UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
Amendment No. 1 to
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 16,958,305.
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
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
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
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED BALANCE SHEET [Unaudited]
June 30, 1999
- --------------------------------------------------------------------------------
ASSETS
1999
----------
CURRENT ASSETS
Cash $ 50,556
Accounts receivable, net 173,351
Inventory 263,176
Note receivable 46,665
Other current assets --
----------
Total Current Assets 533,748
----------
PROPERTY AND EQUIPMENT, Net 19,871
----------
OTHER ASSETS
Goodwill - net of accumulated amortization of $30,000 430,000
Security deposits 30,063
----------
Total Other Assets 460,063
----------
TOTAL ASSETS $1,013,682
==========
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED BALANCE SHEET [Unaudited]
June 30, 1999
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
1999
-----------
<S> <C>
CURRENT LIABILITIES
Accounts payable $ 1,317,776
Accrued expenses and taxes 2,059,946
Current portion of long-term debt 1,144,000
-----------
Total Current Liabilities 4,521,722
OTHER LIABILITIES
Long-term debt, less current portion 150,000
-----------
TOTAL LIABILITIES 4,671,722
STOCKHOLDERS' DEFICIENCY Preferred stock, 15,000,000 authorized:
Series A convertible stock, $0.0001 par value, 500,000 shares
issued and outstanding (liquidation preferences $100,000) 50
Preferred stock, no par value, 20,000 shares Series A
convertible preferred stock authorized, 2,247 shares issued
and outstanding --
Series B non-convertible stock, none issued and outstanding --
Series C convertible stock, $0.0001 par value, 3,000,000
shares authorized, 469,457 subscribed 47
Common stock, $0.0001 par value, 25,000,000 shares and
60,000 authorized, 11,707,248 outstanding 1,170
Common stock, $0.0001 par value, 4,281,600 shares subscribed 428
Additional paid in capital 3,437,510
Accumulated deficit (7,097,245)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (3,658,040)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 1,013,682
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS [Unaudited]
For the Three Months Ended June 30, 1999, and 1998
- --------------------------------------------------------------------------------
1999 1998
------------ ------------
SALES $ 461,709 $ 435,509
COST OF SALES 299,903 344,826
------------ ------------
GROSS PROFIT 161,806 90,683
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 841,822 630,076
------------ ------------
OPERATING LOSS (680,016) (539,393)
------------ ------------
OTHER INCOME (EXPENSES)
Interest expense (33,135) (23,075)
Loss on abandoned assets -- (80,500)
------------ ------------
TOTAL OTHER EXPENSES (33,135) (103,575)
------------ ------------
NET LOSS $ (713,151) $ (642,968)
============ ============
Weighted Average Common Shares Outstanding 14,645,456 11,306,452
============ ============
Net Loss Per Share (Basic and Diluted) $ (0.05) $ (0.06)
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS [Unaudited]
For the Three Months Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (713,151) $ (642,968)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 15,843 (3,206)
Loss on disposal of equipment -- 80,500
Decrease (increase) in accounts receivable (173,351) (83,228)
Decrease (increase) in inventory (263,176) 8,804
Decrease (increase) in other current assets 33,804 105,000
Increase in security deposits -- 375
Increase in accounts payable 25,607 207,293
Increase in accrued expenses and taxes 178,170 77,349
Increase (decrease) in current portion of
long term debt 354,000 --
----------- -----------
TOTAL ADJUSTMENTS 170,897 392,887
----------- -----------
NET CASH (USED) GENERATED FROM OPERATIONS (542,254) (250,081)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock 580,020 227,524
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 580,020 $ 227,524
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS [Unaudited], Continued
For the Three Months Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
------- --------
NET CHANGES IN CASH $37,766 $(22,557)
CASH - Beginning 12,790 (22,557)
------- -------
CASH - Ending $50,556 $(22,557)
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing and financing activities:
On December 7, 1998, the Company issued 8,000,000 shares of its common
stock in exchange for 68% of the equity interest in X-Treem. This
transaction was treated as a recapitalization.
On June 30, 1998, a stockholder of X-Treem exchanged $1,477,524 of debt for
warrant to purchase 873 shares of X-Treem common stock. This exchange was
treated as a contribution to capital.
