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 Quarter Ended: SEPTEMBER 30, 2004
Commission File Number: 000-26415
EVOLVE ONE, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3876100
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1000 CLINT MOORE ROAD, SUITE 101, BOCA RATON, FL 33487
(Address of principal executive offices)
(561) 988-0819
(Issuer's telephone number)
6413 CONGRESS AVENUE, SUITE 230, BOCA RATON, FL 33487
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 registrant's common stock, par value $.00001
per share, as of September 30, 2004 was 3,096,304.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X].
EVOLVE ONE, INC. AND SUBSIDIARIES
INDEX
Page
No.
Part I. Financial Information (unaudited)
Item 1. Condensed Consolidated:
Balance Sheet - September 30, 2004 ........................... 3
Statements of Operations-
Three and Nine Months Ended September 30, 2004 and 2003 ...... 4
Statement of Stockholders' Equity -
Nine Months Ended September 30, 2004 ......................... 5
Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 ................ 6-7
Notes to Condensed Consolidated Financial Statements ......... 8-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 18-21
Item 3. Controls and Procedures ........................................ 21
Part II. Other Information
Item 1. Legal Proceedings .............................................. 22
Item 6. Exhibits and Reports on 8-K .................................... 22
Signatures .............................................................. 23
2
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................................... $ 475,435
Accounts receivable ........................................... 6,403
Marketable equity securities .................................. 88,735
Inventory ..................................................... 114,075
Other current assets .......................................... 680
-----------
TOTAL CURRENT ASSETS ...................................... 685,328
PROPERTY AND EQUIPMENT, NET ..................................... 153,779
MARKETABLE EQUITY SECURITIES .................................... 121,180
NOTE RECEIVABLE ................................................. 10,000
INTANGIBLES ..................................................... 6,500
OTHER ASSETS .................................................... 17,667
-----------
TOTAL ASSETS .............................................. $ 994,454
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .............................................. $ 38,779
Accrued liabilities ........................................... 8
Accrued salaries payable ...................................... 422,449
-----------
Total current liabilities ................................. 461,236
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, $.0001 par value;
authorized 10,000,000 shares; outstanding -0- shares ........ -
Common stock, $.00001 par value. Authorized 1,000,000,000
shares; issued and outstanding 3,096,304 shares ............. 31
Paid-in capital ............................................... 6,730,343
Accumulated deficit ........................................... (6,048,052)
Accumulated other comprehensive (loss) ........................ (149,104)
-----------
Total stockholders' equity ................................ 533,218
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................ $ 994,454
===========
See accompanying notes to condensed consolidated financial statements.
3
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---- ---- ---- ----
SALES AND REVENUES .................................... $ - $ 319,590 $ 494,953 $ 1,036,417
COST OF SALES ......................................... - 197,024 324,467 654,686
----------- ----------- ----------- -----------
GROSS PROFIT .......................................... - 122,566 170,486 381,731
Selling, general and administrative expense ........... 273,584 332,792 971,127 1,033,150
----------- ----------- ----------- -----------
Loss from operations ................................ (273,584) (210,226) (800,641) (651,419)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense .................................... - - - (59)
(Loss) from sale of marketable equity securities .... (5,024) (448,944) (54,074) (476,444)
Investment income ................................... 1 9,446 13,664 11,139
Unrealized (loss) gain on marketable securities ..... (793) 1,206 (1,487) -
----------- ----------- ----------- -----------
Total other income (expense) ...................... (5,816) (438,292) (41,897) (465,364)
----------- ----------- ----------- -----------
NET LOSS .............................................. $ (279,400) $ (648,518) $ (842,538) $(1,116,783)
=========== =========== =========== ===========
NET LOSS PER SHARE
BASIC ............................................... $ (0.09) $ (0.21) $ (0.27) $ (0.36)
=========== =========== =========== ===========
DILUTED ............................................. $ (0.09) $ (0.21) $ (0.27) $ (0.36)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC ............................................... 3,096,304 3,096,304 3,096,304 3,096,304
=========== =========== =========== ===========
DILUTED ............................................. 3,096,304 3,096,304 3,096,304 3,096,304
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
4
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
Accumulated
Other
Common Stock Paid-in Accumulated Comprehensive
Shares Par Value Capital Deficit Income (loss) Total
--------- --------- ---------- ----------- ------------- -----------
BALANCE, January 1, 2004 .............. 3,096,304 $31 $6,730,343 $(5,205,514) $(262,439) $ 1,262,421
-----------
Comprehensive income (loss):
Unrealized gain on available-
for-sale securities, net ........ - - - - 113,335 113,335
Net loss .......................... - - - (842,538) - (842,538)
-----------
Total comprehensive income (loss) - - - - - (729,203)
--------- --- ---------- ----------- --------- -----------
BALANCE, September 30, 2004 ........... 3,096,304 $31 $6,730,343 $(6,048,052) $(149,104) $ 533,218
========= === ========== =========== ========= ===========
See accompanying notes to condensed consolidated financial statements.
