10-Q 1 v026774_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB Quarterly Report Pursuant to Section 13 or 15(d) Of the Securities Exchange Act of 1934 For the quarter ended September 30, 2004 Commission File Number 0-21079 PHLO CORPORATION (Exact name of small business issuer as specified in its charter) Delaware 11-3314168 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6001-21 Argyle Forest Blvd. PMB #117 Jacksonville, Florida 32244-5705 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (973) 691-9012 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 | | No |X| The number of shares outstanding of the issuer's common stock as of September 30, 2005, is 321,110,073. PHLO CORPORATION AND SUBSIDIARIES Quarterly Report on Form 10-QSB for the Quarterly Period Ending September 30, 2004 Table of Contents Page to Page ------------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheet as of September 30, 2004 (Unaudited) 3 Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2004 and 2003 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2004 and 2003 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2. Managements' Discussion and Analysis or Plan of Operation 9 Item 3. Controls and Procedures 10 PART II. OTHER INFORMATION 10 Item 1. Legal Proceedings 10 Item 2. Changes in Securities 11 Item 3. Exhibits 11 Signature Certifications 2 PHLO CORPORATION AND SUBSIDARIES CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) September 30, 2004

The accompanying notes are an integral part of these financial statements. 3 PHLO CORPORATION AND SUBSIDARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three and Six Months Ended September 30, 2004 and 2003

The accompanying notes are an integral part of these financial statements. 4 PHLO CORPORATION AND SUBSIDARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited) For the Three Months Ended September 30, 2004 and 2003

The accompanying notes are an integral part of these financial statements. 5 PHLO CORPORATION AND SUBSIDARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 (Unaudited) NOTE A - SUMMARY OF ACCOUNTING POLICIES General The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the financial statements not misleading have been included. Results for the six months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2005. For further information refer to the consolidated financial statements and footnotes thereto included in the Phlo Corporation and Subsidiaries' annual report on Form 10-KSB for the year ended March 31, 2004. Business and Basis of Presentation Phlo Corporation, a Delaware corporation incorporated in December 1995, and its affiliates (hereinafter collectively referred to as the "Company") is a manufacturer of beverages and liquids containing patented and patent-pending biotechnologies. The Company sells its products to distributors, which offer the products for sale in high volume chain stores, such as supermarkets and drug and convenience stores. Additionally, the Company develops liquids with patented or patent-pending payloads for the U.S. Military, agencies of the United Nations, and humanitarian organizations. The Company is positioned as a biotechnology company which is using high volume distribution networks to commercialize 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 liquid formulations and beverage systems. The Company is focusing its technology acquisition efforts on those technologies related to preventing or ameliorating cancer, reducing the effects of aging, and enhancing cognition and personal performance. The Company is currently conducting discussions with major companies related to the distribution of the Company's products or joint ventures pertaining to the Company's technology and products related thereto. The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries and affiliates. Reclassifications Certain reclassifications have been made in prior period's financial statements to conform to classifications used in the current period. NOTE B - REVOLVING CREDIT FACILITY In June, 2002, the Company closed a revolving credit facility with a one-year term which provides for advances of up to a maximum principal amount of $250,000, at the option of the lender, at an interest rate of 10% per annum, with each advance payable within 30 days. An initial advance was made in the amount of $150,000. In February 2003, a second advance was made in the amount of $70,000. In June 2004, a third advance was made in the amount of $100,000. Repayment of advances under the facility are secured by the Company's assets and are guaranteed by two officers of the Company. In connection with securing the repayment of the three advances under this facility, the Company issued a total of 13,700,000 shares of Common Stock. In connection with the third advance, the Company granted to the Lender the option, after the expiration of a period of one year from such advance, to take title to 1,785,715 shares (or any portion thereof) of such stock collateral. Also in June 2004, the Company issued 3,500,000 shares of Common Stock in exchange for the conversion by the Lender of $46,000 of accrued interest and the waiver of the $150,000 financing fee owed in connection with a prior advance. Additionally, 595,000 collateral shares, valued at $65,450 were used to pay down $48,045 of debt and $11,345 of related accrued interest. Other financing expense of $6,060 was charged to operations in connection with this transaction. The Company did not repay the advances by the maturity date. As a result thereof, the lender has exercised its rights provided by the loan documents to sell shares of stock that were previously issued and pledged as collateral for the repayment of advances pursuant to the credit facility. During the quarter ended September 30, 2004, 873,500 collateral shares, valued at $69,880 were used to pay down $20,000 of debt and $1,861 of related accrued interest. Other financing expense of $48,019 was charged to operations in connection with this transaction. As of September 30, 2004, the sale of collateral has reduced the outstanding principal to $80,000. 