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 1 - Basis of Presentation
On October 22, 1998, Phlo Corporation (formerly known as Perry's Majestic
Beer, Inc.), a Delaware corporation, ("Phlo") 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 the exchange of
up to 93% of the issued and outstanding shares of Phlo's common stock, (the
"Letter Agreement"). On December 7, 1998, Phlo acquired approximately 68%
interest in X-Treem's common stock in exchange for 8,000,000 shares of
Phlo's common stock (the "stock exchange transaction"). The stock exchange
transaction was treated as a recapitalization for accounting purposes since
Phlo was deemed a public shell. The historical financial statements prior
to December 7, 1998 were those of X-Treem. On June 10, 1999, Perry's
Majestic Beer, Inc. changed its name to Phlo Corporation (the "Company").
On April 2, 1999 the directors of the Company voted to amend the Letter
Agreement by agreeing not to reverse-split Phlo's stock, as initially
intended, and as a result, changed the rate at which Phlo exchanged shares
with the X-Treem shareholders from 372.29 to 1 to 4,490.30 to 1. The
majority of 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 amended exchange rate, Phlo would be required
to issue a total of 156,877,611 common shares to acquire 100% of the
outstanding X-Treem capital stock and warrants from X-Treem shareholders.
As of March 31, 2000, 29,214 shares of X-treem capital stock representing
97.72% 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.
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 of Phlo common stock in exchange for tendering their common
shares. 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 shares prior to the amendment to the Letter
Agreement. These share issuances were intended as a partial issuance until
there were more authorized shares to satisfy the total exchange. When
sufficient shares are authorized and the exchange completed, all former
X-Treem shareholders who participated in the exchange transaction will have
received Phlo shares on a pro rata basis.
In addition, subsequent to balance sheet date, as disclosed above and in
Note 11, 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 of common stock to exceed the 25,000,000
shares of common stock the Company presently has authorized. As of March
31, 2000 there are currently 24,328,255 common shares issued and
outstanding.
6
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 1 - Basis of Presentation, continued
In addition, options and warrants to purchase 2,438,333 and 6,342,092
shares of common stock are also outstanding (respectively).
On December 22, 1999 the Company notified their transfer agent, American
Stock Transfer & Trust Company, that no outstanding shares of preferred
stock, including both the Series A and C have been validly 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 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 certificates with replacement shares of preferred stock which are validly
issued.
The Company is required by both Delaware and U. S. Securities law, and is
therefore presently taking the necessary steps, to authorize additional
shares of common stock so the Company can satisfy its requirements to meet
commitments to issue stock and have the ability to accommodate current and
future stock issues.
NOTE 2 - Organization and Nature of Business
Phlo was formed in December 1995 and is located in New York, New York. Phlo
has completed its transformation from a microbrew beer company to a
technology company, which is using the high-volume chain-store segment of
the non-alcoholic beverage industry to commercialize its technology.
X-Treem, a Delaware corporation, was formed on April 11, 1997, was formerly
engaged in producing and marketing new-age beverage lines, including
primarily the McCoy's line of fruit drinks, lemonades and ready-to-drink
iced teas. X-Treem acquired raw materials, intellectual property,
distribution contracts and assumed certain liabilities of a beverage
company as part of its formation.
NOTE 3 - Summary of Significant Accounting Policies
Basis of Reporting
The accompanying audited financial statements have been prepared in
accordance with generally accepted accounting principles.
7
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 3 - Summary of Significant Accounting Policies, continued
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, X-Treem, 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 fifteen-year period. Amortization of goodwill
charged to operations for the three months ended June 30, 1999 amounted to
$10,000.
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. Inventory at
June 30, 1999 was $263,176.
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.
8
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 3 - Summary of Significant Accounting Policies, continued
Depreciation and Amortization
The cost of furniture and equipment is depreciated under the straight-line
method over five years.
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
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.
Fair Value of Financial Instruments
The financial instruments of the Company are reported in the consolidated
balance sheets 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 Statement of Financial Accounting Standards ("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.
9
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 3 - Summary of Significant Accounting Policies, continued
Net (Loss) Per Share
The Company adopted the provision of SFAS No. 128, "Earnings per Share".
SFAS No. 128 eliminates the presentation of primary and fully dilutive
earnings per share ("EPS") and requires presentation of basic and diluted
EPS. 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 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 1999 and 1998, as such inclusion is anti-dilutive.
Comprehensive Income
In 1997, the FASB issued the Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity, except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same preeminence as other
financial statements. The Company adopted this standard in fiscal 1999 and
the implementation of this standard did not have any impact on its
financial statements.
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 customer and
operations are within the United States.
