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 December 31, 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 ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 31, 1999 was 24,328,285.
<PAGE>
PHLO CORPORATION
INDEX
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Page to Page
Item 1. Financial Statements
Consolidated Balance Sheet as of December 31, 1999
[Unaudited] .................................................... 1
Consolidated Statements of Operations for the nine months ended
December 31, 1999 and 1998 [Unaudited].......................... 2
Notes to Consolidated Financial Statements [Unaudited].......... 3-13
Item 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations......................... 14
Signature............................................................ 15
<PAGE>
Item 1:
PHLO CORPORATION
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CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999.
[UNAUDITED]
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ASSETS
CURRENT ASSETS
Cash $ 158,421
Accounts Receivable, Net 207,022
Inventory 305,783
Note receivable 11,667
-----------
Total Current Assets $ 694,717
PROPERTY AND EQUIPMENT, Net 13,551
OTHER ASSETS
Goodwill-net of accumulated amortization of $120,000 1,373,567
Security deposits 30,063
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Total Other Assets 1,403,630
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Total Assets $ 2,111,898
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 2,068,350
Accrued expenses and taxes 1,843,511
Current portion of long-term debt 1,286,901
-----------
Total Current Liabilities 5,198,762
OTHER LIABILITIES
Long-term debt, less current portion 797,448
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TOTAL LIABILITIES 5,996,210
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, 15,000,000 authorized:
Series A convertible stock, $0.001 par value,
500,000 shares issued and outstanding
(liquidation preferences $100,000) 500
Series B non-convertible stock, none issued
and outstanding --
Series C convertible stock, $0.0001 par value,
216,528 shares subscribed 22
Common stock, $0.0001 par value, 25,000,000 shares
authorized, 11,333,335 shares issued and
outstanding 1,133
Common stock, $0.0001 par value, 2,004,892 shares
subscribed 200
Additional paid in capital 3,491,178
Accumulated deficit (8,077,345)
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TOTAL STOCKHOLDERS' DEFICIENCY (4,584,312)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY 2,111,898
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
1
<PAGE>
PHLO CORPORATION
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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Nine months ended
December 30,
--------------------------
1 9 9 9 1 9 9 8
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SALES $ 1,279,856 $ 859,275
COST OF SALES 923,061 851,028
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GROSS PROFIT 356,795 8,247
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,746,275 1,750,852
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NET LOSS $(1,389,480) $(1,742,605)
=========== ===========
Weighted Average Number of Shares 11,333,335 3,333,335
NET (Loss) Per Share (0.12) (0.52)
Supplemental Disclosures of Non-Cash Investing and Financing Activities
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
2
<PAGE>
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. The Company is focusing its technology acquisition efforts on those
technologies related to preventing or ameliorating cancer, reducing the effects
of aging, assisting in weight loss, and enhancing sexual performance.
The Company recently announced that it has retained the services of 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 the Company in
connection with numerous applications of its Super-Phlo System. The Company
believes that the addition of Dr. Regelson to the Company's team represents a
further step in the Company's emphasis on nutritional and nutraceutical
technology. The Company's work with Dr. Regelson will greatly enhance its
ability to tap the huge and rapidly growing nutraceuticals market.
The Company's proprietary (patent pending) advanced delivery system (the
"Super-Phlo System") will afford distributors of its 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,
and the Company's intrinsic value and valuation in the financial markets should
be relatively higher than that of other beverage companies.
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
biotechnological agents which support claims for important health benefits. The
Super-Phlo System can selectively direct such agents to specifically targeted
locations in the body and release the agents over a period of time (12 to 24
hours) for maximum effect. 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.
In October, 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 the Company's 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 the Company the capability to manufacture the
Super-Phlo System, in addition to the Company'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 scientific and manufacturing
experience in the flavor industry. TFF currently works with the Company in the
development of flavors for use in Phlo's McCoy's brand of teas, fruit drinks and
lemonades.