5
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) ........................................... $(842,538) $(1,116,783)
Adjustments to reconcile net (loss) to net
cash (used in) operating activities:
Depreciation and amortization ...................... 72,290 80,152
Loss on marketable equity securities ............... 54,074 476,444
Unrealized loss on marketable equity securities .... 1,487 -
Decrease (increase) in assets:
Accounts receivable .............................. 19,086 22,886
Inventory ........................................ 241,471 (94,453)
Note receivable .................................. - (10,000)
Other assets ..................................... (1,059) 68,063
Increase (decrease) in liabilities:
Accounts payable ................................. (46,614) (50,347)
Other accrued liabilities ........................ (1,816) -
Accrued salaries ................................. 192,449 95,907
--------- -----------
Net cash (used in) operating activities .............. (311,170) (528,131)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ............................... (23,673) (8,411)
Acquisition of intangibles ......................... (6,500) -
Loan receivable - Onspan Networking, Inc., Net ..... 675,000 (675,000)
Interest receivable - Onspan Networking, Inc. ...... 17,940 (9,433)
Purchase of marketable equity securities ........... - (900)
Proceeds from sale of marketable equity securities 4,926 43,206
--------- -----------
Net cash provided by (used in) investing activities .. 667,693 (650,538)
--------- -----------
CONTINUED
See accompanying notes to condensed consolidated financial statements.
6
EVOLVE ONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(CONTINUED)
2004 2003
---- ----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . 356,523 (1,178,669)
CASH AND CASH EQUIVALENTS, beginning of period ....... 118,912 1,370,983
--------- -----------
CASH AND CASH EQUIVALENTS, end of period ............. $ 475,435 $ 192,314
========= ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for:
Interest ........................................... $ - $ 59
========= ===========
See accompanying notes to condensed consolidated financial statements.
7
EVOLVE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Evolve One, Inc. (the "Company" or "EONE") is a diversified holding company that
develops and operates Internet and direct retail marketing companies. The EONE
Group includes wholly owned subsidiaries, StogiesOnline.com, Inc. ("Stogies")
(www.CigarCigar.com), A1Discount Perfume, Inc. (www.A1DiscountProducts.com),
Auctionstore.com Inc. ("Auctionstore") (www.Auctionstore.com), and International
Internet Venture I, LLC ("Ventures"). EONE, through its Ventures division, owns
an equity interest in several companies, some of which are classified as trading
securities and some of which are classified as available-for-sale securities.
EONE was incorporated in Delaware on June 21, 1994.
Stogies became an online distributor and retailer of brand name premium cigars
within the United States on November 18, 1998. Stogies' products consist of
premium cigars, factory brand name seconds and mass market cigars, which are
distributed online to retail and wholesale customers.
On September 28, 2001, the Company created a new Subsidiary named
A1DiscountPerfume Inc. and in October 2001, launched a new e-commerce site
specializing in men's and women's fragrances. The site named
A1DiscountProducts.com is located at http://www.A1DiscountProducts.com. The site
is a competitor of other discount as well as full price online retailers of
Perfume and Cologne.
On July 22, 2004 the Company created a new wholly owned subsidiary,
Auctionstore.com a Florida Corporation. The Company is in the preliminary stages
of finalizing a business plan relating to Internet sales.
The financial statements included in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments (consisting only of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation. These financial statements have not been audited.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations for
interim reporting. The Company believes that the disclosures contained herein
are adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report for the year ended
December 31, 2003, which is included in the Company's Form 10-KSB for the year
ended December 31, 2003. The financial data for the interim periods presented
may not necessarily reflect the results to be anticipated for the complete year.
Certain reclassifications of the amounts presented for the comparative period
have been made to conform to the current presentation.
8
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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 reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is computed by dividing net earnings (loss)
by the weighted-average number of shares outstanding. Diluted net earnings
(loss) per share includes the dilutive effect of stock options. The calculation
of diluted weighted average shares outstanding for the quarters ending September
30, 2004 and 2003 excludes 24,000 and 16,000 common shares respectively,
issuable pursuant to outstanding options. These shares were excluded because
their effect was anti-dilutive.
