UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
T | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal quarter ended March 31, 2006
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 | (I.R.S. Employer Identification Number) Organization) |
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
96,198,027 shares of Common Stock outstanding as of April 7, 2006
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 T No *
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No T
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 * No T
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PART I - FINANCIAL INFORMATION
CONSUMER DIRECT OF AMERICA
CONSOLIDATED BALANCE SHEETS
| | | March 31, 2006 (unaudited) | | December 31, 2006 (audited) | |
| Assets | | | | | |
| Current assets: | | | | | |
| Cash and cash equivalents | | $ | 8,417 | | $ | 21,401 | |
| Loans available for sale | | | -- | | | 831,200 | |
| Accounts receivable and receivables from loans sold, net | | | 120,175 | | | 107,321 | |
| Prepaid and other current assets | | | 108,495 | | | 433,281 | |
| Total current assets | | | 237,086 | | | 1,393,203 | |
| Property and equipment, net | | | 1,510,895 | | | 1,664,571 | |
| | | | | | | | |
| Other assets: | | | | | | | |
| Goodwill | | | 1,372,916 | | | 1,372,916 | |
| Other assets, net | | | -- | | | -- | |
| Total other assets | | | 1,372,916 | | | 1,372,916 | |
| Total assets | | $ | 3,120,897 | | $ | 4,430,690 | |
| | | | | | | | |
| Liabilities and Stockholders' Deficit | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable and accrued expenses | | $ | 1,269,052 | | $ | 1,690,101 | |
| Bridge notes payable | | | 5,869,682 | | | 5,869,682 | |
| Interest payable | | | 130,352 | | | 140,794 | |
| Notes payable | | | 735,183 | | | 333,173 | |
| Notes payable - related party | | | 808,396 | | | 767,846 | |
| Line of credit | | | 2,668,216 | | | 3,497,073 | |
| Total current liabilities | | | 11,480,880 | | | 12,298,669 | |
| | | | | | | | |
| Long-term liabilities: | | | | | | | |
| Notes payable - stockholders, less current maturities | | | -- | | | -- | |
| Total long- term liabilities | | | -- | | | -- | |
| Total liabilities | | | 11,480,880 | | | 12,298,669 | |
| | | | | | | | |
| Stockholders' equity (deficit): | | | | | | | |
| | | | | | | | |
| Common stock, $0.001 par value, 100,000,000 shares authorized, 96,198,027 and 37,544,108 shares issued and outstanding at March 31, 2006 and December 31, 2005, respectively | | | 96,198 | | | 37,544 | |
| | | | | | | | |
| Preferred Stock, $0.01 par value, 15,000,000 shares authorized, -0- shares issued and outstanding at March 31, 2005 and December 30, 2004, respectively | | | -- | | | -- | |
| | | | | | | | |
| Additional paid-in capital - Common stock | | | 23,233,440 | | | 20,926,149 | |
| Treasury stock | | | -- | | | -- | |
| Accumulated deficit | | | (31,689,622 | ) | | (28,831,673 | ) |
| Total stockholders' (deficit) | | | (8,359,983 | ) | | (7,867,979 | ) |
| Total liabilities and stockholders' (deficit) | | $ | 3,120,897 | | $ | 4,430,690 | |
The accompanying notes are an integral part of these financial statements
CONSUMER DIRECT OF AMERICA
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
| | | March 31, 2006 | | March 31, 2005 | |
| Revenues | | | | | |
| Loan origination and sale of mortgage loans | | $ | 191,444 | | $ | 1,208,549 | |
| Marketing revenues and commissions | | | -- | | | 165,540 | |
| Rental income | | | -- | | | 3,395 | |
| Total revenue | | | 191,444 | | | 1,377,483 | |
| | | | | | | | |
| Expenses | | | | | | | |
| Selling, general and administrative | | | 2,869,341 | | | 3,266,035 | |
| Depreciation expense | | | 153,676 | | | 188,734 | |
| Total expenses | | | 3,023,017 | | | 3,454,769 | |
| | | | | | | | |
| Loss from operations | | | (2,831,573 | ) | | (2,077,286 | ) |