6 PHLO CORPORATION AND SUBSIDARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 (Unaudited) NOTE C - CAPITAL STOCK The Company has authorized 15,000,000 shares of preferred stock, with 500,000 shares designated as Series A convertible preferred stock with par value of $.0001 per share; 500,000 shares designated as Series B non-convertible preferred stock with par value of $0.0001 per share; and 3,000,000 shares designated as Series C convertible preferred stock with par value of $.0001 per share. The Company also has authorized 250,000,000 shares of common stock with par value $0.0001 per share. As of September 30, 2004, the Company has 500,000 shares of Series A convertible preferred stock, 1,302,304 shares of Series C convertible preferred stock, and 208,858,912 shares of common stock issued and outstanding. The Company has no Series B non-convertible preferred stock issued and outstanding at September 30, 2004. In April, 2004, in consideration of $240,973, the Company agreed to issue 2,190,665 shares of stock. The common shares subscribed have not been issued as of September 30, 2004. In June, 2004, in connection with a financing and in consideration of guarantees and supplying of shares of stock as collateral in connection with financings, the Company issued 1,030,303 shares of Common Stock to officers of the Company. These shares were valued at $61,818, which approximated the fair value of the common stock at the time the shares were issued. In the quarter ended June 30, 2004, in consideration of $300,000, the Company agreed to issue 5,000,000 shares of Common Stock, 4,100,000 shares of which have been issued as of September 30, 2004. In September 2004, the Company issued 3,100,000 shares of Common Stock to a shareholder upon his conversion of 31,000 shares of Series C Convertible Preferred Stock. Subsequent to the fiscal quarter ended September 30, 2004, the Company's Board of Directors voted to amend the Company's articles of incorporation to increase the number of authorized shares of Common Stock from 350,000,000 to 600,000,000. The board of directors' vote shall be followed by shareholder approval of such increase by shareholders holding the majority of the shares entitled to vote on such matter through shareholder written consent and the issuance of an Information Statement to shareholders to inform them of the amendment to the Company's articles of incorporation. NOTE D - PREPAID EXPENSE In the fiscal year ended March 31, 2004, the Company entered into an agreement with a company which is providing services to the Company related to the enhancement of the Company's biotechnologies, including the supervision of further research and development, protocols, and testing pertaining to the enhancement and protection of the intellectual property related thereto and the commercialization, production, marketing and distribution of the products containing such biotechnologies. In conjunction therewith, the Company made payments thereto of $400,000 during the year ended March 31, 2004 and an additional $398,300 during the quarter ended June 30, 2004 to such company, to be used for the activities set forth above. The Company has accounted for the payment as a prepaid expense at September 30, 2004. Additionally, the Company agreed to pay to the other party two percent of net revenues generated by the sale of products with respect to which the company provided services under the agreement during the term of the agreement, subject to certain limitations set forth therein. During the six and three month periods ended September 30, 2004, the Company charged $555,492 and $398,515, respectively, of this prepayment to operations to reflect the services rendered and the payment of overhead related to the scientific development of the Company's technology. NOTE E - COMMITMENTS AND CONTINGENCIES Litigation The Securities and Exchange Commission instituted public administrative and cease and desist proceedings against Phlo Corporation ("Phlo"), its President James B. Hovis, and its Executive Vice President, Anne P. Hovis, on April 21, 2005, alleging violations by Phlo Corporation related to certain transfer agent regulations and related to the late filing of its required periodic reports. In the quarter ended June 30, 2004, litigation was commenced against the Company based on the liability of one of its affiliates. The Company vigorously defended the action, but, in the fiscal quarter ended September 30, 2004, a judge turned over $103,431 of the Company to the creditor. The Company's counsel believed that the judge exceeded his authority under law in ruling against the Company on a procedural basis prior to a decision through trial on the merits. The Company has filed a complaint against the judge for his actions and intends to seek disciplinary action against the creditor's lawyers. 