STOCK-BASED COMPENSATION
The Company granted stock options to directors and employees that are more fully
described in Note F. The Company accounts for its stock options using the
intrinsic value method under Accounting Principles Board Opinion ("APB") No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
The proforma effect of the compensation expense would not be material in
computing the net (loss) and (loss) per share if the Company had applied the
fair value recognition provisions of Statements on Financial Accounting
Standards ("SFAS") No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," and SFAS
No. 148 "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE."
STOCK SPLIT
On January 31, 2003, the Company issued a 250 to 1 reverse stock split. All
share and per share amounts have been retroactively restated to reflect the
reverse stock split.
B. MARKETABLE EQUITY SECURITIES
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities,"
requires that all applicable investments be classified as trading securities,
available-for-sale securities or held-to-maturity securities. The Company has
classified certain of its investments as trading securities which are reported
at fair value, which is defined to be the last closing price for the listed
securities. The unrealized gains and losses which the Company recognizes from
its trading securities, are included in earnings. The Company also has
investments classified as available-for-sale, which are also required to be
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity (net of the effect
of income taxes). Fair value is also defined to be the last closing price for
the listed security. Due to the size of certain of the Company's investments and
their limited trading volume, there can be no assurance that the Company will
realize the value which is required to be used by SFAS No. 115.
9
The amortized cost of equity securities as shown in the accompanying balance
sheet and their estimated market value at September 30, 2004 are as follows:
2004
----
Trading securities:
Cost ................................................... $ 10,572
Unrealized (loss) ...................................... (10,407)
---------
165
---------
Available-for-sale securities:
Cost ................................................... 358,854
Unrealized (loss) ...................................... (149,104)
---------
209,750
---------
209,915
Marketable equity securities classified as current .............. 88,735
---------
Marketable equity securities classified as non-current .......... $ 121,180
=========
(Losses) from trading securities that were included in earnings for the nine
months ended September 30, 2004 and 2003 were as follows:
2004 2003
---- ----
Realized (loss) .............................. $ (54,074) $(476,444)
========= =========
Unrealized (loss) ............................ $ (1,487) $ -
========= =========
The change in unrealized gains (losses) from available-for-sale securities
included as a component of equity for the nine months ended September 30, 2004
and 2003 were as follows:
2004 2003
---- ----
Net unrealized gain .......................... $ 113,335 $ 113,144
Decrease in deferred tax asset ............... 42,600 42,500
Allowance deferred taxes ..................... (42,600) (42,500)
--------- ---------
Unrealized gain .............................. $ 113,335 $ 113,144
========= =========
10
The Company's investment in available-for-sale securities includes 10,000,000
shares which are not registered of SGD Holdings, Ltd., formerly known as
Goldonline International, Inc. ("SGD"), a holding company primarily engaged in
acquiring and developing jewelry related businesses, with a cost of $58,854 and
a closing value on September 30, 2004 of $200,000 ($.02 per share). The
Company's investment represents approximately 10.4% of the outstanding stock of
SGD and accordingly the Company is subject to certain restrictions on the number
of shares it can sell. There can be no assurance that the company will realize
the calculated carrying value of the securities. The Company classifies
6,059,000 shares of SGD as non-current and 3,941,000 shares of SGD as current,
which is approximately the maximum number of shares it could sell within the
next twelve months.
During the latter part of 2002 the Company became aware, based upon Securities
and Exchange Commission (SEC) filings by SGD, that SGD had taken the position
that the Company was the holder of pre-split shares (SGD had a 6 for 1 reverse
split) and rather than the Company owning 10 Million shares of SGD the Company
was the holder of only 1,666,666 shares of SGD. It is the Company's position
that the number of shares that the Company held of SGD as of September 30, 2004
and 2003 is 10 Million. This is based upon purchase and sale arrangements
between the Company and SGD wherein the Company was sold, issued and receive 10
Million post split shares of SGD from SGD (formerly known as GoldOnline.com,
Inc.). The shares issued and delivered to the Company by SGD reflected the split
and the new split CUSIP change. On November 11, 2000, following the Company's
receipt of these shares, the Company filed a Form 13D, with the SEC, reflecting
the ownership of these shares. The Form 13D had been prepared by SGD's Counsel.
SGD filed quarterly and annual financial reports with the SEC reflecting the
ownership of 10 Million shares by the Company. Should it ultimately be
determined that the shares should be pre-split shares then our investment in
SGD, as of September 30, 2004, rather then being included in the accompanying
balance sheet as $200,000 (current $78,820; long-term $121,180) might be reduced
depending upon the impact of the share price differential on the market price of
the SGD shares and the reduced number of shares that the Company would be
considered as holding.
C. INTANGIBLES
On June 25, 2004, the company purchased the URL named (www.Auctionstore.com) for
$6,500.