| | | | | | | | |
| Other (expense) income | | | | | | | |
| Interest expense | | | (26,375 | ) | | (25,293 | ) |
| Debt discount expense | | | -- | | | (1,244,616 | ) |
| Other income | | | -- | | | -- | |
| Total other (expense) income | | | (26,375 | ) | | (1,269,909 | ) |
| | | | | | | | |
| Loss before minority shareholder interest | | | (2,857,948 | ) | | (3,308,160 | ) |
| | | | | | | | |
| Loss applicable to minority shareholder interest | | | -- | | | (39,034 | ) |
| | | | | | | | |
| Net loss | | | (2,857,948 | ) | | (3,347,194 | ) |
| | | | | | | | |
| Dividends on preferred shares | | | -- | | | (36,318 | ) |
| | | | | | | | |
| Net loss applicable to common shareholders | | $ | (2,857,948 | ) | $ | (3,383,512 | ) |
| | | | | | | | |
| Net loss per share, basic and diluted | | $ | (0.13 | ) | $ | (0.36 | ) |
| | | | | | | | |
| Net loss per common share, applicable to common shareholders, basic and diluted | | $ | (0.13 | ) | $ | (0.36 | ) |
| | | | | | | | |
| Weighted average number of common shares outstanding, basic and diluted | | | 49,373,033 | | | 9,410,000 | |
The accompanying notes are an integral part of these financial statements
CONSUMER DIRECT OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
| | | Three Months Ended March 31, 2006 | | Three Months Ended March 31, 2005 | |
| | | | | | |
Cash flows from operating activities: | | | | | |
| Net (loss) | | $ | (2,857,948 | ) | $ | (3,308,160 | ) |
| | | | | | | | |
Adjustments to reconcile net loss from operations to net cash used in operations: | | | | | | | |
| Depreciation | | | 153,676 | | | 188,734 | |
| Stock based expenses | | | 2,307,290 | | | 676,519 | |
Changes in operating assets and liabilities: | | | | | | | |
| (Increase) decrease in accounts receivable | | | (12,854 | ) | | 96,782 | |
| (Increase) decrease in mortgage loans held for sale | | | 831,200 | | | 7,865,635 | |
| (Increase) decrease in prepaid expenses | | | 324,786 | | | 69,573 | |
| (Increase) decrease in other assets | | | -- | | | 1,246,224 | |
| Increase (decrease) in accounts payable and accrued expenses | | | (431,491 | ) | | 213,557 | |
| (Increase) decrease in minority shareholder interest | | | -- | | | (39,031 | ) |
| | | | | | | | |
| Net cash provided by operating activities | | | 314,660 | | | 7,009,833 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | |
| | | | | | | | |
| Purchase of fixed assets | | | -- | | | (9,931 | ) |
| | | | | | | | |
| Net cash used in investing activities | | | -- | | | (9,931 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | |
| Net repayments on lines of credit | | | (828,857 | ) | | (6,852,893 | ) |
| Proceeds from related notes payable | | | 40,550 | | | 250,000 | |
| Proceeds from notes payable | | | 402,010 | | | -- | |
| Payments of notes payable | | | (117,243 | ) | | (117,243 | ) |
| Issuance of common stock | | | 58,654 | | | -- | |
| Dividends paid on preferred shares of subsidiary | | | -- | | | (36,318 | ) |
| Net cash used for financing activities | | | (327,644 | ) | | (6,756,454 | ) |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (12,984 | ) | | 243,448 | |
| | | | | | | | |
Cash and cash equivalents, beginning of period | | | 21,401 | | | 198,141 | |
| | | | | | | | |
Cash and cash equivalents, end of period | | $ | 8,417 | | $ | 441,589 | |
| | | | | | | | |
Supplemental disclosure of cash flow information | | | | | | | |
| | | | | | | | |
| Interest paid | | $ | -- | | $ | 67,930 | |
The accompanying notes are an integral part of these financial statements
CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS MARCH 31, 2006
(1) | Basis of Presentation: |
The unaudited financial statements as of March 31, 2006 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, 2005 audited financial statements and notes thereto.