3
<PAGE>
Sales and Distribution
The Company began distribution of its McCoy's brand of beverages in late
May, leading with its seven flavors of McCoy's Green Teas. The Company's line of
McCoy's Green Teas 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 has added a new level of distribution this year 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. The Company's
beverages have been received with excitement by the supermarket chains and their
customers. During the fall and winter months of 1999, which traditionally
represent the slow season for beverages, the number of supermarket units (not
including independent grocery accounts) which have authorized the sale of
McCoy's beverages has increased to 2,057.
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 its largest accounts including A&P, Acme, Food Emporium, Super Fresh and
Waldbaums as well as from Haddon House's major independent accounts. Most
recently, Haddon House has continued its expansion of McCoy's beverage sales
along the East Coast by gaining authorizations from supermarket chains such as
Winn-Dixie (50 stores) and Lowes Foods (50 stores) in North Carolina and
Winn-Dixie (110 stores) in South Carolina.
Underscoring the growing support of the McCoy's product line and the most
recent progress in the Company's distribution efforts, Acosta Sales and
Marketing Company, which services supermarket chains in New England and upstate
New York, has gained authorizations for the McCoy's beverage line in Stop & Shop
(194 stores), Bozzuto's (226 stores), Shaw's and Star Market (114 stores),
SUPERVALU (200 stores and key independent accounts), Big Y Foods (43 stores),
A&P and Foodmart (65 stores). These accounts are located throughout Connecticut,
Massachusetts, New York, New Hampshire, Vermont, and Rhode Island.
McCoy's beverages are currently authorized, and the launch of McCoy's
beverages has occurred, in the supermarket chains in the states or regions
indicated through various distributors of the Company as follows: Acme (PA, DE,
NJ); Albertson's (FL); A&P (NY, NJ, CT); Big Y Foods (MA, CT); Bozzuto's (New
England); Clemons (PA); Food Emporium (NY, NJ); Food Mart (PA); Foodtown (NJ);
Genardi's (NJ, PA, DE); Lowes (NC); McCaffrey's (PA); Murphy's (NJ); Pathmark
(16 store test in southern NJ and PA); Redners (PA); Seessel's (TN); Shaws (New
England); Shop n Bag (PA, NJ, DE); Shop n Save (PA); Shop Rite (NJ, PA); Star
Markets (New England); Stop & Shop (New England); Sunshine Markets (FL); Super
Fresh (southern NJ); Super Fresh (Balt./Wash.); SUPERVALU (New England, PA);
Thriftway (PA); Ukrop's (test in 30% of stores in VA); Waldbaums (Long Island);
and Winn-Dixie (NC, SC).
4
<PAGE>
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 notes 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.
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.
o 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 November, 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 a warrant to purchase 100,000 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.
o In November, 1999, the Company issued 30,000 shares of Common Stock to a
designee of JMA Capital, L.L.C. ("JMA") in consideration of financial
services rendered to the Company by JMA.
Equity
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 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.
5
<PAGE>
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.
[2] Summary of Significant Accounting Policies
Basis of Reporting
The accompanying audited financial statements have been prepared in
accordance with generally accepted accounting principles.
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.
6
<PAGE>
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 December 31, 1999 and December
31, 1998 amounted to $5,000 and $560 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
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.
7
<PAGE>
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 the success of future financing.
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 $305,783.
[5] Furniture, Fixtures and Equipment and Depreciation
Furniture, fixtures and equipment and accumulated depreciation as of December
31, 1999 are as follows:
Furniture and Fixtures
Total - At Cost 300,000
Less: Accumulated Depreciation 16,499
Net $ 13,551
========
8
<PAGE>
Depreciation expense for the three months ended December 1, 1999 and 1998 was
$10,590 and $9,500, respectively.
[6] 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.
[7] Stock Options
There was no stock option activity during the quarter ended December 31, 1999.