D. OTHER COMPREHENSIVE INCOME (LOSS)
The following represents a reconciliation of other comprehensive income for the
nine months ended September 30, 2004:
Accumulated other comprehensive income (loss) at 12/31/03: $(262,439)
Unrealized gain from marketable equity securities ........ $57,500
Reclassification adjustment .............................. 55,835
-------
Net unrealized gain from marketable equity securities .... 113,335
---------
Net accumulated other comprehensive income (loss) ........ $(149,104)
=========
11
E. INCOME TAXES
The Company recorded no income tax expense for the three and six month periods
ended September 30, 2004 and 2003.
Total income tax expense (benefit) applicable to earnings (loss) before income
taxes is reconciled with the "normally expected" federal income tax expense
(benefit) as follows for the nine months ended September 30, 2004 and 2003:
2004 2003
---- ----
"Normally expected" income tax expense (benefit) ... $ (286,500) $ (379,706)
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal income
tax benefit ...................................... (30,500) (15,704)
Other .............................................. 46,800 19,710
Change in valuation allowance ...................... 270,200 375,700
----------- -----------
$ - $ -
=========== ===========
The deferred income tax liabilities (assets) at September 30, 2004 are comprised
of the following:
CURRENT NONCURRENT
------- ----------
Unrealized loss on trading securities .............. $ (4,000) $ -
Unrealized gain on available-for-sale securities ... (23,700) (32,400)
Officers Salaries .................................. (158,900) -
Net operating loss ................................. (2,178,400) -
Asset basis ........................................ - 700
----------- -----------
Total deferred income tax (assets) .............. (2,365,000) (31,700)
Valuation allowance ............................. 2,365,000 31,700
----------- -----------
Net deferred income tax (assets) ................... $ - $ -
=========== ===========
The Company has provided a valuation allowance on the deferred tax assets
because of uncertainty regarding its realization. The increase in the valuation
account during the nine months ended September 30, 2004 and 2003 was $270,200
and $375,700, respectively. Management utilizes tax planning strategies and
projected future taxable income in assessing these assets.
NOTE F. NOTE RECEIVABLE
The Company issued a demand line of credit with Onspan Networking, Inc a related
party, totaling $1,000,000, under which Onspan Networking, Inc. was allowed to
borrow on an unsecured basis at 5%
12
annually. On June 19, 2003 Onspan Networking, Inc. borrowed $675,000 under this
line of credit. On March 30, 2004, Onspan Networking, Inc. borrowed an
additional $6,000 under this line of credit, for a total of $681,000. On April
5, 2004 Onspan Networking, Inc. repaid the additional $6,000. On May 27, 2004,
Onspan Networking, Inc. repaid the original balance outstanding under the line
of credit, including accrued interest. This line of credit expired upon
repayment on May 27, 2004.
The terms of the demand line of credit state that Onspan Networking, Inc. must
issue options to the Company to purchase common stock equal to 10% of the dollar
amount of the loan advance at an exercise price of $0.10 per share, and options
to purchase common stock equal to 90% of the dollar amount of the loan advance
at the ten trading day average at the time of the draw ($0.30 at June 30, 2003).
On June 19, 2003, Onspan Networking, Inc. granted 67,500 stock options to Evolve
One, Inc. under the revolving note agreement The options have an exercise price
of $.10 per share. Onspan Networking, Inc. also granted on June 19, 2003,
607,500 stock options to Evolve One, Inc. in the same note agreement. These
options have an exercise price of $.30 per share. The Company currently has
excluded these "options" on common stock from assets of the company as the
underlying stock due to market conditions, are not readily convertible to cash.
If conditions are satisfied and the underlying stock becomes marketable, the
"options" would be reclassified as a derivative and recorded at fair value as an
adjustment through current period results of operations.
NOTE G. STOCK OPTIONS
In November 1999, the Board of Directors approved the establishment of Evolve
One, Inc. Stock Option Plan (the "Plan") to provide incentives to attract future
employees and retain existing key employees with the Company. The Company has
reserved 100,000 shares of common stock for the grant of qualified incentive
options or non-qualified options to employees and directors of the Company or
its parents or subsidiaries, and to non-employee directors, consultants and
advisors and other persons who may perform significant services for or on behalf
of the Company under the Plan. These options were granted in accordance with
employment agreements. Prices for incentive stock options must provide for an
exercise price of not less than 100% of the fair market value of the common
stock on the date the options are granted unless the eligible employee owns more
than 10% of the Company's common stock for which the exercise price must be at
least 110% of such fair market value. Non-statutory options must provide for an
exercise price of not less than 85% of the fair market value. The Plan was
approved by the shareholders at a meeting on November 11, 1999.
