiscal year, the Company has focused its
efforts on establishing a secure and rapidly expanding distribution platform
from which to distribute its technology. The Company began production and
distribution of its McCoy's brand of beverages in late May, 1999.
The Company added a new level of distribution to the traditional "up and
down the street" network (e.g. neighborhood grocery stores, delicatessens, and
convenience stores) through which McCoy's beverages have been distributed in the
past. The Company, through its newest distributors, has gained authorization for
McCoy's beverages throughout the entire systems of a number of the largest
supermarket accounts of such distributors. Since the launch of McCoy's in May,
the Company gained the authorization of 632 supermarkets to distribute McCoy's
beverages.
Haddon House, one of the nation's largest distributors of specialty foods
and one of the Company's major distributors, is responsible for more than 25
major chain accounts and 2200 independent supermarkets. Haddon House has
received authorization and prime shelf allocation for McCoy's beverages from
many of their largest accounts including A&P, Acme, Food Emporium, Super Fresh
and Waldbaums as well as from Haddon House's major independent accounts. Haddon
House launched distribution of all 17 varieties of McCoy's beverages in mid-May
1999.
The Company is able to bring more to its relationship with its distributors
than just an excellent brand of beverages. The first point of distinction is the
Company's line of McCoy's Green Teas, which are the only new age beverages with
a truly functional level (the level which medical studies currently indicate is
the ideal daily amount of a particular nutritional ingredient) of powerful green
tea catechins, including the super-antioxidant EGCg. Studies show that a high
daily intake of EGCg aids in the prevention of cancer and cardiovascular
disease. McCoy's Green Teas also contain Vitamin C (which is known to enhance
EGCg's effects) and Siberian ginseng for sustained energy and power of
concentration.
The Company's second point of distinction is its aggressive effort to
develop a proprietary product base the result of which would dramatically
increase the intrinsic value of the Company and its valuation within the
financial community and financial markets. In December, 1998, the Company
exclusively licensed the Super-Phlo System, a proprietary (patent pending)
"advanced delivery" technology for use in beverages and certain foods which the
Company has further developed for and has tested in its beverages. This
technology allows the Company to be the first to incorporate truly functional
amounts of nutritional ingredients, selectively directed to different locations
in the body on a sustained-release basis for maximum effect, in clear beverages
without compromising the taste, color, appearance, mouth-feel, stability or cost
of the product.
5
<PAGE>
The Super-Phlo System will afford distributors of the Company's products
the opportunity to distribute a beverage that contains a nutritional technology
which no other beverage company can offer in the marketplace today.
Additionally, the introduction of the new proprietary products in the market
should have an excellent effect on the Company's margins and the margins of its
distributors.
The Company believes that its Super-Phlo System is the only delivery system
existing in the marketplace which can convey through the use of the most
consumer-friendly medium (beverages) high payloads of nutritional and/or
pharmaceutically-active agents which support claims for important health
benefits. The Super-Phlo System can selectively direct such agents to
specifically targeted locations in the body, on a sustained-release basis for
maximum effect, without compromising taste, color, appearance, mouth-feel,
stability, or cost of the beverage product. Therefore, the Company is in the
position to drive, through its control of the most convenient gateway into the
consumer's system, the beverage industry's share of the huge and rapidly growing
nutraceuticals market.
Stock Exchange Transaction
On October 22, 1998, the Company entered into a letter of intent to acquire
a minimum of 80% of the capital stock of a beverage company, X-Treem Products
Corporation ("X-Treem"), through an exchange with the shareholders of X-Treem of
up to 93% of the issued and outstanding shares of the Company's capital stock as
of December 7, 1998, whereby X-Treem will become a subsidiary of the Company
(the "Stock Exchange Transaction"). Pursuant to the Stock Exchange Transaction,
on December 7, 1998, the Company acquired approximately 68% of the capital stock
of X-Treem from the principal shareholders of X-Treem in exchange for
approximately 67% of the issued and outstanding shares of the Company's capital
stock. This was achieved through the issuance by the Company of an aggregate of
8,000,000 shares of its common stock to the principal stockholders of X-Treem,
in partial consideration for the exchange of shares of their stock of X-Treem.