7 PHLO CORPORATION AND SUBSIDARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004 (Unaudited) NOTE F - SUBSEQUENT EVENTS Financing In January, 2005, an additional advance was made under the Company's revolving credit facility in the amount of $40,000. In conjunction therewith, the Company issued 3,500,000 shares of Common Stock which serve as collateral to secure repayment of advances made to the Company under the facility and the meeting of all obligations of the Company under the facility loan documents. Also in connection with such advance, the Company granted to the Lender the option, after the expiration of a period of one year from such advance, to take title to 1,212,121 shares (or any portion thereof) of such stock collateral. In April, 2005, an additional advance was authorized under the Company's revolving credit facility of up to $150,000, $130,000 of which has been advanced as of the date of this filing. In conjunction therewith, the Company issued 13,700,000 shares of Common Stock which serve to collateralize the repayment of advances made to the Company under the facility and the meeting of all obligations of the Company under the facility loan documents. Also in connection with such advance, the Company granted to the Lender the option, after the expiration of a period of one year from such advance, to take title to 4,600,000 shares (or any portion thereof) of such stock collateral; agreed to deliver to the Lender, until such advance has been repaid, net proceeds received by the Company generated by the sale of its rehydration beverage of up to $50,000; and agreed to increase the interest rate with respect to the current advance and the outstanding principal balance on prior advances from 10% to 12%. Equity In October 2004, in consideration of $50,000, the Company agreed to issue 1,515,152 shares of Common Stock, 333,333 of which have been issued to date. In the quarter ended March 31, 2005, in connection with a financing and in consideration of guarantees and supplying of shares of stock as collateral in connection with financings, the Company issued 1,803,030 shares of Common Stock to officers of the Company. In the quarter ended March 31, 2005, the Company issued 7,575,758 shares of Common Stock in connection with the provision of services related to the further development and enhancement of its intellectual property. In the quarter ended March 31, 2005, in consideration of $60,000, the Company issued 5,000,000 shares of Common Stock (4,700,000 which have been issued to date) and agreed to issue warrants to purchase 250,000 shares of Common Stock at an exercise price per share of $0.02. In April 2005, the Company issued 454,545 shares of Common Stock previously subscribed. In April 2005 in consideration for extended payment terms relating to a Company obligation, the Company agreed to extend the expiration date of a warrant granted the recipient from March 2005 to 2007. Additionally, the numbers of shares of the Company's common stock purchasable pursuant to the warrant were increased from 200,000 shares to 750,000 shares and a decrease in the warrant exercise price from $0.05 to $0.03. In the quarter ending June 30, 2005, in connection with a financing and in consideration of guarantees and supplying of shares of stock as collateral in connection with financings, the Company issued 6,852,055 shares of Common Stock to officers of the Company. In May and June, 2005, in consideration of $67,500, the Company agreed to issue 7,500,000 shares of Common Stock, all of which have been issued to date. In June, 2005, the Company issued 6,060,606 shares of the Common Stock in connection with an existing agreement. In August, 2005, in conjunction with a settlement agreement providing for the payment to the Company of up to $100,000, and the provision of services to the Company, the Company issued 12,121,212 shares of Common Stock. In the quarter ended September 30, 2005, in consideration of $230,500, the Company issued 51,006,925 shares of Common Stock. 8 Item 2. PHLO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION SAFE HARBOR STATEMENT The Company has made, and may continue to make, various forward-looking statements with respect to its financial position, business strategy, and plans and objectives of management. Such forward-looking statements are identified by the use of forward-looking phrases such as "anticipates", "intends", "expects", "plans", "believe", "estimates", or words or phrases of similar import. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and the statements looking forward beyond 2004 are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from those anticipated by the forward-looking statements. The Company's forward-looking statements represent its judgment only on the dates such statements are made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed, or unanticipated events or circumstances. OVERVIEW The following discussion of the Company's financial condition as of September 30, 2004 and results of operations for the six months ended September 30, 2004 and 2003 includes Phlo Corporation and its affiliates (collectively, the "Company") and should be read in conjunction with the condensed consolidated financial statements and notes appearing elsewhere in this 10-QSB. RECENT DEVELOPMENTS Subsequent to the fiscal quarter ended September 30, 2004, the Company's Board of Directors voted to amend the Company's articles of incorporation to increase the number of authorized shares of Common Stock from 350,000,000 to 600,000,000. The board of directors' vote shall be followed by shareholder approval of such increase by shareholders holding the majority of the shares entitled to vote on such matter through shareholder written consent and the issuance of an Information Statement to shareholders to inform them of the amendment to the Company's articles of