Since inception through March 31, 2006, the Company has suffered recurring losses from operations of approximately $31,689,622. Although a substantial portion of the Company’s cumulative net loss is attributable to non-cash operating expenses, management believes that it will need additional equity or debt financing to be able to sustain its operations until it can achieve profitability, if ever. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
(2) | Principles of Consolidation: |
The consolidated financial statements include the accounts of Consumer Direct and its subsidiary Shearson Home Loans. 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 months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006.
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, 2005, included in the Company’s Annual Report on Form 10-KSB/A.
Earnings per share have been calculated based upon the weighted average number of common shares outstanding during both reporting periods.
(4) | Stock Issued for Services: |
The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counter party’s performance is complete or the date on which it is probable that performance will occur. For the quarter ended March 31, 2006, the amounts that have been charged against income for those services were approximately $2,307,290.
(5) | Related-Party Transactions: |
On January 21, 2005, the Company borrowed $125,000 from its Chief Financial Officer, Wayne Bailey.
CONSUMER DIRECT OF AMERICA
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
MARCH 31, 2006
During the month of December 2005, the Company entered in to financing agreement with Eclipse Holding Company, which is 50% owned by the Company’s Chief Executive Officer, Michael Barron. The Company entered into an agreement to borrow a total of $750,000 in the form of a note payable, with an interest of 10% per annum. At December 31, 2005, the outstanding balance on this note was $683,396. The agreement calls for the issuance of common stock warrants. As of March 31, 2006 the Company issued 22,469,999 shares.
On February 7, 2006, Consumer Direct of America agreed to sell Shearson Home Loans, Inc., a Nevada Corporation ("SHL"), and wholly owned subsidiary of Consumer Direct of America, Inc. ("CDA"), to Paragon Financial Corporation (PGNF), pursuant to the terms and conditions of a Share Exchange Agreement dated February 7, 2006 (the "Exchange Agreement") among CDA, SHL and PGNF. Pursuant to the Exchange Agreement, PGNF acquired all of the common stock of SHL for 149,558,791 shares of PGNF common stock and 79 shares of PGNF Series F Preferred Stock (convertible into 443,217,018 shares of PGNF Common Stock), valued at approximately $16,000,000. Each share of the Series F Preferred Stock automatically converts into 5,610,342 shares of PGNF common stock upon the filing of an amendment to PGNF articles. Immediately prior to entering into the Exchange Agreement, PGNF had 119,566,360 shares of PGNF common stock outstanding. In addition, PGNF had outstanding warrants to purchase 18,531,592 shares of PGNF common stock and outstanding debt convertible into 4,846,000 shares of PGNF common stock arriving at an exchange ratio of 4 to 1.
On April 14, 2006, the Company filed Form PRE 14A, requesting a vote of its shareholders, to increase the authorized shares of the Company to 200,000,000 from 100,000,000.
| 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 102 people, 85 of which are residential mortgage and/or real estate brokerage professionals. 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. 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
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
During the quarter ended March 31, 2005, we funded 287 loans with an aggregate dollar value of approximately $52 million compared to 770 loans with an aggregate dollar value of approximately $134 million in the quarter ended March 31, 2004. This decrease was due to a reduction of 47 branch locations and less favorable market conditions. The average loan size for the quarter ended March 31, 2005 was approximately $181,000, which was an increase from an average loan size of $175,000 for the quarter ended March 31, 2004.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Net revenues from origination and/or sale of loans decreased 86.1% or $1.2 million, to $191,444 for the quarter ended March 31, 2006 from $1.4 million for the quarter ended March 31, 2005. The decrease in revenues can be attributed to the sale of Ocean West.
