UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(as amended November 25, 2005)
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended September 30, 2004
000-32745
Commission File Number
CONSUMER DIRECT OF AMERICA
(Exact name of Registrant as Specified in its Charter)
Nevada | 88-0471353 |
| | |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
6630 S. Sandhill Rd.
Las Vegas, Nevada 89107
(Address of Principal Executive Offices including Zip Code)
(702) 547-7300
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
State the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date
3,825,916 shares of Common Stock outstanding as of November 15, 2004
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form l0-QSB, or any amendment to this Form 10-QSB
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No x
PART I - FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
| | | September 30, 2004 (Unaudited) | | December 31, 2003 (Audited) | |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 262,739 | | $ | 2,589 | |
| Loans available for sale | | | 6,494,026 | | | | |
| Accounts receivable | | | 155,548 | | | 611,507 | |
| Prepaid and other current assets | | | 1,386,984 | | | -- | |
| Total current assets | | | 8,299,297 | | | 614,096 | |
| Property and equipment, net | | | 1,444,796 | | | 1,560,567 | |
| | | | | | | | |
| Other assets: | | | | | | | |
| Notes receivable | | | 30,875 | | | 30,875 | |
| Goodwill | | | 1,871,361 | | | 1,871,361 | |
| Other assets | | | 2,373,081 | | | 81,049 | |
| Total other assets | | | 4,275,317 | | | 1,983,285 | |
| Total assets | | $ | 14,019,410 | | $ | 4,157,948 | |
| Liabilities and Stockholders' Deficit | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable and accrued expenses | | $ | 1,859,275 | | $ | 1,298,451 | |
| Bridge notes payable | | | 6,013,765 | | | 295,600 | |
| Interest payable | | | 22,692 | | | 16,414 | |
| Notes payable net of deferred interest | | | 817,919 | | | 58,500 | |
| Line of credit | | | 6,671,993 | | | 29,669 | |
| Total current liabilities | | | 15,385,644 | | | 1,698,634 | |
| Long-term liabilities: | | | | | | | |
| Notes payable - stockholders, less current maturities | | | 555,762 | | | -- | |
| Total long- term liabilities | | | 555,762 | | | -- | |
| Total liabilities | | | 15,941,406 | | | 1,698,634 | |
| Minority shareholder interest | | | (269,866 | ) | | | |
| Stockholders' equity: | | | | | | | |
| Common stock, $0.001 par value, 100,000,000 shares authorized, 3,825,916 and 3,088,529 shares issued and outstanding at September 30, 2004 and December 30, 2003, respectively | | | 3,825 | | | 3,088 | |
| Additional paid-in capital - Common stock | | | 7,263,163 | | | 7,868,648 | |
| Treasury stock | | | (556,600 | ) | | -- | |
| Accumulated deficit | | | (8,362,518 | ) | | (5,412,422 | ) |
| Total stockholders' equity | | | (1,652,530 | ) | | 2,459,314 | |
| Total liabilities and stockholders' equity | | $ | 14,019,410 | | $ | 4,157,948 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS
FO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
| | | Three Months Ended | | Nine Months Ended | |
| | | September 30, 2004 | | September 30, 2003 | | September 30, 2004 | | September 30, 2003 | |
| Revenues: | | | | | | | | | |
| Loan origination | | $ | 3,393,901 | | $ | 2,258,795 | | $ | 5,583,744 | | $ | 7,668,349 | |
| Marketing revenues and commissions | | | -- | | | 220,177 | | | -- | | | 520,884 | |
| Other income | | | -- | | | 850 | | | -- | | | (3,303 | ) |
| Total revenues | | | 3,393,901 | | | 2,479,822 | | | 5,583,744 | | | 8,185,930 | |
| | | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | | |
| Selling, general and administrative | | | 4,613,590 | | | 2,291,891 | | | 8,269,741 | | | 8,085,032 | |
| Depreciation expense | | | 167,510 | | | 153,676 | | | 501,451 | | | 452,349 | |
| Total expenses | | | 4,781,100 | | | 2,445,567 | | | 8,771,192 | | | 8,537,381 | |
| | | | | | | | | | | | | | |
| (Loss) income from operations | | | (1,387,199 | ) | | 34,255 | | | (3,187,448 | ) | | (351,451 | ) |
| | | | | | | | | | | | | | |
| Other income/ (expenses): | | | | | | | | | | | | | |
| Interest expense | | | (159,567 | ) | | (432 | ) | | (216,712 | ) | | (36,817 | ) |
