SEC Filing - Evolution Petroleum Corporation

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 quarterly period ended June 30, 1999 Commission file number: 0-27862 REALITY INTERACTIVE, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-1781991 ------------------------------ --------------------------------- State or other jurisdiction of I.R.S. Employer Identification No. incorporation of organization SUITE 115 6121 BAKER ROAD MINNETONKA, MINNESOTA 55344 (612) 253-4700 ------------------------------ --------------------------------- Address of principal executive Registrant's telephone number offices Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. /X/ Yes / / No At April 30, 1999, 4,677,407 shares of registrant's $.01 par value Common Stock were outstanding. Transitional Small Business Issuer Format / / Yes /X/ No

FORM 10-QSB INDEX PART I - FINANCIAL INFORMATION - -------------------------------- Item 1. Financial Statements.................................................3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................7 Item 4. Submission of Matters to a Vote of Security Holders..................9 PART II - OTHER INFORMATION - ---------------------------- Item 6. Exhibits and Reports on Form 8-K....................................10 SIGNATURES...................................................................11 EXHIBIT INDEX................................................................12 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward-looking statements. On April 27, 1999, the Company announced that it would cease current business operations effective April 30, 1999. Management of the Company believes this action was necessary in light of the Company's current liquidity needs and lack of short-term revenue opportunities. The Company is currently exploring potential uses of its public shell. While the Company seeks potential uses for the public shell, the primary factor that might cause such difference in results is the Company's inability to find a suitable acquisition or merger candidate or other use for its public shell in the near future. 2

PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REALITY INTERACTIVE, INC. BALANCE SHEET June 30, December 31, 1999 1998 ----------- ------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents ..................................................$ 28,704 $ 291,697 Restricted cash ............................................................ 111,000 111,000 Accounts receivable ........................................................ 54,671 231,525 Prepaid expenses and other current assets .................................. 26,133 40,299 ----------- ------------ Total current assets.................................................... 220,508 674,521 ----------- ------------ Fixed assets, net............................................................... 33,833 63,833 Other assets.................................................................... 0 9,356 ----------- ------------ Total assets............................................................$ 254,341 $ 747,710 ----------- ------------ ----------- ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................... $ 15,641 $ 38,733 Accrued liabilities ........................................................ 48,418 31,938 Bridge notes payable ....................................................... 70,631 0 Deferred revenue............................................................ 0 49,495 Other current liabilities.................................................. 0 1,572 ----------- ------------ Total current liabilities............................................... 134,690 121,738 ----------- ------------ Long-term liabilities .......................................................... 0 0 Total liabilities....................................................... 134,690 121,738 Stockholders' equity: Common stock, $.01 par value, 25,000,000 shares authorized; 4,677,407 shares outstanding ........................................... 46,774 46,774 Additional paid-in capital ................................................. 15,386,692 15,386,692 Accumulated deficit during the development stage ...........................(15,313,815) (14,807,494) ----------- ------------ Total stockholders' equity ............................................. 119,651 625,972 ----------- ------------ Total liabilities and stockholders' equity .............................$ 254,341 $ 747,710 ----------- ------------ ----------- ------------ See accompanying notes to the financial statements. 3

REALITY INTERACTIVE, INC. STATEMENT OF OPERATIONS (UNAUDITED) Three months ended Six months ended June 30, June 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ------------ ----------- ----------- Product revenues ............................. $ 13,945 $ 87,215 $ 86,769 $ 218,910 Service revenues ............................. 138,595 114,696 139,395 227,340 ----------- ----------- ----------- ----------- Total revenues ....................... 152,540 201,911 226,164 446,250 ----------- ----------- ----------- ----------- Cost of product revenues ..................... 1,249 25,625 18,685 57,363 Cost of service revenues .................... 108,024 91,542 108,024 184,143 ----------- ----------- ----------- ----------- Total cost of revenues ............... 109,273 117,167 126,709 241,506 ----------- ----------- ----------- ----------- Gross profit ................................. 43,267 84,744 99,455 204,744 ----------- ----------- ----------- ----------- Operating expenses: Sales and marketing ...................... 31,189 168,061 99,284 323,312 Research and development ................. 34,950 161,683 103,456 296,991 General and administrative ............... 207,262 336,239 408,155 668,655 ----------- ----------- ----------- ----------- Total operating expenses ............. 273,401 665,983 610,895 1,288,958 ----------- ----------- ----------- ----------- Operating loss ............................... (230,134) (581,239) (511,440) (1,084,214) Interest income (expense), net ........... 1,689 15,450 5,119 39,219 ----------- ----------- ----------- ----------- Net loss ............................. $ (228,445) $ (565,789) $ (506,321) $(1,044,995) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic and diluted earnings (loss) per share .. $ (0.05) $ (0.12) $ (0.11) $ (0.22) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding ... 4,677,407 4,677,407 4,677,407 4,677,407 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- See accompanying notes to the financial statements. 4