Accounting Developments
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ASEC of AICPA") issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". Effective for
fiscal years beginning after December 15, 1998, SOP No. 98-1 requires that
certain costs of computer software developed or obtained for internal use
be continued capitalized and amortized over the useful life of the related
software. The Company does not expect that the adoption of this standard
will have a material impact on its financial statements.
10
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 3 - Summary of Significant Accounting Policies, continued
In April 1998, the ASEC of AICPA issued SOP No. 98-5, "Reporting on the
Costs of Start-up Activities". Effective for fiscal years beginning after
December 15, 1998. SOP 98-5 requires the costs of start-up activities and
organization costs to be expensed as incurred. The Company does not expect
that the adoption of this standard will have a material impact on its
financial statements.
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 4 - Going Concern
As shown in the accompanying financial statements, the Company incurred a
net loss of $713,151 during the three months ended June 30, 1999. As of
June 30, 1999, the Company's current liabilities exceeded its current
assets by $3,987,974, and its total liabilities exceeds its total assets by
$3,658,040. 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, generating
sufficient revenue through the expansion of its beverage lines, and/or the
sublicensing of its exclusively licensed technologies in exchange for
sub-licensing fees and royalties.
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 June 30, 2000 and beyond. Among
the actions taken, the Company anticipates generating more revenue through
the expansion of its McCoy's beverage line, raising of additional funds
through private placement offerings of its securities and utilization of
public securities markets and generating licensing fees. No assurance can
be made that the management will be successful in achieving its plan.
11
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 5 - Property and Equipment
Property and equipment consists of the following at June 30, 1999:
1999
---------
Furniture and fixtures $ 30,000
Less: Accumulated depreciation (10,129)
---------
Net $ 19,871
=========
Depreciation expense for the three months ended June 30, 1999 was $5,843.
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 1999 and 1998 are primarily
attributable to the valuation allowance for the NOL and other permanent
differences.
As of June 30, 1999, the Company estimated the available NOL carryforwards
to be approximately $7,213,000 and the Company's total deferred tax assets
relating to the carryforwards amounted to approximately $2,885,000. The
Company has a valuation allowance for the full assessment of the deferred
tax assets at June 30, 1999 as management does not believe it is more
likely than not that the valuation of the asset is recoverable.
Further, the Company is not current in the filings of Federal, state or
local income or franchise tax returns. This 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.
12
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 7 - Stock Options, continued
Options Granted Separate from the Stock Option Plan
In connection with the 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 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 granted 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 from such issuance
by agreement of all parties in June 1999 (see Note 11).
In December 1998, the Company issued a combined total of options to
purchase 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 exercise price of $0.05 per share and expire in
December 2003 (See Note 8).
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 0.75
Option cancelled --
Option exercised --
---------
Balance - March 31, 1999 3,208,333 $0.57
Balance - June 30, 1999 3,208,333 $0.57
=========
13
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 7 - Stock Options, continued
Options Granted Separate from the Stock Option Plan, continued
The options issued to officers, directors and employees expire in five (5)
to ten (10) 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 7.25
years.
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 stock options under the fair value method of SFAS 123.
The weighted-average fair value of options granted was $0.21 per share. The
fair market value for these options was estimated at the date of grant
using a Black-Scholes option-pricing model with the following
weighted-average assumptions for the three months ended June 30, 1999:
ASSUMPTIONS
---------------------------------------------------------------------------
Risk-free rate 4.43%
Dividend yield --
Volatility factor of the expected market price 1.517
Average life 5 Years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require that input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, 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.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma information for the three months ended June 30, 1999 is
as follows:
Net Loss - As reported $(713,151)
Net Loss - Pro forma (693,151)
Pro forma net loss per share:
- Basic $(0.05)
- Diluted $(0.05)
14
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 8 - Stockholders' Equity
Common Stock
Phlo has 25,000,000 authorized common shares, $0.0001 par value, of which
3,783,335 shares were issued and outstanding at March 31, 1998.
On December 1, 1998, two officers of the Company returned 450,000 shares of
the common stock in exchange for options to purchase 850,000 shares of
common stock (see Note 7). These returned shares were treated as having
been retired.
On December 7, 1998, Phlo issued 8,000,000 shares of its common stock to
three shareholders of X-Treem pursuant to a stock exchange transaction and
obtained a 68% equity interest of X-Treem (see Note 1).
Exchange of Debt for Warrant by a Stockholder
On June 30, 1998, a note payable along with related interest in the total
amount of $1,477,524 was exchanged for a warrant by a stockholder. The
holder of the warrant is entitled to purchase of 893 shares of the common
stock of X-Treem at an exercise price of $0.50 per share. In connection
with the stock exchange transaction, this warrant can be converted into a
warrant to purchase shares of Phlo's common stock.