| Dividends on preferred shares | | | (36,319 | ) | | -- | | | (36,319 | ) | | -- | |
| Other income (expenses) | | | 20,517 | | | -- | | | -- | | | -- | |
| Total other income (expense) | | | (175,369 | ) | | (432 | ) | | (253,031 | ) | | (36,817 | ) |
| Net (loss) income before provision for income taxes | | | (1,562,568 | ) | | 38,823 | | | (3,440,479 | ) | | (388,268 | ) |
| Provision for income taxes | | | -- | | | -- | | | -- | | | -- | |
| Net (loss) income before extraordinary item | | | (1,562,568 | ) | | 33,823 | | | (3,440,479 | ) | | (388,268 | ) |
| Extraordinary item - gain on settlement of lawsuit | | | -- | | | -- | | | 490,373 | | | -- | |
| | | | | | | | | | | | | | |
| Net (loss) income | | | (1,562,568 | ) | | 33,823 | | | (2,950,106 | ) | | (388,268 | ) |
| | | | | | | | | | | | | | |
| Net (loss) income before extraordinary item per common share basic and diluted | | $ | (0.41 | ) | $ | 0.01 | | $ | (1.03 | ) | $ | (0.18 | ) |
| | | | | | | | | | | | | | |
| Extraordinary income, net of tax per common share basic and diluted | | | -- | | | -- | | | 0.15 | | | -- | |
| | | | | | | | | | | | | | |
| Net (loss) applicable to common shareholders per common share basic and diluted | | $ | (0.41 | ) | $ | 0.01 | | $ | (0.88 | ) | $ | (0.18 | ) |
| | | | | | | | | | | | | | |
| Weighted average number of common shares outstanding basic and diluted | | | 3,819,224 | | | 2,462,724 | | | 3,336,538 | | | 2,209,749 | |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
| | | Nine Months Ended September 30, 2004 | | Nine Months Ended September 30, 2003 | |
| | | | | | |
| | | | | | |
Cash flows from operating activities: | | | | | |
| Net (loss) | | | (2,913,787 | ) | $ | (388,268 | ) |
| | | | | | | | |
Adjustments to reconcile net (loss) to net cash (used) by operations: | | | | | | | |
| Depreciation | | | 501,451 | | | 452,349 | |
| Extraordinary gain from settlement of lawsuit | | | | | | | |
| Minority interest | | | (269,866 | ) | | | |
| (Increase) decrease in mortgage loans held for sale | | | (6,137,020 | ) | | | |
| (Increase) decrease in accounts receivable | | | (357,006 | ) | | (288,973 | ) |
| (Increase) decrease in prepaid expenses | | | | | | (60,871 | ) |
| (Increase) decrease in restricted cash | | | | | | (500,006 | ) |
| (Increase) decrease in other receivables | | | 455,959 | | | | |
| (Increase) decrease in employee advances | | | | | | (19,061 | ) |
| (Increase) decrease in other assets | | | (3,871,763 | ) | | 18,157 | |
| (Increase) decrease in goodwill | | | -- | | | | |
| Increase (decrease) in accounts payable and accrued expenses | | | 567,967 | | | 307,122 | |
| Increase (decrease) in accrued interest | | | -- | | | -- | |
| Increase(decrease) in payroll liabilities | | | -- | | | -- | |
| Net cash used in operating activities | | | (12,024,065 | ) | | (479,551 | ) |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | |
| Purchase of fixed assets | | | (493,233 | ) | | (162,030 | ) |
| Notes receivable | | | -- | | | 30,875 | |
| Net cash used in investing activities | | | (493,233 | ) | | (131,155 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | |
| Net proceeds (repayments) in long term debt | | | 555,672 | | | (286,718 | ) |
| Issuance of common stock | | | 737 | | | -- | |
| Proceeds from issuance of common stock | | | -- | | | 919,547 | |
| Decrease in additional paid-in capital | | | (335,619 | ) | | -- | |
| Net proceeds (repayments) from line of credit | | | 6,671,993 | | | (29,669 | ) |
| Net proceeds (repayments) in notes payable | | | 759,419 | | | 41,815 | |
| Purchase of treasury stock | | | (556,600 | ) | | -- | |
| Minority shareholder interest | | | (269,866 | ) | | -- | |
| Proceeds from issuance of bridge notes | | | 5,718,165 | | | -- | |
| Net cash provided by financing activities | | | 12,777,448 | | | 644,975 | |
Net increase in cash and cash equivalents | | | 260,150 | | | 34,269 | |
Cash and cash equivalents, beginning of period | | | 2,589 | | | 159,484 | |
Cash and cash equivalents, end of period | | $ | 262,739 | | $ | 193,753 | |
Supplemental disclosure of cash flow information | | | | | | | |
| Interest paid | | $ | -- | | $ | -- | |
The accompanying notes are an integral part of these consolidated financial statements.
PROFORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2004
(Unaudited)
| | | CDA | | OCEAN WEST | | COMBINED | |
| | | | | | | | |
| Assets: | | | | | | | |
| Current assets: | | | | | | | |
| Cash | | $ | 176,423 | | $ | 126,237 | | $ | 302,480 | |
| Accounts receivable | | | 177,890 | | | 6,539,026 | | | 6,716,916 | |
| Stock subscription receivable | | | -- | | | 1,022,425 | | | 1,022,425 | |
| Prepaid expenses | | | 667,311 | | | 1,100,391 | | | 1,767,702 | |
| Total current assets | | | 1,021,444 | | | 8,788,079 | | | 9,809,523 | |
| Property and equipment, net | | | 1,295,121 | | | 251,695 | | | 1,546,816 | |
| Other assets: | | | | | | | | | | |
| Deposits and other assets | | | 1,951,039 | | | 427,917 | | | 2,378,956 | |
| Goodwill | | | 1,871,361 | | | -- | | | 1,871,361 | |
| Total other assets | | | 3,822,400 | | | 427,917 | | | 4,250,317 | |
| Total assets | | $ | 6,138,964 | | $ | 9,467,691 | | $ | 15,606,656 | |
| | | | | | | | | | | |
| Liabilities and Stockholders Deficit | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | |
| Accounts payable & accrued expenses | | $ | 979,509 | | $ | 1,139,159 | | $ | 2,118,668 | |
| Notes payable, net of deferred interest | | | 1,013,765 | | | 817,919 | | | 1,831,684 | |
| Accrued interest payable | | | 22,692 | | | | | | 22,692 | |
| Bridge notes | | | 5,000,000 | | | | | | | |
| Warehouse lines of credit | | | 145,448 | | | 6,526,545 | | | 6,671,993 | |
| Total current liabilities | | | 7,161,414 | | | 8,483,623 | | | 10,645,037 | |
| Long- term liabilities: | | | | | | | | | | |
| Notes payable | | | -- | | | 555,762 | | | 555,762 | |
| | | | | | | | | | | |
| Total liabilities | | | 2,161,414 | | | 9,039,385 | | | 9,902,577 | |
| Stockholders' deficit: | | | | | | | | | | |
| Preferred stock | | | -- | | | 3,837,500 | | | 3,837,500 | |
| Common stock | | | 9,635 | | | 57,962 | | | 67,597 | |
| Additional paid-in capital — Common stock | | | 7,820,336 | | | 1,543,194 | | | 9,363,530 | |
| Treasury stock | | | (556,600 | ) | | -- | | | (556,600 | ) |
| Accumulated (deficit) | | | (8,295,821 | ) | | (5,010,350 | ) | | (13,306,171 | ) |
| Total stockholders' deficit | | | (1,022,450 | ) | | 428,306 | | | (594,144 | ) |
| Total liabilities and stockholders’ deficit | | $ | 6,138,964 | | $ | 9,467,691 | | $ | 15,606,656 | |
CONSUMER DIRECT OF AMERICA
PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
| | | CDA | | OCEAN WEST | | COMBINED | |
| Revenues: | | | | | | | |
| Loan origination | | $ | 6,771,029 | | | 4,327,335 | | | 11,098,364 | |
| Other income | | | 26,576 | | | -- | | | 26,576 | |
| Total revenues | | | 6,797,605 | | | 4,237,335 | | | 11,124,940 | |
| Operating expenses: | | | | | | | | | | |
| Selling, general and administrative | | | 9,669,931 | | | 5,106,657 | | | 14,766,588 | |
| Interest expense | | | 216,712 | | | | | | 216,712 | |
| Other expenses | | | (469,856 | ) | | | | | (469,856 | ) |
| Depreciation expense | | | 506,983 | | | 91,981 | | | 598,964 | |
| Total operating expenses | | | 9,923,769 | | | 5,198,638 | | | 15,122,407 | |
| Net (loss) from operations | | | (3,126,164 | ) | | (871,303 | ) | | (3,997,467 | ) |
| Provision for income taxes | | | -- | | | 4,500 | | | 4,500 | |
| Net (loss) income | | | (3,126,164 | ) | | (875,803 | ) | | (4,001,967 | ) |
| Dividends on preferred shares | | | -- | | | 107,640 | | | 107,640 | |
| Net (loss) income applicable to common | | | ($3,126,164 | ) | | ($983,443 | ) | | ($4,109,607 | ) |
CONSUMER DIRECT OF AMERICA
PROFORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2003
| | | CDA | | OCEAN WEST | | COMBINED | |
| | | | | | | | |
| Assets: | | | | | | | |
| Current assets: | | | | | | | |
| Cash | | | 93,753 | | | 457,969 | | | 651,722 | |
| Accounts receivable | | | 672,891 | | | 8,142,323 | | | 8,815,214 | |
| Other receivables | | | -- | | | 45,000 | | | 45,000 | |
| Employee advances | | | 19,061 | | | -- | | | 19,061 | |
| Prepaid expenses | | | 69,643 | | | 984,319 | | | 1,053,962 | |
| Total current assets | | | 955,348 | | | 9,629,611 | | | 10,584,959 | |
| Property and equipment, net | | | 1,431,152 | | | 357,522 | | | 1,788,674 | |
| Other assets: | | | -- | | | 587,093 | | | 587,093 | |
| Deposits and other assets | | | | | | | | | | |