REALITY INTERACTIVE, INC. STATEMENT OF CASH FLOWS (UNAUDITED) Six months ended June 30, --------------------------- 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................................... $ (506,321) $(1,044,995) Reconciliation of net loss to net cash used by operating activities: Depreciation and amortization ........................................... 30,000 33,117 Changes in assets and liabilities: Accounts receivable ..................................................... 176,854 159,965 Inventory ............................................................... 0 4,417 Prepaid expenses and other assets ....................................... 23,522 (20,354) Accounts payable ........................................................ (23,092) 1,079 Accrued liabilities ..................................................... 16,480 (87,042) Deferred revenue ........................................................ (49,495) (152,263) Other current liabilities ............................................... (1,572) (1,684) ----------- ----------- Net cash used by operating activities ............................... (333,624) (1,107,760) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets, net of retirements ................................ 0 (5,087) Purchases of short-term investments ......................................... 0 (32,977) Sale of short-term investments .............................................. 0 1,563,522 Cash restricted for operating leases ........................................ 0 (111,000) ----------- ----------- Net cash used by investing activities ............................... 0 1,414,458 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bridge notes payable .......................................... 70,631 0 ----------- ----------- Net cash provided (used) during period .......................................... (262,993) 306,698 CASH AND CASH EQUIVALENTS: ----------- ----------- Beginning of period ............................................................. 291,697 487,994 ----------- ----------- End of period ............................................................... $ 28,704 $ 794,692 ----------- ----------- ----------- ----------- See accompanying notes to the financial statements. 5

REALITY INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) NOTE 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization and Business Reality Interactive, Inc. (the "Company") was incorporated on May 24, 1994 for the purpose of developing technology-based knowledge solutions for the industrial marketplace. On April 27, 1999, the Company announced that it would cease current business operations effective April 30, 1999. At that time, all employees were terminated. Management of the Company believes this action was necessary in light of the Company's current liquidity needs and lack of short-term revenue opportunities. The Company is currently exploring potential uses of its public shell. In the meantime, the Company intends to comply with all public company filing requirements in order to maintain its status as a public company. Basis of Presentation The accompanying unaudited financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. The preparation of financial statements in accordance with generally accepted accounting principles require management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities, including the disclosure of contingent assets and liabilities at the date of the accompanying interim financial statements, and the reported amounts of revenue and expenses during the reporting period. In the opinion of management, the interim financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. Because the Company has ceased business operations, operating results for the three and six months ended June 30, 1999 will not be indicative of the operating results for the year ending December 31, 1999. See Item 2. - - Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Developments. Certain information and footnote disclosures normally included in financial statements in accordance with generally accepted accounting principles have been omitted. The statements should be read in conjunction with the Company's Annual Report on Form 10-KSB for the year ended December 31, 1998. 6