Preferred Stock
The Company has 15,000,000 shares of preferred stock, $0.001 par value,
authorized.
Series A Convertible Preferred Stock
At June 30, 1999, 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.
Series B Non-Convertible Preferred Stock
At June 30, 1999, none of the 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.
15
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 8 - Stockholders' Equity, continued
Series C Convertible Preferred Stock
At June 30, 1999, none of the Series C Convertible Preferred Stock ("Series
C Preferred") was issued and outstanding and 469,457 shares were subscribed
in connection with the private placement offering (see below) and private
offerings during the quarter, April 1999 to June 1999. The Series C
Preferred is subject to certain conversion, redemption and liquidation
provisions, as defined. In addition, each share of the Series C Preferred
is convertible into 100 shares of the Company's common stock.
The Company is intending on taking the necessary steps to authorize
additional shares of common stock so the Company will have the ability to
accommodate current and future stock issues.
Private Placement Offering
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. 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 additional one (1) 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. Of the total proceeds, $430,894
was received prior to March 31, 1999 and the remaining balance of $22,137
was received shortly subsequent to March 31, 1999. As of June 30, 1999,
such common stock, Series C Preferred and rights 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.
NOTE 9 - Long-Term Debt
Long-term debt as of June 30, 1999 consists of the following:
1999
----------
Note payable with interest at 10% per annum.
This note was converted to equity in 1999. $ --
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
----------
Balance (forward) $ 600,000
----------
16
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 9 - Long-Term Debt, continued
1999
----------
Balance (forward) $ 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 note provides for
a penalty interest at a rate of $1,250 per week
after maturity. The holder of the note has
initiated an action to enforce the note. The
Company continues to accrue interest on this 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
Term note payable was entered into. Simple interest
accrues at an annual rate of 14% and is payable at
the note's maturity date of August 30, 1999. The
Company exercised its option to extend the maturity
date of the note to December 31, 1999, in exchange
for the issuance to the holder of warrants to
purchase 200,000 shares of common stock at an
exercise price of $0.20 per share. Payment was not
made on the date of maturity. The Company believes
that the holder engaged in intentional conduct
which resulted in damage to the Company. The holder
filed a motion for summary judgment against the
Company, and the Company answered and asserted its
counterclaims. On March 7, 2000, the summary
judgment motion was granted, and the Company's
claims were severed. The Company is preparing to
bring an action against the holder to assert its
claims. 250,000
Bridge loan payable in the principal amount of
$104,000 with simple interest accruing at an annual
rate of 10% which is payable at the note's maturity
date of December 31, 2000. In consideration of this
loan and two prior bridge loans, the Company has
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
----------
Total Long-Term Debt 1,294,000
Less: Current Portion 1,144,000
----------
Long-Term Debt, net of current portion $ 150,000
==========
17
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 10 - Commitments and Contingencies
Employment Agreements
The Company has one employment agreement with an executive of the Company
that expires in the year 2001. The annual commitments for compensation are
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. The total outstanding balance of the loan
at March 31, 1999 was approximately $65,000.
Licensing Agreement
On December 5, 1998, the Company entered into an agreement to exclusively
license an advanced delivery technology and the related trademarks for use
in the development, manufacture, marketing, distribution and sale of
products incorporating the delivery system in the United States and Canada
for $70,000. The Company paid $60,000 during the year ended March 31, 1999
and additional $10,000 was paid subsequent to the year-end. In addition,
the Company is required to pay royalty fee of 2.5% of net sales of the
products, as defined.
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 March 31, 1999.
Related Party Transactions
On December 1, 1998, Phlo entered into a license agreement with X-Treem,
whereby X-Treem granted to Phlo the exclusive right and license to use the
names and marks of the McCoy products, including but not limited to the
right and license to manufacture and sell such products (the "Name and
Marks") for $100,000. In addition, X-Treem also granted to Phlo an option
to purchase the Name and Marks for $300,000. The option will expire on
December 31, 2001. On December 23, 1998, after the stock exchange
transaction as discussed in Note 1, Phlo exercised the option and issued to
X-Treem a promissory note of $300,000 with interest at 10% per annum. This
exercise of the option was treated as a related party transaction and has
been eliminated in the consolidation.
18
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 10 - Commitments and Contingencies, continued
Payroll Taxes
The Company has unpaid payroll taxes since the fourth quarter 1997. The
Company is in the process of filing all unfilled returns and has accrued
estimated penalties and interest of $125,000.