| Restricted cash | | | 500,006 | | | -- | | | 500,006 | |
| Goodwill | | | 1,517,266 | | | -- | | | 1,517,266 | |
| Total other assets | | | 2,017,272 | | | 587,093 | | | 2,604,365 | |
| Total assets | | | 4,403,772 | | | 10,574,226 | | | 14,977,998 | |
| Liabilities and Stockholders Deficit | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | |
| Accounts payable & accrued expenses | | | 1,547,066 | | | 1,490,343 | | | 3,037,409 | |
| Notes payable, net of deferred interest | | | 143,917 | | | 931,044 | | | 1,074,961 | |
| Accrued interest payable | | | 12,134 | | | -- | | | 12,134 | |
| Warehouse lines of credit | | | -- | | | 8,032,976 | | | 8,032,976 | |
| Total current liabilities | | | 1,703,117 | | | 10,454,363 | | | 12,157,480 | |
| Long- term liabilities: | | | | | | | | | | |
| Notes payable | | | -- | | | 383,181 | | �� | 383,181 | |
| Total liabilities | | | 1,703,117 | | | 10,837,544 | | | 12,540,661 | |
| Stockholders’ equity: | | | | | | | | | | |
| Preferred stock | | | -- | | | 1,587,500 | | | 1,587,500 | |
| Common stock | | | 47,934 | | | 57,962 | | | 105,896 | |
| Additional paid-in capital — Common stock | | | 6,630,843 | | | 1,543,194 | | | 8,174,037 | |
| Treasury stock | | | -- | | | -- | | | -- | |
| Accumulated (deficit) during development stage | | | (3,978,122 | ) | | (3,451,974 | ) | | (7,430,096 | ) |
| Total stockholders’ equity | | | 2,700,655 | | | (263,318 | ) | | 2,437,337 | |
| Total liabilities and stockholders’ equity | | | 4,403,772 | | | 10,574,226 | | | 14,977,998 | |
CONSUMER DIRECT OF AMERICA
PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited)
| | | CDA | | OCEAN WEST | | COMBINED | |
| Revenues: | | | | | | | |
| Marketing revenues and commissions | | | 641,181 | | $ | -- | | | 641,181 | |
| Loan origination | | | 7,542,173 | | | 9,857,947 | | | 17,400,120 | |
| Rental income | | | 850 | | | -- | | | 850 | |
| Other income | | | -- | | | -- | | | -- | |
| Total revenues | | | 8,184,204 | | | 9,857,947 | | | 18,042,151 | |
| Operating expenses: | | | | | | | | | | |
| Selling, general and administrative | | | 8,157,598 | | | 9,707,363 | | | 17,864,961 | |
| Interest expense | | | 2,683 | | | -- | | | 2,683 | |
| Other expenses | | | 384 | | | -- | | | 384 | |
| Depreciation expense | | | 452,349 | | | 147,756 | | | 600,105 | |
| Total operating expenses | | | 8,613,014 | | | 9,855,119 | | | 18,468,133 | |
| Net (loss) income from operations | | | (428,810 | ) | | 2,828 | | | (425,982 | ) |
| Provision for income taxes | | | -- | | | 17,953 | | | 17,953 | |
| Net (loss) income | | | (428,810 | ) | | (15,125 | ) | | (443,935 | ) |
| Dividends on preferred shares | | | -- | | | 156,284 | | | 156,284 | |
| Net (loss) income applicable to common | | | (428,810 | ) | | (171,409 | ) | | (600,219 | ) |
September 31, 2004
(1) | Basis of Presentation: |
The unaudited financial statements as of September 30, 2004 included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. It is suggested that these financial statements be read in conjunction with the December 31, 2003 audited financial statements and notes thereto.
Since inception through September 30, 2004, the Company has suffered recurring losses from operations. As of September 30, 2004, the Company incurred aggregate net losses of approximately $8,362,518.
(2) | Principles of Consolidation: |
The consolidated financial statements include the accounts of Consumer Direct and its wholly owned subsidiary, Pro Mortgage and the accounts of Ocean West Holding Corporation and Subsidiary of which the Company, on July 15, 2004, acquired 84.9% of the outstanding common stock through a stock exchange affected pursuant to a Purchase and Sale of Capital Stock Agreement. The minority shareholder interest of 15.1% of Ocean West Holding Corporation amounts to $269, 866. All significant inter-company accounts and transactions have been eliminated.
These financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2004.
The unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the past fiscal year ended December 31, 2003, included in the Company’s Annual Report on Form 10-KSB.
Earnings per share have been calculated based upon the weighted average number of common shares outstanding during both reporting periods.