Total operating expenses decreased $474,154 or 14.5% to $2.8 million for the quarter ended March 31, 2006 from $3.3 million for the quarter ended March 31, 2005. The decrease is related to expenses relating to Ocean West and an increase in professional fees.
We had a net loss of $2.9 million for the quarter ended March 31, 2006 compared to net loss of $3.4 million for the same quarter of 2005. The decrease in the loss for the March 31, 2006 quarter was due the sale of Ocean West and the Company restructuring its operations by eliminating certain overhead costs.
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. If our loan volume were to increase too rapidly, we believe the increase could have a severe impact on our liquidity. 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. Thus, it is crucial that we closely monitor our loan volume.
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 warehouse lines of credit with Bank of Arizona through our subsidiary, Shearson Home Loans and a Private Line with Club Vista. Shearson Home Loans, formerly Consumer Direct Lending, entered into a Mortgage Loan and Purchase Agreement with Bank of Arizona for $10,000,000. The facility is collateralized by the related mortgage loans receivable. Interest is due monthly at the bank reference rate plus an established percentage, varying from prime plus 1 to 1.5%. Each loan carries a fee of approximately $100 to $175 per loan. There are restrictive covenants relating to tangible net worth of not less than $250,000 and a debt to equity ratio no greater than 20:1, the Company is in compliance with the covenants as the equity of Shearson Home Loans is approximately $3.1 million. As of March 31, 2006 the outstanding balance with Bank of Arizona and the private line was $2.7 million. The lending limit on the line of credit through Bank of Arizona and the private line is $10 million and $5 million, respectively.
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.
Management currently believes that cash flows from operations should be sufficient to meet the Company’s current liquidity and capital needs at least through fiscal 2006 however, if they are not, management will seek equity funding from the public capital markets , so long as there are no material adverse changes to the terms or availability of our warehouse lines of credit, we believe we can meet our liquidity and capital needs at current production levels at least through fiscal 2006. However we are currently exploring possible liquidity sources either through additional borrowings or potential capital partners to enable us to increase our loan production and expansion. Future offerings are probable in order to fund the acquisition growth by the Company. The Company anticipates raising equity capital in the amount of $2 million during 2006 in order to fund the integration of this growth. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Any equity financing could result in dilution to existing stockholders.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Cash Flows
During the first three months of fiscal 2006 and 2005 we had net cash provided by operating activities of 314,660 and $7.0 million, respectively. The primary sources of net cash provided by was a decrease in receivables from loan sold, mortgage loans held for sale, decrease in accounts payable, stock based expenses of $2.3 million, for the month period ending March 31, 2006. The primary sources of net cash provided by was a decrease in receivables from loan sold, mortgage loans held for sale, decrease in other current assets and an increase in accounts payable and stock based expenses of $188,734, for the month period ending March 31, 2005 offset by the net loss for the period. As investors purchase loans, the amounts advanced for such loans through the warehouse lines of credit are paid. At that time, the receivables are cleared and the cash deposited in our operating account. These accounts vary significantly depending upon where the bulk of the loans are in the process of funding and selling.
Net cash used for investing activities during the first three months of fiscal 2006 and 2005 was $0 and $9,931, which was attributable to the purchase of property and equipment.
Net cash used for financing activities for the three months ended March 31, 2006 was $327,644. This consisted primarily of net payments under the warehouse lines of credit of $828,857, proceeds of notes payable related party of $40,550, proceeds of notes payable of $402,010, as well as issuance of common stock of $58,654. Net cash used for financing activities for the three months ended March 31, 2005 was $6.8 million This consisted primarily of net payments under the warehouse lines of credit of $6.8 million, proceeds of notes payable related party of $250,000, payments of notes payable of $117,243, as well as dividends paid of $36,318.
At 2005, the Company has net operating loss carryforwards (“NOLs”) of approximately $10,929,765, expiring in various years through 2017.