Late Filings
Pror to this filing the Company had not filed certain quarterly and annual
reports with the Securities and Exchange Commission. Management believes
that the previously late filings will not have a material adverse effect on
the financial position of the company
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.
2000 $120,250
2001 120,250
2002 120,250
2003 120,250
--------
Total $481,000
========
Rent expense for the three months ended June 30, 1999 was $30,063. In
connection with the above lease, a refundable security deposit in the
amount of $30,063 is being held by the landlord.
NOTE 11 - 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, furniture and fixtures, raw materials
inventory, and all intellectual property, related to the McCoy's beverage
line.
19
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 11 - Subsequent Event, continued
Creation of Subsidiaries and Assignment of Assets, continued
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 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.
Notes Payable
The following notes were issued by the Company subsequent to June 30, 1999,
in conjunction with financing activities:
In November and December 1999, convertible notes payable in the aggregate
amount of $400,000 were entered into with simple interest accruing at an
annual rate of one percentage point (1%) above the prime rate and is
payable at the notes' maturity dates which begin in May, 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.
20
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 11 - Subsequent Event, continued
Notes Payable, continued
In December 1999, two bridge loans in the aggregate amount of $100,000 were
entered into with simple interest accruing at an annual rate of one
percentage point (1%) above the prime rate and is payable at the notes'
maturity date 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
In October and November, 1999, in consideration of $121,500, the Company
sold to seven investors units aggregating 303,750 shares of Common Stock,
of which 253,750 shares have been issued as of March 15, 2000.
In March, 2000, in consideration of $165,000, the Company sold to five
investors an aggregate of 165,000 shares of Common Stock, none of which
have been issued as of March 15, 2000.
In connection with the Unit Offering commenced in the fourth fiscal quarter
of 1999, 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 in consideration for providing bridge financing related to
such offering and to issue a cashless warrant providing for the purchase of
2,401,670 shares of Common Stock at an exercise price of $0.01 per share
for investment banking services related to such offering. Such warrants
have not been issued as of March 15, 2000.
In August and November 1999, the Company issued 511,435 and 30,000 shares
of Common Stock to a company in consideration of financial services
rendered.
In September, 1999, the Company issued 26,374 shares of Common Stock to a
company in connection with advertising services rendered to the Company and
36,550 shares of Common Stock to a law firm in connection with legal
services rendered to the Company.
21
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [Unaudited]
- --------------------------------------------------------------------------------
NOTE 11 - Subsequent Event, continued
Equity, continued
Between August and October, 1999, the Company issued an aggregate of
125,000 shares of Common Stock to two of its distributors pursuant to sales
incentive programs offered to such distributors by the Company.
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.
In October, 1999, the Company issued 20,000 shares of Common Stock to an
individual in connection with an agreement providing for the rendering of
investment banking services. Terms of this agreement were breached, and the
Company has filed suit seeking damages and the return of the shares of
Common Stock to the Company.
In March, 2000, Phlo System, Inc. entered into an exclusive license
agreement for all uses, worldwide, a proprietary composition consisting of
an ester (derivative) of Vitamin E combined with a delivery system. In
connection with the execution of this license agreement, the Company issued
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.
22
<PAGE>
Item 2:
PHLO CORPORATION
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS [Unaudited]
- --------------------------------------------------------------------------------
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.
23
<PAGE>
RESULTS OF OPERATIONS
The Company had a net loss of $713,151 for the three months ended June 30, 1999
as compared to a net loss of $642,968 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 and
$242,000 in charges recorded in connection with stock issued for services
pursuant to SFAS 123.
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 $841,822 and $630,076, respectively. The
former includes $242,000 associated with stock referred to above.
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 $2,700,230 and $713,151,
respectively. In addition the Company has a working capital deficit at June 30,
1999 equal to $3,987,974. 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.
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, generating sufficient revenue through the
expansion of its beverage lines, and/or the sublicensing of its exclusively
licensed technologies in exchange for sub-licensing fees and royalties.
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 June 30, 2000 and beyond. Among the actions taken, the
Company anticipates generating more revenue through the expansion of its McCoy's
beverage line, raising of additional funds through private placement offerings
of its securities and utilization of public securities markets and generating
licensing fees. No assurance can be made that the management will be successful
in achieving its plan.
24
<PAGE>
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
May _____, 2000 By: /s/ James B. Hovis
-------------------------------------
James B. Hovis
President and Chief Executive Officer