Pursuant to the Stock Exchange Transaction, each share of the capital stock
of X-Treem is exchangeable for 4,490.30 shares of common stock (or common stock
equivalents) of the Company. Additionally, each holder of a warrant to purchase
the common stock of X-Treem (an "X-Treem Warrant") is entitled to exchange the
X-Treem Warrant for a comparable warrant to purchase 4,490.03 shares of the
common stock of the Company for each share of common stock purchasable pursuant
to the X-Treem Warrant. The Company will complete the Stock Exchange Transaction
with the holders of securities of X-Treem through the issuance of additional
shares of its capital stock to X-Treem shareholders in exchange for additional
shares of their capital stock and through the issuance to holders of X-Treem
Warrants of warrants to purchase the stock of the Company in exchange for the
X-Treem Warrants.
In June, in furtherance of the Stock Exchange Transaction, the Company
issued an aggregate of 9,379,151 shares of common stock and 1,013,549 shares of
Series C Convertible Preferred Stock to 18 shareholders who participated in such
transaction. Such issuance was a partial issuance of the capital stock to which
the former shareholders of X-Treem are entitled pursuant to the terms of the
Stock Exchange Transaction. See Financing Activities above for terms of the
preferred stock.
6
<PAGE>
Assuming the participation of 100% of the holders of the capital stock and
warrants of X-Treem in the Stock Exchange Transaction and the full issuance of
shares of stock and warrants of the Company to such holders pursuant to such
Stock Exchange Transaction, the completion thereof would result in the issuance
of 156,877,611 shares of stock, on a fully diluted basis, to the exchanging
holders of the stock and warrants of X-Treem.
Financing Activities
In June 1999, in consideration for $500,000, the Company sold to an
institutional investor 2,312,872 shares of Common Stock and 238,051.5 shares of
Series C Convertible Preferred Stock.
A Term Note payable to Giltner B. Stevens was entered into in May, 1999. The
principal amount of the note is $250,000. Simple interest accrues at an annual
rate of 14% and is payable at the note's maturity date of August 30, 1999. In
connection with the loan transaction, the Company issued to Mr. Stevens a
warrant to purchase 250,000 shares of the common stock of the Company at an
exercise price of $0.20 per share, and issued to Mr. Stevens' designee a similar
warrant to purchase 250,000 shares of common stock. The Company also issued to a
trustee 105,875 shares of common stock and 11,441 of preferred stock to secure
repayment of the note. The Company exercised its option to extend the maturity
date of the note to December 31, 1999, in exchange for the issuance to Mr.
Stevens of warrants to purchase 200,000 shares of common stock at an exercise
price of $0.20 per share. Subsequently, payment was not made on the date of
maturity. The Company believes that Mr. Stevens engaged in conduct which
resulted in damage to the Company. Mr. Stevens filed a motion for summary
judgment against the Company, and the Company answered and asserted its
counterclaims. The summary judgment motion was granted, and the Company's claims
were severed. The Company is preparing to bring an action against Mr. Stevens to
assert its claims.
A bridge loan payable was entered into in June 1999. The principal amount of the
loan is $104,000. Simple interest accrues at an annual rate of 10% and is
payable at the note's maturity date of June 29, 2000. In consideration of this
loan and two prior bridge loans made by the holder to the Company which have
been repaid, the Company has agreed to issue to the holder shares of the
Company's common and/or convertible preferred stock representing approximately
200,000 shares of common stock on a fully converted basis.
In April and May, 1999, in consideration for $80,000, the Company sold to three
investors units representing an aggregate of 173,913 shares of Common Stock and
18,782 shares of Series C Convertible Preferred Stock.