A summary of stock option activity is as follows:
Weighted Average
Number of Exercise Price
Options Common Stock
Outstanding and Exercisable on April 1, 1997 58,333 $7.20
Granted 1,550,000 $0.46
Exercised -- --
Forfeited/Expired -- --
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Outstanding and Exercisable on March 31, 1998
Forward 1,608,333 $0.48
Weighted Average
Common Exercise Price
Stock Common Stock
Outstanding and Exercisable on March 31, 1998
Forwarded 1,608,000 $0.48
Granted 1,600,000 0.75
Exercised -- --
Forfeited/Expired 750,000 0.10
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Outstanding on December 31, 1999 $2,458,333 $0.40
========== =====
Exercisable on December 31, 1999 $2,458,333 $0.13
========== =====
The following table summarizes information about stock options outstanding at
December 31, 1998. The options issued to consultants to purchase 200,000 shares
of common stock at an exercise price of $0.875 have a weighted average remaining
contractual life of 6.5 years. All other options expire in 7 to 7.5 years.
9
<PAGE>
Common Stock
Exercise Price Shares
$ 0.16 850,000
$ 0.50 300,000
$ 0.875 500,000
$ 7.20 58,333
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Total 1,708,333
[8] Note Payable
Notes payable as of December 31, 1999 equals $2,084,349 and are as follows:
September 30,
2000 1,286,901
2001 788,965
2002 6,392
2003 2,091
Thereafter --
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Total $2,084,349
==========
[9] 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.
10
<PAGE>
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.
[10] 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
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.
[11] 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.
11
<PAGE>
[B] Loan Guarantee/Pledged Inventory - The Company purchased the Post Road brand
of ales from Old Marlborough Brewing Co., subject to a lien held by Fleet Bank
on the purchased assets which secured a loan made to the former owner of the
Post Road brand by Fleet Bank. At the time the Company sold the Post Road brand,
it negotiated with Fleet Bank to remove the lien in order to accomplish the
sale, but was required to guarantee payment of the outstanding balance of the
former owner's loan and to secure the guarantee with a lien on the Company's
assets.
[12] 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
December 31, 1999.
For the Year Ending
December 31, Amount
----------------------------------------------------------------
2000 $120,250
2001 120,250
2002 120,250
2003 60,125
--------
Total minimum lease payments $420,875
========
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.
[13] Subsequent Events
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).
Equity
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.
In March, 2000, in consideration of $165,000, the Company sold five
investors an aggregate of 165,000 shares of Common Stock.
12
<PAGE>
Technology Agreements
In October, 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
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.
. . . . . . . . . . . . . . . . .
13
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Item 2:
PHLO CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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For the three months ended December 31, 1999 compared with the three months
ended December 31, 1998.
The following discussion of the Company's financial condition as of December 31,
1999 and results of operations for the nine months ended December 31, 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
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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.
14
<PAGE>
RESULTS OF OPERATIONS
The Company had a net loss of $1,389,480 for the nine months ended December 31,
1999 as compared to a net loss of $$1,742,605 for the nine months ended December
31, 1998. The loss from operations for the nine months ended December 31, 1999
is primarily slotting fees and the cost of competing in the marketplace while
building McCoy's. The Company is focusing on ways to increase its sales without
significantly increasing its selling expenses.
The net sales for the Company for the nine months ended December 31, 1999 were
$1,279,856 as compared to $857,275 for the nine months ended December 31, 1998.
This increase is due to the Company's plan to emphasis supermarket chain sales.
The Company had a gross profit of $356,795 or 27.8%% as compared to a gross
profit of $8,247 or 1% for the nine months ended December 31, 1999 and 1998,
respectively. The increase in the gross profit is attributable to the continued
supermarket activity as well as a higher gross margin.
The Company's selling, general and administrative expenses for the nine months
ended December 31, 1999 and 1998 were $1,746,275 and $1,750,852, 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 December 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 $4,504,405. 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 the steps necessary to operate in the normal course
of business. However there is no asssurance of this, and, if not successful, the
Company would no longer be able to operate as a going concern.
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
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James B. Hovis, President & Chief Executive
Officer
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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