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following presentation of management's discussion and analysis of the Company's financial condition and results of operation should be read in conjunction with the Company's financial statements and notes contained herein for the three and six months ended June 30, 1999 and 1998. RESULTS OF OPERATIONS REVENUES. Revenues were $152,540 for the second quarter of 1999, a 24% decrease from revenues of $201,911 for the second quarter of 1998. For the six month period ended June 30, 1999, revenues were $226,164, a 49% decrease from revenues of $446,250 for the comparable period of 1998. The revenue decrease was due primarily to fewer sales opportunities, longer than anticipated sales cycles for contract service opportunities and ceasing business operations on April 30, 1999. COST OF REVENUES. Cost of revenues were $109,273 for the second quarter of 1999, compared to $117,167 for the second quarter of 1998. For the six month period ended June 30, 1999, cost of revenues were $126,709, compared to cost of revenues of $241,506 for the same period of 1998. The decrease in cost of revenues was due to the decrease in revenues. OPERATING EXPENSES. The Company's operating expenses for the second quarter of 1999 were $273,401, a 60% decrease from operating expenses of $665,983 in the second quarter of 1998. For the six month period ended June 30, 1999, operating expenses were $610,895, a 53% decrease from operating expenses of $1,288,958 for the same period of 1998. This decrease in operating expenses between 1999 and 1998 was due primarily to expense reductions and ceasing business operations on April 30, 1999. (a) SALES AND MARKETING. Sales and marketing expenses were $31,189 for the second quarter of 1999 compared to $168,061 for the second quarter of 1998, a 81% decrease. For the six-month period ended June 30, 1999, sales and marketing expenses were $99,284, a 69% decrease from sales and marketing expenses of $323,312 for the same period of 1998. This decrease was due primarily to lower staffing, travel and general selling expenses, along with cutbacks in direct marketing initiatives such as tradeshow and marketing literature expenses. (b) RESEARCH AND DEVELOPMENT. Research and development expenses were $34,950 for the second quarter of 1999 compared to $161,683 for the second quarter of 1998, a 78% decrease. For the six month period ended June 30, 1999, research and development expenses were $103,456, a 65% decrease from research and development expenses of $296,991 for the same period of 1998. This decrease was primarily attributed to a decrease in development staff as the Company moved from a product development to a contracted service business model the beginning of 1998. Development costs associated with contracted services are deferred until related service revenues are recognized, at which time, such costs are expensed as cost of revenues. (c) GENERAL AND ADMINISTRATIVE. General and administrative expenses were $207,262 for the second quarter of 1999 compared to $336,239 for the second quarter of 1998, a 38% decrease. For the six month period ended June 30, 1999, general and administrative expenses were $408,155, a 39% decrease from general and administrative expenses of $668,655 for the same period of 1998. This decrease was due primarily to a decrease in headcount and lower expenses for rent, travel, equipment leases and administrative operating costs due to an overall drop in Company personnel. 7

OTHER INCOME (EXPENSE). The Company's net other income was $1,689 for the second quarter of 1999, compared to net other income of $15,450 for the second quarter of 1998. For the six month period ended June 30, 1999, net other income was $5,119, compared to net other income of $39,219 for the same period of 1998. Net other income consists entirely of interest earned on cash and cash equivalents. The decrease between periods is attributed to a decrease in cash reserves. NET LOSS. Net loss was $228,455 for the second quarter of 1999, compared to a net loss of $565,789 for the second quarter of 1998. For the six-month period ended June 30, 1999, net loss was $506,321, compared to a net loss of $1,044,995 for the same period of 1998. Since the Company has ceased its business operations, the Company does not expect to incur additional losses in 1999, except for activities relating to the shut down of operations and costs relating to SEC public filing requirements. See "--Recent Developments." LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents were $28,704 as of June 30, 1999, compared to $291,697 as of December 31, 1998. This decrease in cash and cash equivalents was due primarily to the net loss from operations for the quarter. As of June 30, 1999, the Company had outstanding a letter of credit from a bank totaling $111,000. The letter of credit secures an operating lease of office space for its business premises. The Company is required to maintain at the bank a cash amount equal to the letter of credit until such letter of credit expires on July 15, 1999. At that time, the Company will be able to use such cash to pay expenses associated with the wind-down of its business operations. RECENT DEVELOPMENTS On April 27, 1999, the Company announced that it would cease current business operations effective April 30, 1999. Management of the Company believes this action was necessary in light of the Company's current liquidity needs and lack of short-term revenue opportunities. The Company is currently exploring potential uses of its public shell. In the meantime, however, the Company is executing a plan to sell its assets. See "Item 4. Submission of Matters to a Vote of Security Holders." With respect to maintaining its status as a public company, the Company intends to comply with all future SEC and other filing requirements associated with being a public company. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Some computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. All of the software produced by the Company has been analyzed and the Company is not aware of any potential for date recognition problems in its products. The Company also uses off-the-shelf software ("Administrative Software") produced by third parties for use in administrative functions such as word processing, billing and record keeping. The vendors of the Company's Administrative Software products have indicated that such products are Year 2000 compliant. In the event that any of these programs are susceptible to date recognition problems, this could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process critical business transactions. In the event that the Company experiences Year 2000 problems, the Company believes the cost to remedy such problems will be immaterial. 8