During the three months ended June 30, 2004, the Company planned to issue $4,444,000 shares of common stock in conjunction with a $5,000,000 stock subscription and 1,103,000 shares common stock in conjunction with the conversion of $1,450,600 in Bridge Notes. Only 115,000 of the 1,103,000 shares of common stock were issued. The Company decided not to pursue the stock subscription.
(5) | Stock Subscription Agreement: |
On July 1, 2004, the Company entered into an agreement to purchase 1.5 million of senior preferred stock of Ocean West Holdings, Inc., a for an aggregate purchase price of $1,500,000. On September 1, 2004, the Company committed to purchase an additional 750,000 senior preferred shares for an aggregate purchase price of $750,000. Since the offer and sale of the Shares have not been registered under the Securities Act in reliance upon Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated there under, the Purchaser will offer or resell the Shares only in compliance with the provisions of all applicable Federal and state securities laws and regulations. The Purchaser will offer or resell such Shares only if such Shares are registered under the Securities Act or an exemption from such registration is available. Unless the Shares that are the subject of such offer or sale are registered under the Securities Act or an exemption from registration is available (in which latter case the Company shall have received an opinion of counsel, in form and substance reasonably satisfactory to the Company, to such effect), the Company shall not permit the transfer of the Shares.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 31, 2004
During the three months ended September 30, 2004, the Company borrowed $247,347 in the form of Bridge Financing Notes. The notes were issued for working capital needs. Company assets are being used as collateral to secure the notes. The note terms call for each promissory note to be repaid with 10% interest in cash.
(7) | Credit Facility and Joint Venture Agreement |
On September 21, 2004 the Company entered into a term loan facility with Club Vista Holdings Inc., (“Club Vista”) pursuant to which a revolving line of credit arrangement for which $5,000,000 can be borrowed from time to time on a secured basis. Collateral shall be evidenced by an assignment of Borrowers interest in all mortgage notes for which funds have been advanced. Interest under the term loan facility will be determined and imposed in accordance with the respective cost of funds that Lender may incur. The maturity will be on a revolving basis for the incurrence of indebtedness for the period of one year. The funds advanced under this facility will be used exclusively as follows; to fund home loans and various costs, fees, expenses and other payments made in connection with the loans made by the Borrower, to fund any fees relating to warehouse banking lines and for any such purposes specifically authorized by the Lender in writing. The net proceeds related to the term loan shall be divided 50/50 between the Company and Club Vista of which the Company shall maintain at all times a separate accounting for such transactions.
On September 14, 2004, the Company entered into a joint venture agreement with Club Vista to offer a product, home equity lines of credit or HELOC. The proceeds of such will be split 50/50 between both parties. The credit facility of this joint venture shall be contributed by Club Vista in the form of a mortgage warehouse credit facility for $10,000,000 to be collateralized by the Note and Deed of Trust on each and every loan transaction. Borrowings may only be used for the sole purpose of warehousing CDA loans. No interest shall be paid on the initial contributions to the capital of the joint venture. The joint venture may be dissolved at any time by agreement by both parties.
(8) | Acquisition or Disposition of Assets |
On July 15, 2004, the Company acquired 84.9% of the outstanding common stock of Ocean West Holding Corporation through a stock exchange affected pursuant to a Purchase and Sale of Capital Stock Agreement. Marshall L. Stewart, Daryl S. Meddings, Enfo Loan Corporation, Kingsley and Nancy Cannon and Dale and Suzanne Delmege agreed to sell 4,921,930 of their shares of common stock of Ocean West Holding Corporation to CDA in exchange for 622,388 shares of CDA (the “Transfer”). The consideration was based on the average monthly trading prices of each company’s shares for the month of June 2004. The Transfer results in CDA having majority control and ownership, of Ocean West Holding Corporation.
Ocean West Holding Corporation is a holding company, which holds all of the issued and outstanding stock of Ocean West Enterprises. Ocean West Enterprises is a wholesale and retail mortgage banking company primarily engaged in the business of originating and selling loans secured by real property with one to four units.
The pro forma financial statements of CDA showing the effect of this acquisition for the current year up to the date of this report and for the corresponding period in the preceding year are disclosed as a part of this Report.
On May 21, 2004, the Company filed a Form S-8 to register 750,000 shares of its common stock at an offering price of $2.20 per share. Currently there have not been any shares issued under this plan.
(10) | Subsequent Event - Rescission Agreement |
On October 1, 2004, the Company rescinded its acquisition agreement with Pro Mortgage Corporation (“Pro Mortgage”). On November 20, 2003 the Company and Pro Mortgage entered into an acquisition agreement, whereby Pro Mortgage and the Company agreed to exchange 1,000 shares of Pro Mortgage capital stock, representing 100% of the issued and outstanding capital stock of Pro Mortgage, in exchange for 3,000,000 shares of the Company’s capital stock, (the “Exchange”). The Exchange was never duly authorized and approved by the parties thereto, and each of the parties hereto desired to rescind the exchange. In connection with such rescission the Company transferred and assigned its shares of the Pro Mortgage capital stock to the Pro Mortgage shareholders and the Pro Mortgage shareholders transferred back its shares of the common stock of the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 31, 2004
The rescission shall have the effect of placing the Company in the position it was in prior to the Merger. Pursuant to the Rescission Agreement, the liabilities and assets of Pro Mortgage that existed at the time of the Merger and as existed as of the closing of the Recession Agreement, shall remain the liabilities and assets of Pro Mortgage. The Company views this rescission as nullification and accordingly has not included any operating activities related to Pro Mortgage in the accompanying consolidated financial statements.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this document. This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed below under Factors Affecting Future Operating Results. The Company disclaims any obligation to update information contained in any forward- looking statement.