incorporation. The Company was granted a patent on its VEP/PPC technology. The Company has licensed VEP/PPC on an exclusive basis, worldwide, for all uses including nutraceutical, biotechnological, and pharmaceutical. The VEP/PPC technology has been shown to be effective in repairing cell damage in all human tissues and in protecting cells from damage related to oxidative stress and exposure to toxins. Cell injury related to oxidative stress is associated with aging, cancer, emphysema, heart disease, Alzheimer's disease, alcoholic liver disease, and drug-induced tissue injury. The Company believes that, with clinical trials, VEP/PPC may have applications for treating such diseases. During the fiscal quarter ended September 30, 2004, the Company announced that its Aquis Rapid Response Rehydration beverages were available for sale to the general public through MadLax Sports, the largest lacrosse specialty store in the Washington, DC area. MadLax continues to sell Aquis through its website (madlax.com) and in its three stores located in McLean and Alexandria, Virginia and Olney, Maryland. During the fiscal quarter ended June 30, 2003, further tests were completed by some of the world's top scientists in the rehydration field confirming that Aquis is superior to current solutions formulated in accordance with the World Health Organization's most advanced specifications. Tests were conducted by a team of scientists at the International Center for Diarrheal Disease Research, Bangladesh ("ICDDRB") and demonstrate that the use of Aquis results in superior and faster absorption of both electrolytes and water as compared with the use of other leading oral rehydration solutions in the world, including those based on the World Health Organization's most advanced specifications. These results have been presented at two of the most highly regarded conferences in the world in the field of rehydration, the American Gastroenterological Association meeting in New Orleans, May 15, 2004 and the 10th Asian Conference on Diarrhoeal Diseases and Nutrition (10th ASCODD) in Dhaka, Bangladesh (December, 7-9 2003). Additionally, Aquis has a superior taste which is conducive to increased fluid intake by those drinking it. The ICDDRB pioneered the discovery of oral rehydration solutions and recently received the Gates Award for Global Health in recognition of this contribution. RESULTS OF OPERATIONS The Company had no revenues during the three and six month periods ended September 30, 2004, as compared to $327,704 and $422,449 in revenues for the three and six month periods ended September 30, 2003, respectively. There was no cost of sales for the three and six month periods ended September 30, 2004, and for the three and six month periods ended September 30, 2003, as the revenue generated during the three and six month periods ended September 30, 2003, resulted from the receipt of product distribution rights fees rather than from product sales. The selling, general and administrative expenses for the three and six month periods ended September 30, 2004 were $601,572 and $881,893, respectively, as compared to $458,480 and $705,343 for the comparable three and six month periods during 2003. The Company incurred research and development costs of $18,979 and $127,596, respectively, during the three and six month periods ended September 30, 2004, with none for the comparable three and six month periods during 2003. 9 The Company's loss from operations was $620,551 and $1,009,489, respectively, for the three and six month periods ended September 30, 2004, as compared with an operating loss of $130,776 and $282,894 for the comparable three and six month periods ended September 30, 2003. However, during the period ended September 30, 2004, the Company conducted increased activities related to its technological base and focused its efforts on developing its marketing plan and establishing key marketing relationships with respect to its Aquis Rapid Response Rehydration beverages. The Company's proprietary biotechnology base (including its commercialization and manufacturing capabilities related thereto), the products generated therefrom, and the access to major markets as a result thereof represent the core of the Company's business plan, which emphasizes the building of major, long-term fundamental value. Although the process of executing this business plan requires significant time, the Company should be able to produce significantly greater positive operating results and greater shareholder value than would otherwise be possible. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital deficit increased $243,846 during the six month period ended September 30, 2004, to $3,476,071. In addition, the Company's Stockholders' Deficiency increased from $3,613,191 to $3,840,259 during the same six-month period. During the fiscal year ending March 31, 2005 and beyond, the Company is taking steps to reduce or eliminate the Stockholders' Deficiency and to create a positive working capital position. The Company believes it is more likely than in prior years to raise substantial equity funds as a result of its prospects for national and global distribution of its products and joint venture activities with major international entities, the existence now of three product lines containing commercialized biotechnology, the prospects for numerous additional products based on the Company's biotechnology foundation, and significantly increased scientific and commercialization capabilities. Finally, the Company has taken steps to convert certain existing debts into equity and will continue to