A Term Note payable was entered into in May 1999. The principal amount of the
note is $25,000. Simple interest accrues at an annual rate of 10% and is payable
at the note's maturity date on July 2, 1999. In accordance with the loan
transaction, the Company issued to the holder a warrant to purchase 5,000 shares
of the common stock of the Company at an exercise price of $0.04.
7
<PAGE>
The Company raised $439,562 in the third and fourth quarter of fiscal 1999
pursuant to an offering of units at a purchase price of $0.46 per unit. Each
unit consists of two shares of the common stock of the Company and 0.216 of a
share of Series C Convertible Preferred Stock, and the right to purchase, at an
aggregate purchase price of $0.46, one additional share of common stock and
0.108 of an additional share of Series C Convertible Preferred Stock. Pursuant
to the terms of the Series C Convertible Preferred Stock, (1) each share of
Series C Convertible Preferred Stock is convertible into 100 shares of Common
Stock (as adjusted for stock splits, mergers, consolidations, and other
extraordinary corporate events) and (2) the Series C Convertible Preferred Stock
may not be converted until the earlier to occur of (a) June 30, 2000, and (b)
the closing of a secondary public offering of the Common Stock resulting in
gross proceeds to the Company of not less than $10,000,000. The Company raised
an additional amount of approximately $14,000 pursuant to the unit offering in
April, 1999.
In connection with the Stock Exchange Transaction, the Company issued to Robert
J. Sipper a warrant to purchase 5,420,426 shares of common stock (or common
stock equivalents) of the Company at an exercise price of $0.12 per share.
[2] Summary of Significant Accounting Policies
Basis of Reporting
The accompanying audited financial statements have been prepared in
accordance with generally accepted accounting principles.
8
<PAGE>
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, Quigley and X-Treem, collectively referred to as the
"Company". All significant inter-company transactions and balances have
been eliminated in consolidation.
Minority Interest
The minority interest is held by certain investors who own approximately
33% of Phlo. Since the minority interest on the consolidated balance sheet
has been reduced to zero, the minority's interest in current or future
losses are not being recorded until the aggregate of such prior losses and
accumulated deficit equals the aggregate of any future profits.
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 fifteen-year period. Amortization of goodwill
charged to operations for the quarters ended June 30, 1999 and June 30,
1998 amounted to $5,000 and $0 respectively. In addition, $932,183 of
unamortized goodwill has been written off during the last quarter ended
March 31, 1998 as management determined such goodwill was impaired in
accordance with Statement of Financial Standards No. 121, "Accounting for
the Impairment of Long Lived Assets and for Long Lived Assets to be
Disposed of." The amount of goodwill impairment was measured based on the
projected discounted future operating cash flows compared to the carrying
value of goodwill.
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.
Furniture and Equipment
Furniture and equipment is stated at cost. Maintenance and repair costs are
charged to expense as incurred, and 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 under the straight-line
and accelerated methods over the estimated useful lives of the related
assets.
Revenue Recognition
Revenue is recognized at the time products are shipped and title passes.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the consolidated financial statement and tax basis of
9
<PAGE>
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. Valuation
allowance is established when necessary to reduce deferred tax assets to
the amount expected to be realized.
Reclassifications
Certain accounts in the prior year consolidated financial statements have
been reclassified for comparative purposes to conform with the presentation
in the current year consolidated financial statements. These
reclassifications have no effect on the previously reported income.
Fair Value of Financial Instruments
The financial instruments of the Company are reported in the statement of
financial condition at market or fair values, or at carrying amounts that
approximate fair values because of the short maturity of the instruments.
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. SFAS No. 131 establishes the criteria
for determining an operating segment and establishes the disclosure
requirements for reporting information about operating segments. The
Company adopted this standard in fiscal 1999 and the adoption of this
standard had no impact on the Company's results of operations or financial
condition. In addition, the Company has determined that under SFAS No. 131,
it operates in one segment of business and its customer and operations are
within the United States.