The Company applied Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for the incentive stock options granted to employees under
its stock option plan in its statements of operations. During 2002, the Company
granted nonqualified options to purchase 8,000 shares of common stock to
directors outside of the Plan. . On January 3, 2003 the Company granted
nonqualified options to purchase an additional 8,000 shares of common stock to
directors outside of the Plan. The additional stock options, expiring January 3,
2008, have en exercise price of $.001 per share and vest immediately. On January
3, 2004 the Company granted nonqualified options to purchase an additional 8,000
shares of common stock to directors outside of the Plan. The additional stock
options, expiring January 3, 2009, have en exercise price of $.131 per share and
vest immediately.
13
A summary of the status of the Company's stock options as of September 30, 2004
and the changes during the nine months ended September 30, 2004 and the year
ended December 31, 2003 is presented below:
WEIGHTED
AVERAGE
SHARES PRICE
------ -----
Beginning Balance, January 1, 2003 ........ 8,000 $.007
Options granted ........................... 8,000 .001
Options exercised ......................... - -
Options cancelled ......................... - -
------ -----
Ending Balance, December 31, 2003 ......... 16,000 $.004
------ -----
Options granted ........................... 8,000 $.131
Options exercised ......................... - -
Options cancelled ......................... - -
------ -----
Ending Balance, September 30, 2004 ........ 24,000 $.046
====== =====
The pro forma compensation expense of the stock options would not be material to
the accompanying financial statements for the current period, if the Company
would have elected SFAS No. 123. The Company used the Black-Scholes option
pricing model to determine the fair value of the grants. The assumptions were
applied as follows:
Risk Free Interest Rate ................................ 3.81%
Expected Dividend Yield ................................ 0%
Expected Option Life ................................... 5 years
Expected Stock Price Volatility ........................ 138%
14
NOTE H. SEGMENT INFORMATION
The Company reports segments based upon the management approach, which
designates the internal reporting that is used by management for making
operating decisions and assessing performance.
For the nine months ended September 30, 2004, the Company operated in the
following segments, none of which have inter-segment revenues:
A1Discount
Ventures Stogies Corporate Perfume Auctionstore Consolidated
-------- ------- --------- ------- ------------ ------------
Revenue .... $ - $ 480,006 $ - $ 14,861 $ 86 $ 494,953
Operating
(Loss) ..... (282) (215,034) (560,420) (10,439) (14,466) (800,641)
Other income
(expense) .. (55,561) - 13,664 - - (41,897)
Net (Loss) . (55,843) (215,034) (546,756) (10,439) (14,466) (842,538)
Assets ..... 213,879 228,688 508,433 29,625 13,829 994,454
For the nine months ended September 30, 2003, the Company operated in the
following segments, none of which have inter-segment revenues:
A1Discount
Ventures Stogies Corporate Perfume Consolidated
-------- ------- --------- ------- ------------
Revenue .... $ - $1,003,122 $ - $ 33,295 $ 1,036,417
Operating
Loss ....... (19,264) (153,554) (462,313) (16,288) (651,419)
Other income
(expense) .. (476,397) (59) 11,092 - (465,364)
Net Loss ... (495,661) (153,613) (451,221) (16,288) (1,116,783)
Assets ..... 252,323 664,729 765,168 59,626 1,741,872
15
The Ventures segment owns an equity interest in several companies, mainly with
Internet operations, and derives its revenue from the net gains and losses
recognized when the investments are sold. In addition, the Ventures segment
recognizes income or loss from the unrealized gains or losses associated with
its trading securities.
The Stogies segment is an online distributor and retailer of brand name premium
cigars within the United States. Stogies revenue includes wholesale sales to
cigar stores as well as, retail sales to internet customers.
The A1Discount segment is an online distributor and retailer of brand name
premium colognes, perfumes and exercise and yoga equipment within the United
States. A1Discount revenue includes retail sales to internet customers.
The Auctionstore segment is in the preliminary stages of finalizing a business
plan relating to internet sales.
Corporate assets consist primarily of cash. Interest expense will be allocated
to the other segments to the extent it exceeds interest income.
NOTE I. LEGAL PRECEEDINGS
SECURITIES ACTIONS:
Lakewood Development(s) Corporation v. Gary Schultheis and Herbert Tabin and
Evolve One, Inc., Civil Action No. 4-03-CV-1224-A, in the United States District
Court of the Northern District of Texas, Ft. Worth Division (Complaint filed on
August 6, 2003). This action asserts claims for violation of Texas securities
law, fraud, breach of contract, and breach of fiduciary duties. The action
sought damages in the amount of $4,125,000, for the plaintiff, the plaintiffs'
attorneys' fees and costs, and certain other relief.