pursue these steps. While the Company has raised sufficient capital to meet its operating requirements in the past, additional financing is required in order to meet such operating requirements in the future. The Company can give no assurances that the necessary funding will be completed or, if completed, on terms favorable to the Company. There can be no assurance that management's plans will be realized and therefore, until the present conditions referred to above are either removed or substantially improved, there is substantial doubt about the Company's ability to continue as a going concern. The Company's independent certified public accountants have stated in their report included in the Company's March 31, 2004 Form 10-KSB, that the Company has incurred operating losses in the last two years, and that the Company is dependent upon management's ability to develop profitable operations. These factors among others may raise substantial doubt about the Company's ability to continue as a going concern. Impact of Inflation The Company does not believe that inflation has had a material adverse effect on sales or income during the past periods. Future increases in supplies or other operating costs could adversely affect the Company's operations; however, the Company believes it could increase prices to offset increases in costs of goods sold or other operating costs. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements. Item 3. CONTROLS AND PROCEDURES Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that the Company files under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Evaluation of Disclosure and Controls and Procedures. As of the end of the period covered by this Quarterly Report, the Company conducted an evaluation, under the supervision and with the participation of its chief executive officer and chief financial officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act). Based on this evaluation, the Company's chief executive officer and chief financial officer concluded that its disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. 10 Changes in Internal Controls Over Financial Reporting. There was no change in the Company's internal controls, which are included within disclosure controls and procedures, during its most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls. PART II ITEM 1. LEGAL PROCEEDINGS 1) The Securities and Exchange Commission instituted public administrative and cease and desist proceedings against Phlo Corporation ("Phlo"), its President James B. Hovis, and its Executive Vice President, Anne P. Hovis, on April 21, 2005, alleging violations by Phlo Corporation related to certain transfer agent regulations and related to the late filing of its required periodic reports. More specifically, the Division of Enforcement has alleged the violation by Phlo of Sections 17A(d)(1) and 17(b)(1) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rules 17Ad-2 (which requires transfer agents to turnaround within three business days of receipt at least 90% of all routine items received for transfer during a month) and 17Ad-5 (which requires transfer agents to respond within five business days to any written inquiry regarding the status of items presented for transfer within the preceding six months) thereunder. The Division of Enforcement also alleged that Anne Hovis aided and abetted such violations. The Division also alleges that Phlo violated Section 13(a) of the Exchange Act, and Rules 13a-1 and 13a-13 thereunder (which require the filing of annual and quarterly reports with the SEC), and alleged that James Hovis aided and abetted such violations. The Company disputes all allegations made by the Division of Enforcement (except for the fact that Phlo did not timely make certain periodic filings) and is vigorously defending the SEC action. The Company expects to be completely current in its financial reporting prior to the issuance of an initial decision on this matter. The Company has also provided to the SEC evidence of the existence of extraordinary circumstances related to its former outside auditing firms resulting in Phlo not being able to maintain timely financial filings. Finally, the Company can make no assurances with respect to the outcome of this matter. 2) In the quarter ended September 30, 2005, litigation was commenced against the Company based on the liability of one of its affiliates. The Company vigorously defended the action, but, subsequent to the fiscal quarter, a judge turned over $103,431 of the Company to the creditor. The Company's counsel believed that the judge exceeded his authority under law in ruling against the Company on a procedural basis prior to a decision through trial on the merits. The Company has filed a complaint against the judge for his actions and intends to seek disciplinary action against the creditor's lawyers. The Company is a party to certain other legal matters arising in the ordinary course of business. Management believes the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations. ITEM 2. CHANGES IN SECURITIES During the period covered by this report, the Company issued shares of its common stock as follows: In September 2004, the Company issued 3,100,000 shares of Common Stock to a shareholder upon his conversion of 31,000 shares of Series C Convertible Preferred Stock. ITEM 3. EXHIBITS Signatures Pursuant to the requirements of the Securities and 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 October 5, 2005 By: /s/ James B. Hovis ------------------------------------- James B. Hovis President and Chief Executive Officer 13

PHLO CORP 10-Q