[3] Going Concern
The financial statements presented herein have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern and realization of assets and settlement of
liabilities and commitments in the normal course of business.
The Company incurred a net loss of $2,677,429 for the year ended March 31,
1999. The inability of the Company to generate projected cash needed for
operations, considering currently available funds, creates an uncertainty about
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 successfully implementing management's plans to raise
additional capital and to grow the business to achieve a profitable level.
There can be no assurances that management's plans to reduce operating
losses and to obtain additional financing to fund operations will be successful.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
[4] Inventories
The Company's inventory consists of raw materials, packaging and finished
products of $263,176.
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[5] Furniture, Fixtures and Equipment and Depreciation
Furniture, fixtures and equipment and accumulated depreciation as of June 30,
1999 are as follows:
Furniture and Fixtures $19,871
-------
Total - At Cost 30,000
Less: Accumulated Depreciation 10,129
Net $19,870
=======
Depreciation expense for the three months ended June 30, 1999 and 1998 was
$6,990 and $6,500, respectively.
[6] Settlement Agreement
In June, 1999, the Company entered into a settlement agreement with Leroux
Creek Food Corporation and its President, Edward Tuft, from which the Company
had purchased the Leroux Creek brand of applesauce products. As a result of the
settlement agreement, (1) Leroux Creek Food Corporation reacquired the
applesauce brand, (2) a note payable by the Company to Leroux Creek Food
Corporation in the amount of $650,000 was canceled, and (3) the Company was
relieved of its agreement to issue to Leroux Creek and Mr. Tuft options to
purchase an aggregate of 750,000 shares of Common Stock at an aggregate purchase
price of $75,000.
[7] Income Taxes - Deferred income tax assets and liabilities are computed
annually for differences between the consolidated financial statement 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. Valuation
allowance are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
[8] Stock Options
There was no stock option activity during the quarter ended June 30, 1999.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise Price
of Options Common Stock
<S> <C> <C>
Outstanding and Exercisable on April 1, 1997 58,333 $7.20
Granted 1,550,000 $0.46
Exercised -- --
Forfeited/Expired -- --
--------- -----
Outstanding and Exercisable on March 31, 1998
Forward 1,608,333 $0.48
<CAPTION>
Weighted Average
Number Exercise Price
of Options Common Stock
<S> <C> <C>
Outstanding and Exercisable on March 31, 1998
Forwarded 1,608,333 $0.48
Granted 1,600,000 0.75
Exercised -- --
Forfeited/Expired 750,000 0.10
---------- -----
Outstanding on September 30, 1999 $2,458,333 --
========== =====
Exercisable on September 30, 1999 $2,458,333 --
========== =====
</TABLE>
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<PAGE>
The following table summarizes information about stock options outstanding at
June 30, 1999. The 200,000 common stock options issued to consultants at an
exercise price of $0.875 have a weighted average remaining contractual life of 3
years. The 750,000 options issued at an exercise price of $0.13 have a weighted
average remaining contractual life of 4.75 years. All other options expire in
9.5 years.
Common Stock
Exercise Price Shares
$ 0.16 850,000
$ 0.50 300,000
$ 0.875 500,000
$ 7.20 58,333
--------- ---------
Total 1,708,333
[9] Note Payable
Notes payable as of June 30, 1999 total $1,205,349.
Maturities of the notes payable are as follows:
June 30
2001 $807,901
2002 395,357
2003 2,091
Thereafter --
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[10] New Authoritative Pronouncements
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
Are reported in annual financial statements and requires the reporting of
Selected information about operating segments in interim financial reports
Issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. The Company expects to adopt the provisions
of SFAS No. 131 in its annual financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure about
Pension and Other Postretirement Benefits," which is effective for fiscal years
beginning after December 15,1997. The modified disclosure requirements will not
have a material impact on the Company's results of operations, financial
position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it is designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income until the consummation of the underlying
transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
[11] Financial Instruments
Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
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<PAGE>
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
For certain instruments, including cash and cash equivalents, accounts
receivable and accounts payable, it was assumed that the carrying amount
approximated fair value because of the short maturities of these instruments.