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 8, 1999, the Company mailed a Proxy Statement to its shareholders that gave notice of a Special Meeting of Shareholders to be held at the Company's corporate offices on July 29, 1999. The purpose of the Special Meeting was to consider the sale, lease, transfer or other disposition of all or substantially all of the property and assets of the Company and, in particular, to vote on the following proposals: 1. To approve the sale of certain intellectual property assets of the Company, pursuant to an Asset Purchase Agreement dated June 18, 1999 (the "IP Asset Sale"), to VirtualFund.com, Inc. (the "Buyer"), in connection with the process of winding-down the Company's business affairs. 2. To approve the sale of the remaining intellectual property and all furniture, fixtures and equipment owned by the Company. As of July 29, 1999, only 1,554,521 shares, or 33% of total shares outstanding of 4,677,407, were voted and present at the Special Meeting. Although less than a quorum, the shares were voted in the following manner: FOR AGAINST ABSTAIN --- ------- ------- PROPOSAL 1 1,423,821 106,200 24,500 PROPOSAL 2 1,423,821 106,200 24,500 Because a quorum was not achieved, the Company rescheduled the Special Meeting of Shareholders in order to accumulate additional votes. The new meeting will be held at 9:00 a.m. on Tuesday, August 17, 1999, at the corporate offices of the Company, Baker Technology Plaza, 6121 Baker Road, Suite 115, Minnetonka, Minnesota. 9

PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS EXHIBIT NO. DESCRIPTION 27.1 Financial Data Schedules 99.1 Cautionary Statement (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended June 30, 1999 10

SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REALITY INTERACTIVE, INC. Dated: August 13, 1999 By /s/ Paul J. Wendorff ------------------------------------- Paul J. Wendorff Its Chief Executive Officer Dated: August 13, 1999 By /s/ Wesley W. Winnekins ------------------------------------- Wesley W. Winnekins Its Chief Financial Officer 11

EXHIBIT INDEX Exhibit No. Description - ------- --------------------------------------------------------- 27.1 Financial Data Schedules 99.1 Cautionary Statement 12

5 6-MOS DEC-31-1999 JUN-30-1999 28,704 0 54,671 0 0 220,508 453,004 419,171 254,341 134,690 0 0 0 46,774 72,877 254,341 226,164 231,283 126,709 126,709 610,895 0 0 (506,321) 0 (506,321) 0 0 0 (506,321) (.11) (.11)

EXHIBIT 99.1 CAUTIONARY STATEMENT Reality Interactive, Inc. (the "Company"), or persons acting on behalf of the Company, or outside reviewers retained by the Company making statements on behalf of the Company, or underwriters, from time to time make, in writing or orally, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. When used in conjunction with an identified forward-looking statement, this Cautionary Statement is for the purpose of qualifying for the "safe harbor" provisions of such sections and is intended to be a readily available written document that contains factors which could cause results to differ materially from such forward-looking statements. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement. The following matter, among others, may have a material adverse effect on the business, financial condition, liquidity, results of operations or prospects, financial or otherwise, of the Company. Reference to this Cautionary Statement in the context of a forward-looking statement or statements shall be deemed to be a statement that may cause actual results to differ materially from those in such forward-looking statement or statements: DISCONTINUATION OF CURRENT OPERATIONS. The Company ceased its business operations effective as of April 30, 1999. Management of the Company believes this action was necessary in light of the Company's current liquidity needs and lack of short-term revenue opportunities. The Company is currently exploring potential uses for the Company in its current form as an inoperative public company. In the meantime, the Company intends to comply with all SEC filing requirements in order to maintain the Company's good standing under the Securities Exchange Act of 1934, as amended. In the event the Company is unable to find a suitable acquisition or merger candidate or other suitable use for the Company in the near future, the Company will be liquidated and its remaining assets will be distributed to its creditors in satisfaction of its then-current obligations and, if any assets remain thereafter, to its shareholders. There can be no assurance that any such candidate or other suitable use for the Company or its assets will be found.