On April 6, 2004, United States District Judge John McBryde of the United States
District Court of the Northern District of Texas, Ft. Worth Division, entered a
final judgment in favor of Evolve One, Inc. and its officers Gary Schultheis and
Herbert Tabin dismissing the case with prejudice. The court also ordered
Lakewood to pay defendants' court costs.
NOTE J. SUBSEQUENT EVENTS
On October 13, 2004, the Company's stock obtained a dual listing on both the
Pink Sheets and the Over-The-Counter Bulletin Board. On November 12, 2004, the
Company's stock became majority traded on the Over-the-Counter Bulletin Board.
As of October 7, 2004, the Company had filed all reports required under Section
13(a) of the Securities Exchanges Act of 1934 to become fully compliant with its
reporting requirements under Section 13(a) of the Securities Exchange Act of
1934.
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On October 15, 2004, the Company issued in a private transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities Act")
in reliance on an exemption provided by Section4(2) of the Securities Act
170,000 shares of common stock of the Company. OnSpan Networking Inc., a related
party where certain officers and directors of the Company are also officers and
directors of Onspan Networking Inc., purchased 150,000 shares of common stock
for $27,000. Martin Scott and Dr. Irwin Horowitz, directors of the Company, each
purchased 10,000 shares of common stock for $1,800.
On October 20, 2004, the following actions were approved by our board of
directors, the Company amended its Certificate of Incorporation to effect a
forward stock split of all of the outstanding shares of our common stock at a
ratio of eight-for-one (8:1) effective on December 3, 2004, and ratify an
amendment to its Stock Option Plan to increase the number of shares available
for issuance under the Plan from 100,000 shares to 1,000,000 shares, which will
be further increased to 8,000,000 shares on the effective date of the forward
stock split. The Company filed a Definitive Information Statement Pursuant to
Section 14(c) of the Securities Exchange Act of 1934 on November 12, 2004.
On October 20, 2004 the Company issued 335,000 stock options (increasing to
2,680,000 options upon stock split) under the Company's Stock Option Plan to
certain officers, employees and service providers of the Company.
On November 12, 2004, the Company named Dr. Irwin Horowitz as a new independent
director and member of the Compensation Committee. Dr. Horowitz was formally a
director with the Company from 1997 to late 2000 who left to pursue other
opportunities. Dr. Horowitz received his podiatry degree from the M.J. Lewi
College of Podiatric Medicine in 1959. Dr. Horowitz is the Chairman of the
Board, Chief Executive Officer and the President of Diversifax Inc. Dr. Horowitz
has been Chairman of the Board and President of IMSG Systems, Inc. and certain
affiliated companies that were acquired by Diversifax. Dr. Horowitz has also
been a Director of the Langer Biomechanics Group, Inc., a public company
primarily engaged in the business of manufacturing and selling orthotic
products.
On November 12, 2004, the Company named Martin Scott as a member of its Audit
Committee and Compensation Committee. Martin Scott who currently is an
independent member of the Company's Board of Directors is a certified public
accountant, he owns a consulting practice that specializes in assisting small
public companies in preparing financial reports.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
We have identified the policies outlined below as critical to our business
operations and an understanding of our results of operations. The listing is not
intended to be a comprehensive list of all of our accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management's judgment in their application. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies, see the Notes to Condensed Consolidated Financial
Statements. Our preparation of the financial statements requires us to make
estimates and assumptions that affect the reported amount of assets and
liabilities, disclosure of contingent assets and liabilities at the date of our
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurance that actual results will not
differ from those estimates.
PROPERTY, PLANT AND EQUIPMENT
Property and equipment are stated at cost and depreciated on an accelerated
basis over the assets' estimated useful lives. Changes in circumstances such as
technological advances, changes to the Company's business model or changes in
the Company's capital strategy could result in the actual useful lives differing
from the Company's estimates. In those cases where the Company determines that
the useful life of property, plant and equipment should be shortened, the
Company would depreciate the net book value in excess of the estimated salvage
value over its revised remaining useful life.
DEFERRED TAX ASSETS
The Company records a valuation allowance to reduce the carrying value of its
deferred tax assets to an amount that is more likely than not to be realized.
While the Company has considered future taxable income and prudent and feasible
tax planning strategies in assessing the need for the valuation allowance,
should the Company determine that it would not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to the carrying value
of the deferred tax assets would be charged to income in the period in which
such determination was made.