The fair value of long-term debt is estimated based on rates at which the
Company could borrow funds with similar remaining maturities. The fair value of
the Company's debt approximates its carrying value.
[12] Commitments and Contingencies
[A] Employment Agreements - As of April 4, 1996, the Company entered into a
five (5) year employment agreement with Robert Sipper pursuant to which Mr.
Sipper serves as the Company's President and Chief Executive Officer. The
agreement, which was amended in February, 1997, provides for Mr. Sipper to
receive a salary of $150,000 per annum. Pursuant to the Stock Exchange
Transaction, which involved a change in control of the Company, Mr. Sipper
relinquished his positions as President and CEO of the Company in December,
1998, and became the Company's Chief Operating Officer.
[B] Loan Guarantee - The Company is a guarantor of a 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, 1999 was $70,000.
[13] Leases
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, 1999.
For the Year Ending
June 30, Amount
---------------------------------------
2000 $120,250
2001 120,250
2002 120,250
2003 120,250
--------
Total minimum lease payments $481,000
========
Rent expense for the years ended March 31, 1999 and 1998 was $70,410 and
$33,833, respectively. In connection with the above lease, a refundable security
deposit in the amount of $30,063 is being held by the landlord.
14
<PAGE>
[14] Subsequent Events
Creation of Subsidiaries and Assignment of Assets
The Company incorporated Phlo Beverage Products Company, a wholly-owned
subsidiary of the Company on July 16, 1999. On July 19, 1999, the Company
assigned to Phlo Beverage Products Company all of its right, title and interest
in and to finished goods and raw materials inventory, and all intellectual
property, related to the McCoy's beverage line. Thereafter, the production and
sale of McCoy's beverages was conducted by Phlo Beverage Products Company.
The Company incorporated Phlo System, Inc., a wholly-owned subsidiary of
the Company, on August 2, 1999. On August 4, 1999, the Company assigned to Phlo
System, Inc. all of its right, title and interest in and to the exclusive
license of the advanced delivery technology for use in all liquids and certain
foods. Phlo System, Inc. will conduct the Company's biotechnology-related
activities.
Acquisitions
In March, 2000, Phlo System, Inc. exclusively licensed for all uses,
worldwide, a proprietary (patent pending) composition consisting of an ester
(derivative) of Vitamin E combined with a delivery system (with
sustained-release capability). This technology has been shown through in vitro
and in vivo tests to be effective in protecting cells from oxidative stress
associated with aging and exposure to toxic agents. Further, these tests have
shown this composition to be effective in stimulating the membrane repair
function of cells, particularly of the liver, heart and brain. The uses covered
by the Company's exclusive, worldwide license of this technology include, among
other things, pharmaceuticals, biotechnologicals, nutraceuticals, dietary
supplements, food and beverage products and topical preparations (for
therapeutic or cosmetic use).
Notes Payable
The following notes were issued by the Company subsequent to June 30, 1999, in
conjunction with financing activities:
o In November and December, 1999, convertible notes payable in the aggregate
amount of $400,000 were entered into. Simple interest accrues at an annual
rate of one percentage point (1%) above the prime rate and is payable at
the notes' respective maturity dates in May and June, 2001. After December
31, 1999, the principal under the notes is convertible, at the option of
the respective holders, into shares of the Company's common stock at a
conversion price of $0.22 per share.
o Two bridge loans in the aggregate amount of $100,000 were entered into in
December 1999. Simple interest accrues at an annual rate of one percentage
point (1%) above the prime rate and is payable at the notes' maturity dates
of March 31, 2000. A payment default occurs under the note only in the
event that the Company fails to pay an amount due as and when payable, with
such failure continuing for a period of thirty days.