Overview
Consumer Direct of America (The "Company") is a direct-to-consumer mortgage broker and banker with revenues derived primarily from origination commissions earned on the closing of first and second mortgages on single-family residences ("mortgage loans" and "home equity loans"). The Company currently employs over 600 people, 450 of which are residential mortgage and/or real estate brokerage professionals. The Company has closed loan volume of over $800 million for the nine months ended September 30, 2004. The Company has acquired and intends to acquire other businesses in the direct-to consumer mortgage brokerage business and may acquire other businesses that are outside the direct-to-consumer mortgage brokerage business. A recent acquisition, Pro Mortgage in San Francisco, independently produced loan volume in excess of $500 million in 2003. The Company believes it has the infrastructure, systems, direct marketing call center support and operational management necessary to properly integrate more acquisitions in order to establish and support a national network.
Results of Operations
Expensed vs. Capitalized Treatment of Items
The Company has elected to expense certain items associated with the acquisition of Ocean West and its 60 branches that are eligible to be capitalized under Generally Accepted Accounting Principles. These expenses items total $1,147,781 and are being expensed in this quarter rather than being capitalized so that the amortization will not be a drag on earnings going forward. As the Company expects to make a profit in the fourth quarter and continue profitability going forward, management has elected to expense these items during FY 2004 such that they will not impact net income during 2005. Had the Company elected to capitalize the above items and not expensed them, the net loss for the quarter would have been $ 527,590 or $0.14 per share instead of $ 0.44 or an improvement of $ 0.30 per share for the quarter.
Three Months Ended September 30, 2004 and 2003
Revenues: During the quarter ended September 30, 2004, revenue increased 36.8% to $3.4 million from $2.5 million for the quarter ended September 30, 2003. The increase in revenues can be attributable to the acquisition of additional loan officers and the acquisition of Ocean West which added 60 branches, which was offset by overall market conditions.
Expense: Total operating expenses increased by $2.3 million or 95.5% to $4.8 million for the quarter ended September 30, 2004 from $2.4 million for the quarter ended September 30, 2003. The acquisition of Ocean West and its branches added to the operational expenses of the organization.
Depreciation: Depreciation expenses increased to $168,000 for the quarter ended September 30, 2004 from $154,000 for the quarter ended September 30, 2003. Increase in depreciation is attributed to new computer and office equipment.
Net Loss: Consumer Direct had a net loss of $1,526,000 for the quarter ended September 30, 2004 compared to a net income of $33,823 for the same quarter in 2003. The decrease in income was related in the short term to the additional costs incurred by consolidating with Ocean West, as well as overall market conditions. Due to the additional 60 branches and the consolidation of the related expenses the Company anticipates by economies of scale to add additional income.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Earnings per share: The basic diluted net loss per share for the quarter ended September 30, 2004 increased to a loss of $0.41 from a gain of $0.01 for the same quarter in 2003, which represents a decrease in earnings over the same period the prior year of $0.42 on a per share basis.
Nine Months Ended September 30, 2004 and 2003
Revenues: During the nine months ended September 30, 2004, revenue decreased 31.8% to $5.6 million from $8.2 million for the nine months ended September 30, 2003. The decrease in revenues can be attributable to the overall market conditions and the rescission of Pro Mortgage.
Expense: Total operating expenses increased by $234,000 or 2.7% to $8.8 million for the nine months ended September 30, 2004 from $8.5 million for the nine months ended September 30, 2003. This is attributable to the impact of the acquisition of 60 branches and the related acquisition costs incurred in the last quarter.
Depreciation: Depreciation expenses increased to $501,452 for the nine months ended September 30, 2004 from 452,349 for the nine months ended September 30, 2003. The primary reason for the increase is the ongoing normal recurring purchases of equipment and related leaseholds.
Net Loss: Consumer Direct had a net loss of $2,950,000 for the nine months ended September 30, 2004 compared to a net loss of 388,000 for the same period in 2003. The decrease in income was related in the short term to the additional costs incurred by consolidating with Ocean West, as well as overall market conditions. Due to the additional 60 branches and the consolidation of the related expenses the Company anticipates by economies of scale to add additional income.