INVESTMENTS
Investments are classified as either available-for-sale or trading securities
and are held for resale in anticipation of short-term market movements or until
such securities are registered or are otherwise unrestricted. At September 30,
2004, investments consisted of common stock and options to acquire common stock
held for resale. Trading account assets, consisting of marketable equity
securities, are stated at fair value. Unrealized gains or losses on trading
securities are recognized in the statement of operations based on changes in the
fair value of the security as quoted on national or inter-dealer stock
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exchanges. Available-for-sale assets, which are also required to be reported at
fair value, with unrealized gains and losses excluded from earnings are reported
as a separate component of stockholders' equity (net of the effect of income
taxes).
The Company's continuing operations consist of two Internet based businesses
within the United States. Stogies is an online distributor and retailer of brand
name premium cigars and accessories. A1Discount Perfume is an online retailer of
premium perfumes and colognes.
Stogies became operational in November 1998 and it accounts for substantially
all sales revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company decreased its working capital from $946,932 at December 31, 2003 to
$224,092 at September 30, 2004. The working capital decrease in the amount of
$722,840 consists primarily of increases in cash in the amount of $356,523,
marketable securities in the amount of $55,848 and accrued salaries $192,449,
and decreases in inventory of $241,471, loan receivable - Onspan Networking,
Inc., a related party, $675,000, interest receivable $17,940 , and accounts
payable of $46,614.
During the nine months ended September 30, 2004 stockholders' equity decreased
$729,203, which includes an increase in other comprehensive income in the amount
of $113,335, and the net loss for the period of $842,553. (See Other
Comprehensive Income below)
RESULTS OF OPERATIONS
SALES AND COST OF SALES
During the nine months ended September 30, 2004, consolidated sales decreased
52% from $1,036,417 for 2003 to $494,953 for the current period. The decrease in
sales is attributed to a number of factors, including the Company's plan to
reduce inventory due to a refocus of its business effort to concentrate more on
cigar accessories (including Cigar Ashtrays, Cigar Books, Cigar Cutters, Cigar
Humidors and Cigar Lighters) which earn a greater gross profit percentage than
cigars and a move out of the Company's warehouse space into a temporary location
at which time sales were halted for the three month period ended September 30,
2004 due to the inability to ship and process orders while in a temporary space.
The Company plans to resume shipping in November 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $62,023 to $971,127 in
the nine month period ended September 30, 2004, as compared to the same period
of the prior year. This decrease in selling, general and administrative expense
consists primarily of increases in: salaries and wages - $52,405; due to $62,500
in payments to two temporary employees for services completed offset by less
employees; legal - $26,955; due to lawsuit with Lakewood Development (Note I);
accounting - $37,179 due to the 2002 and 2003 audit not being performed until
2004; offset by decreases to insurance - ($33,583); due to the cancellation of
19
the D & O policy in 2003; rent - ($24,625); due to the Company non-renewal of
the lease of its former corporate headquarters at Suite 240 and its warehouse
space at Suite 160; advertising - ($36,257); due to decreased usage of internet
search engine and no advertising during the third quarter of 2004; consulting -
($18,351); due to move of servers in 2003; software costs - ($6,578); due to
purchase of upgrades on programs in 2003.
MARKETABLE EQUITY SECURITIES
The Company sold marketable equity securities and recognized a realized loss of
($5,024) for the three month period ended September 30, 2004, and recognized a
realized loss of ($448,944) during the three month period ended September 30,
2003.
The Company sold marketable equity securities and recognized a realized loss of
($54,074) during the nine month period ended September 30, 2004 and a realized
loss of ($476,444) during the nine month period ended September 30, 2003.
The Company recorded unrealized (losses) gains in the amount of ($793) and
$1,206 during the three month periods ended September 30, 2004 and 2003,
respectively. Available-for-sale securities are described in Other Comprehensive
Income (below).
The Company recorded unrealized losses in the amount of ($1,487) nine month
period ended September 30, 2004. There were no unrealized losses in the nine
month period ended September 30, 2003. Available-for-sale securities are
described in Other Comprehensive Income (below).
INVESTMENT INCOME
The Company had income of $1 and $9,446 from interest and dividends in the three
month period ended September 30, 2004 and 2003, respectively. The Company had
income of $13,664 and $11,139 from interest and dividends in the nine month
periods ended September 30, 2004 and 2003, respectively. The interest income for
2004 was mainly earned on the outstanding loan balance from Onspan Networking,
Inc. (Note F).
INCOME TAXES
The Company recorded no income tax expense for 2004 and 2003.