Equity
o In October and November, 1999, in consideration of $121,500, the Company
sold to seven investors units aggregating 303,750 shares of Common Stock.
15
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o In March, 2000, in consideration of $165,000, the Company sold to three
investors an aggregate of 165,000 shares of Common Stock.
o In August, 1999, the Company issued 511,435 shares of Common Stock to JMA
Capital, L.L.C. ("JMA") in consideration of financial services rendered to
the Company. In consideration of additional financial services rendered to
the Company by JMA, in November, 1999, the Company issued to a designee of
JMA, 30,000 shares of the Common Stock.
o In December, 1999, the Company issued to Mark Butler, a former officer and
director of the Company, 20,000 shares of Common Stock as a result of his
exercise of an option to purchase such shares at an exercise price of $0.05
per share.
o Between August and October, 1999, the Company issued an aggregate of
125,000 share of Common Stock to two of its distributors pursuant to sales
incentive programs offered to such distributors by the Company.
o In December, 1999, the Company entered into an agreement with the providers
of advertising and marketing services pursuant to which such service
providers would earn warrants to purchase an aggregate of 50,000 shares of
Common Stock at an exercise price of $0.10 per share in consideration for
services rendered. Pursuant to such agreement, warrants providing for the
purchase of such shares vest and become issuable as the performance of
certain tasks is accomplished. In connection therewith, the Company issued
two cashless warrants in January, 2000, each providing for the purchase
thereunder of 8,333 shares of the Common Stock at an exercise price of
$0.10 per share.
o In October, 1999, the Company issued 20,000 shares of Common Stock to
Gregory S. Kroning pursuant to the terms of a letter agreement providing
for the rendering of investment banking services. Mr. Kroning breached the
terms of the letter agreement, and the Company has filed suit against Mr.
Kroning seeking damages and the return of the shares of Common Stock to the
Company.
o In March, 2000, in connection with the execution of the exclusive license
for all uses, worldwide, of a proprietary composition consisting of an
ester (derivative) of Vitamin E combined with a delivery system, the
Company issued to the licensor of the technology, a warrant to purchase
200,000 shares of the common stock of the Company at an exercise price of
$0.05 per share.
Technology Agreements
In October, 1999, the Company formed a strategic alliance with Technology
Flavors & Fragrances, Inc. ("TFF"), an international flavor and fragrance
development company headquartered in Amityville, New York. The two companies
have pooled their resources and expertise to further develop Phlo's proprietary
advanced delivery system technology (the "Super-Phlo System") in preparation for
the introduction into the marketplace of beverages incorporating the Super-Phlo
System. The joint development project between the two companies will also give
Phlo the capability to manufacture the Super-Phlo System, in addition to Phlo's
exclusive license to include it in all liquid formulations and certain other
food products. The top three key members of the scientific team at TFF who will
be involved in the further development of the Super-Phlo System and products
associated with the Super-Phlo System have, collectively, over 80 years of
16
<PAGE>
scientific and manufacturing experience in the flavor industry. TFF currently
works with Phlo in the development of flavors for use in Phlo's McCoy's brand of
teas, fruit drinks and lemonades.
In November, 1999, the Company's wholly-owned subsidiary, Phlo System,
Inc., executed a consulting agreement with William Regelson, M.D., a widely
published specialist in medical oncology, with joint appointments in
microbiology and biomedical engineering (Medical College of Virginia, Virginia
Commonwealth University, Richmond) who has been a leading researcher in the
field of aging for over twenty years and has over 200 publications to his
credit. Dr. Regelson will be working with Phlo System, Inc. on
biotechnology-related product development activities as well as applications of
its advanced delivery technology.
----------
17
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Item 2:
PHLO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
For the three months ended June 30, 1999 compared with the three months ended
June 30, 1998.