Earnings per share: The basic diluted net loss per share for the nine months ended September 30, 2004 increased to $0.88 from a loss of $0.12 for the same period in 2003, which represents a decrease in earnings over the same period the prior year of $0.76.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support asset growth, satisfy disbursement needs, maintain reserve requirements and otherwise operate on an ongoing basis.
In the mortgage banking industry the rate of growth is tied to the amount of money that can be used to fund the banks part of each mortgage. Our warehouse credit facilities limit the amount that may be advanced on each loan funded. Therefore, cash must be used to fund the additional dollars needed to close escrow. This money is now provided for in our agreement with Cub Vista. Therefore we do not have any restrictions on growth
Historically we have funded loans primarily through our warehouse credit facilities or using cash on hand. During fiscal 2004, we have funded approximately 15% of our loans through our warehouse credit facilities. Loans that are closed using our credit facilities are funded through short term borrowing on our warehouse lines of credit. We pay interest on funds advanced under the warehouse lines of credit at a pre-negotiated rate. The interest rate at which we borrow is variable in nature and typically averages between 4.5% and 7% per annum. The average time between funding a mortgage and the receipt of the proceeds from the sale of the mortgage was approximately 22 days during fiscal 2003 and continued as such during the nine months ended September 30, 2004.
Our ability to finance and purchase mortgage loans depends on our ability to secure warehouse lines of credit with acceptable terms.
Currently, we fund loans through our warehouse lines of credit with Club Vista warehouse lines of credit. The arrangement calls for expense being paid on both sides and the remain income split on a 50/50 basis. However the lines also covers additional monies to fund on other warehouse lines. This additional monies a called haircuts. The haricuts are the amount of the mortgage funded by the warehouse facility less their hold backs. This about is typical about 2% of the mortgage funded. The balances at September 30, 2004 under the facility was $5,207,829. The lending limit on the line of credit is currently $15,000,000 and the term is for one year
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Historically we have funded operations through a combination of borrowings and issuance of stock. We currently intend to retain our earnings for the foreseeable future to help increase our liquidity. Management continues to explore investment alternatives to aid in its liquidity, but there can be no reliance made on such.
Cash Flows
The Company's sources of cash flow include cash commissions from the brokerage of mortgages, borrowings under institutional credit facilities, marketing fees, and interest income. The Company's uses of cash include operating expenses, payment of interest, and capital expenditures primarily comprised of facility expansion, furniture, fixtures, computer equipment, software and leasehold improvements. During the first nine months of fiscal 2004 and 2003 we had net cash used in operating activities of $12.0 million and $0.5 million, respectively. The primary sources of net cash used in were the acquisition of 60 additional branches. The primary source of the net cash used in operating activities for the nine monthperiod ended September 30, 2003 was $0.5 million.
Net cash used for investing activities during the first nine months of fiscal 2004 and 2003 was $0.5 million and $0.2 million respectively, which was attributable to fixed assets acquired in its acquisition of Ocean West.
Net cash provided by financing activities for the nine months ended September 30, 2004 was $12.8 million. This consisted primarily of proceeds of convertible debt for $5 million as well as proceeds from notes of $7 million. Net cash provided by financing activities for the nine months ended September 30, 2003 was $0.6 million. This consisted primarily of an increase of 905,277 to additional paid in capital offset by repayments of long term debt of 286,718.
The Company believes that its existing cash and cash equivalents as of September 30, 2004 will be sufficient to fund its operating activities, capital expenditures and other obligations for the next twelve months. However, if during that period or thereafter the Company is not successful in generating sufficient cash flow from operations, or in raising additional funds when required in sufficient amounts and on terms acceptable to the Company, it could have a material adverse effect on the Company's business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of its then-current stockholders would be reduced.
Quantitative and Qualitative Disclosures About Market Risks
The following important factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this report or presented elsewhere by management from time to time.
While We Achieved a Profitable Quarter During Fiscal 2003, We Have a History of Losses, and We May Not Be Able to Maintain Profitability
While we achieved a profitable quarter as of June 30, 2002, we have an accumulated deficit of $8.6 million. Because we expect our operating costs will increase to accommodate expected growth in loan applications, we will need to generate significant revenues to maintain profitability. We may not sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, our business, results of operations and financial condition will be adversely affected.
We Have a Limited Operating History and Consequently Face Significant Risks and Challenges in Building Our Business
We cannot assure you that we will be able to operate successfully if a downturn in the mortgage business occurs. As a result of our limited operating history, our recent growth and our reporting responsibilities as a public company, we may need to expand operational, financial and administrative systems and control procedures to enable us to further train and manage our employees and coordinate the efforts of our underwriting, accounting, finance, marketing, and operations departments.