Regulatory Trends
The regulatory environments in which we operate have an impact on the activities in which we may engage, how the activities may be carried out and the profitability of those activities. Therefore, changes to laws, regulations or regulatory policies can affect whether and to what extent we are able to operate profitably. For example, proposed state and federal legislation targeted at predatory lending could have the unintended consequence of raising the cost or otherwise reducing the availability of mortgage credit for those potential borrowers with less than prime-quality credit histories, thereby resulting in a reduction of otherwise legitimate sub-prime lending opportunities.
Forward-Looking Statements
Statements contained in this Form 10-QSB that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements or events, or timing of events, to differ materially from any future results, performance or achievements or events, or timing of events, expressed or implied by such forward-looking statements. We cannot assure that we will be able to anticipate or respond timely to the changes that could adversely affect our operating results in one or more fiscal quarters. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of our securities.
In the event we need to raise additional financing, there can be no assurance that any such financing will be available on acceptable terms. If such financing is not available on satisfactory terms, we may be unable to expand or continue our business as desired and operating results may be adversely affected. Debt financing will increase expenses and must be repaid regardless of operating results. Equity financing could result in dilution to existing stockholders.
Some of the more prominent known risks and uncertainties of our business are set forth below. However, this section does not discuss all possible risks and uncertainties to which we are is subject, nor can it be assumed that there are not other risks and uncertainties which may be more significant.
| | · | Our losses from period to period; |
| | · | Our failure to continue to be an approved FHA mortgagee; |
| | · | Our dependence on the warehouse lines of credit which has been reduced ; |
| | · | Our need for additional funding sources so that our ability to originate and fund loans is not impaired and |
| | · | Our ability to compete with banks and other mortgage lenders that are significantly larger. |
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.
In the normal course of business, the Company is involved in various legal actions. It is the opinion of management that none of these legal actions will have a material effect on the financial position or results of operations of the Company.
On April 14, 2004, the Company commenced an action against Consulting Services LLC. Consulting Services LLC instituted a counterclaim on April 19, 2004, against the Company. Both claims are contented by the parties to be of a breach of contract nature from a certain Asset Acquisition Agreement in which the Company claims never consummated therfore services are not liable under the agreement. The counterclaimis of a similare nature which CDA is claiming no liabilty and Consulting Services LLC is asking for the the amount of stock agreed to be given for services per the acquistion agreement of approximately 2.4 million shares of the Company’s stock valued at the time to be approximately $1.8 million and $655,321 for certain liabilities the Company were to assume per the agreement upon closing. The Company is asserting its position of no liability and asking for approximately $712,859 of which was advanced to Consulting Services prior to the knowledge that the transaction was not to close. In April of 2005, the Company filed a motion for summary judgement. Management of the Company anticipates a favorable outcome and has determined it is not necessary to impair this investment.
| Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
| Defaults Under Senior Securities |
None.
| Submission of Matters to a Vote of Security Holders |
None.
None.
| Exhibits and Reports on Form 8-K |
INDEX OF EXHIBITS
Description of Exhibit | | Exhibit No. |
| | | |
| 302 Certifications | | 31 |
| | | |
(i) Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | |
| | | |
(ii) Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | |
| | | |
| 906 Certifications | | 32 |
| | | |
| (i) Certificate of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** | | |
On May 8, 2006, the Company filed a Form 8-K, announcing the resignation of its independent auditor and the engagement of its new independent auditor Pollard Kelley Auditing Services Inc. There have been no disagreements on any accounting principles or practices.
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: May 22, 2006 | | | |
| | By: | /s/ Michael A. Barron | |
| | | Michael A. Barron |
| | | Chief Executive Officer |
| | | | |
| Date: May 22, 2006 | | | |
| | By: | /s/ Lee Shorey | |
| | | Lee Shorey |
| | | Chief Financial Officer (Principal Accounting Officer) |
12