The following discussion of the Company's financial condition as of June 30,
1999 and results of operations for the three months ended June 30, 1999 and 1998
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
The Company manufactures and sells the McCoy's beverages, which feature the
unique concept of "microbrewed" fruit drinks, lemonades, iced teas and green
teas as well as distinctive flavors, packaging and bottle. The McCoy's line of
all natural beverages contains no preservatives, artificial colors or flavors
and is made from the highest quality natural ingredients.
The McCoy's line is offered in 20 ounce proprietary glass bottles in 12 pack
cases, and currently encompasses 17 flavors, as follows:
Iced Teas Green Teas Lemonades Fruit Drinks
- --------- ---------- --------- ------------
Lemon Lemon Pink Blackberry Cherry
Diet Lemon Diet Lemon Old Fashioned Kiwi Strawberry
Peach Peach Raspberry Vanilla
Raspberry Raspberry Tropical Punch
Ginger Vanilla
Ginger Mandarin Orange
Ginger Plum
McCoy's Diet Lemon Iced Tea and Diet Lemon Green Tea contain Aspartame
(NutraSweet), a low calorie sweetener. The lemonades and fruit drinks contain 5%
juice while the iced teas and green teas contain no fruit juice.
The Company will be introducing diet versions of the McCoy's iced teas, green
teas, and certain of the fruit drinks. The Company will also add new flavors to
those currently offered.
The Company has been actively developing a proprietary product base the result
of which would 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 technology, nutraceutical, biotechnological,
and/or pharmaceutical in nature, which the Company initially plans to convey to
consumers through the use of beverage systems. The Company is focusing its
technology acquisition and development 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 has exclusively licensed a proprietary (patent pending) advanced
delivery technology for use in liquids and apple-based products throughout the
United States and Canada. Through the use of this technology, the Company will
be able to deliver to the consumer in the most effective and consumer-friendly
manner nutritional and/or pharmaceutically active agents through its beverage
products. The Company is currently developing the delivery system for use in all
of its beverages.
18
<PAGE>
RESULTS OF OPERATIONS
The Company had a net loss of $338,661 for the three months ended June 30, 1999
as compared to a net loss of $470,168 for the three months ended June 30, 1998.
The loss from operations for the three months ended June 30, 1999 is primarily
due to the time required to establish the two tier system of distribution.
The net sales for the Company for the three months ended June 30, 1999 was
$461,709 as compared to $435,509 for the three months ended June 30, 1998.
The Company had a gross profit of $161,806 or 35% as compared to a gross profit
of $90,683 or 20.8% for the three months ended June 30, 1999 and
1998, respectively. The increase in the gross profit is due to an improved
promotional program relating to the introduction of McCoy's.
The Company's selling, general and administrative expenses for the three months
ended June 30, 1999 and 1998 were $500,417 and $560,851, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company incurred a net loss for the year ended March 31, 1999 and the period
from April 1, 1999 through June 30, 1999 equal to $2,604,001 and $1,389,480
respectively. In addition the Company has a working capital deficit at June 30,
1999 equal to $3,750,150. Management has implemented plans to raise additional
capital. During the period from July 1999 to February 2000, the Company raised
approximately $1,600,000 in equity and loan transactions. Additionally, the
Company has implemented plans to increase beverage sales, especially to chain
supermarkets accounts. By December 31, 1999, the number of chain supermarket
units that had authorized carrying the McCoy's beverages has increased nearly
400% to 2057 stores at December 31, 1999. Management believes it will be
successful in implementing steps necessary to operate in the normal course of
business. However there is no assurance of this, and, if not successful, the
Company would no longer be able to operate as a going concern.
19
<PAGE>
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-QSB to be signed on its behalf
by the undersigned thereon duly authorized.
PHLO CORPORATION
March 22, 2000 /s/ James B. Hovis
-------------------------------------------
James B. Hovis, President & Chief Executive
Officer
20
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