OTHER COMPREHENSIVE INCOME (LOSS)
During the nine months ended September 30, 2004, the Company recorded a decrease
in its net unrealized loss from available-for-sale securities in the amount of
$113,335, due to an increase in market value. Available-for-sale securities
consists primarily of SGD Limited Holdings (SGD) a holding company principally
engaged in acquiring and developing jewelry related businesses. Our investment
represents approximately 10.4% of the outstanding stock of SGD and accordingly,
the Company is subject to certain restrictions on the shares it can sell. Of the
10,000,000 shares held by the Company 3,941,000 shares valued at $78,820 have
been classified as current. Due to the size of the Company's investment and the
20
limited trading volume of SGD as well as other available-for-sale securities,
there can be no assurance that the Company will realize the value assigned,
under Statement of Accounting Standards #115 (Accounting for Certain Investments
in Debt and Equity Securities), to these securities.
During the latter part of 2002 the Company became aware, based upon Securities
and Exchange Commission (SEC) filings by SGD, that SGD had taken the position
that the Company was the holder of pre-split shares (SGD had a 6 for 1 reverse
split) and rather than the Company owning 10 Million shares of SGD the Company
was the holder of only 1,666,666 shares of SGD. It is the Company's position
that the number of shares that the Company held of SGD as of September 30, 2004
and 2003 is 10 Million. This is based upon purchase and sale arrangements
between the Company and SGD wherein the Company was sold, issued and receive 10
Million post split shares of SGD from SGD (formerly known as GoldOnline.com,
Inc.). The shares issued and delivered to the Company by SGD reflected the split
and the new split CUSIP change. On November 11, 2000, following the Company's
receipt of these shares, the Company filed a Form 13D, with the SEC, reflecting
the ownership of these shares. The Form 13D had been prepared by SGD's Counsel.
SGD filed quarterly and annual financial reports with the SEC reflecting the
ownership of 10 Million shares by the Company. Should it ultimately be
determined that the shares should be pre-split shares then our investment in
SGD, as of September 30, 2004, rather then being included in the accompanying
balance sheet as $200,000 (current $78,820; long-term $121,180) might be reduced
depending upon the impact of the share price differential on the market price of
the SGD shares and the reduced number of shares that the Company would be
considered as holding.
ITEM 3. CONTROLS AND PROCEDURES
The Company's President and Principal Financial and Accounting Officer and
Controller have concluded, based on their evaluation within 90 days of the
filing date of this report, that the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a -14(c) and 15d-14(c)) were
adequate and designed to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others
within those entities. There have been no significant changes in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the previously mentioned evaluation.
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. All statements other than statements of historical fact included in
this section or elsewhere in this report are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Exchange Act of 1934. Important factors that
could cause actual results to differ materially from those discussed in such
forward-looking statements include: 1. General economic factors including, but
not limited to, changes in interest rates and trends in disposable income; 2.
Information and technological advances; 3. Cost of products sold; 4.
Competition; and 5. Success of marketing, advertising and promotional campaigns.
21
PART II - ITEM 1 LEGAL PROCEEDINGS
Lakewood Development(s) Corporation v. Gary Schultheis and Herbert Tabin and
Evolve One, Inc., Civil Action No. 4-03-CV-1224-A, in the United States District
Court of the Northern District of Texas, Ft. Worth Division (Complaint filed on
August 6, 2003). This action asserts claims for violation of Texas securities
law, fraud, breach of contract, and breach of fiduciary duties. The action
sought damages in the amount of $4,125,000, for the plaintiff, the plaintiffs'
attorneys' fees and costs, and certain other relief.
On April 6, 2004, United States District Judge John McBryde of the United States
District Court of the Northern District of Texas, Ft. Worth Division, entered a
final judgment in favor of Evolve One, Inc. and its officers Gary Schultheis and
Herbert Tabin dismissing the case with prejudice. The court also ordered
Lakewood to pay defendants' court costs.
PART II - ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
PART II - ITEM 3 DEFAULTS UPON SENIOR SECURITIES
NONE
PART II - ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
PART II - ITEM 5 OTHER INFORMATION
NONE
PART II - ITEM 6 EXHIBITS
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
14 Evolve One, Inc. Code of Business Conduct and Ethics
Adopted by the Board of Directors On November 18, 2002,
(Filed as Exhibit 14 to registrant's December 2002, Form
10-KSB)
21 Subsidiaries of Evolve One, Inc. (Filed as Exhibit 21 to
registrant's December 2002, Form 10-KSB)
31.1 Certification of President and Principal Financial and
Accounting Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification of President and Principal Financial and
Accounting Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) REPORTS ON FORM 8-K
Employment Agreement with President and Principal Financial and
Accounting Officer and Director of Marketing
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EVOLVE ONE, INC.
Date: November 15, 2004 By: /s/ Gary Schultheis
-------------------
Gary Schultheis,
President and Principal
Financial and Accounting Officer
23