Our Quarterly Financial Results Are Vulnerable to Significant Fluctuations and Seasonality, Which Could Adversely Affect Our Stock Price
Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors. Certain months or quarters have historically experienced a greater volume of purchase money mortgage and auto loan applications and funded loans. As a result, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Interest Rate Fluctuations Could Significantly Reduce Customers' Incentive to Refinance Existing Mortgage Loans
A significant percentage of our mortgage customers use our services to refinance existing mortgages and they are motivated to do so primarily when interest rates fall below the rates of their existing mortgages. In the event interest rates significantly increase, consumers' incentive to refinance will be greatly reduced and the number of loans that we originate could significantly decline.
Uncertainty With Respect to the Time It Takes to Close Mortgage Loans Can Lead to Unpredictable Revenue and Profitability
The time between the date an application for a mortgage loan is received from a customer and the date the loan closes can be lengthy and unpredictable. The loan application and approval process is often delayed due to factors over which we have little or no control, including the timing of the customer's decision to commit to an available interest rate, the close of escrow date for purchase loans, the timeliness of appraisals and the adequacy of the customer's own disclosure documentation. Purchase mortgage loans generally take longer to close than refinance loans as they are tied to the close of the property sale escrow date. This uncertain timetable can have a direct impact on our revenue and profitability for any given period. We may expend substantial funds and management resources supporting the loan completion process and never generate revenue from closed loans. Therefore, our results of operations for a particular period may be adversely affected if the mortgage loans applied for during that period do not close in a timely manner or at all.
We Have Recently Experienced Significant Growth in Our Business, and If We Are Unable to Manage this Growth, Our Business Will Be Adversely Affected
Over the past two years we have experienced significant growth, which has placed a strain on our resources and will continue to do so in the future. Our failure to manage this growth effectively could adversely affect our business. We may not be successful in managing or expanding our operations or maintaining adequate management, financial and operating systems and controls. Our headcount has grown substantially. At December 31, 2001 and 2002, we had 36 and 347 full-time employees, respectively.
The Termination of One or More of Our Mortgage Funding Sources Would Adversely Affect Our Business
Under our agreements with each of our lenders, we make extensive representations, warranties and various operating and financial covenants. A material breach of these representations, warranties or covenants could result in the termination of our agreements.
Our Business Will be Adversely Affected if We Are Unable to Safeguard the Security and Privacy of Our Customers' Financial Data
We retain on our premises personal financial documents that we receive from prospective borrowers in connection with their loan applications. These documents are highly sensitive and if a third party were to misappropriate our customers' personal information; customers could possibly bring legal claims against us. We cannot assure you that our privacy policy will be deemed sufficient by our prospective customers or compliant with any federal or state laws governing privacy, which may be adopted in the future.
Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company that is required to be included in the Company's periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company's internal controls or, to the Company's knowledge, in other factors that could significantly affect those internal controls subsequent to the date the Company carried out its evaluation, and there have been no corrective actions with respect to significant deficiencies and material weaknesses.
The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost- effective control system, misstatements due to error or fraud may occur and not be detected.
The company has from time to time acted as a plaintiff and respondent to several lawsuits as a matter of its normal course of business. None of the legal activities it is involved with are of significant effect to the business.
Item 2. | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
During the three months ended June 30, 2004, the Company planned to issue $4,444,000 shares of common stock in conjunction with a $5,000,000 stock subscription and 1,103,000 shares common stock in conjunction with the conversion of $1,450,600 in Bridge Notes. Only 115,000 of the 1,103,000 shares of common stock were issued. The Company decided not to pursue the stock subscription and entered into a Convertible Promissory Note with Club Vista Holdings, Inc. for $5,000,000, which was converted to 5,000,000 shares of Preferred Stock, during the three months ended September 30, 2004.
Item 3. | Defaults Under Senior Securities |
None.
| Submission of Matters to a Vote of Security Holders |
None.
| Exhibits and Reports on Form 8-K |
| | 4.3 | Stock Subscription Agreement. |
| | 4.4 | Stock Subscription Agreement. |
| | 4.5 | Stock Subscription Agreement. |
| | 5.0 | Convertible Promissory Note. |
| | 5.1 | Credit Facility Agreement. |
| | 5.2 | Joint Venture Agreement. |
| | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
On August 3, 2004 the Company furnished a report on Form 8-K regarding its purchase of 84.9% of the outstanding common stock of Ocean West Holding Corporation through a stock exchange affected pursuant to a Purchase and Sale of Capital Stock Agreement.
On October 4, 2004 the Company furnished a report on Form 8-K/A regarding the addition of pro-forma financial information, consolidating the operations with Ocean West Holding Corporation.
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | CONSUMER DIRECT OF AMERICA | |
| | | | | |
| Date: | November 25, 2005 | | | |
| | | By: | /s/ Michael A. Barron | |
| | | | Michael A. Barron | |
| | | | Chief Executive Officer | |
| | | | | |
| Date: | November 25, 2005 | | | |
| | | By: | /s/ Lee Shorey | |
| | | | Wayne K. Bailey | |
| | | | Chief Financial Officer (Principal Accounting Officer) | |
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