UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 16, 2006
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EVOLVE ONE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-26415 13-3876100
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(Commission File Number) (IRS Employer Identification No.)
5301 N. Federal Highway, Suite 120, Boca Raton, FL, 33487
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(Address of Principal Executive Offices) (Zip Code)
(561) 989-9171
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(Registrant's Telephone Number, Including Area Code)
Post Office Box 859, Tallevast,Florida 34270
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(Former name or former address, if changed since
last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[__] Written communications pursuant to Rule 425 under the Securities
Act (17 CFR 230.425)
[__] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[__] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[__] Pre-commencement communications pursuant to Rule 133-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 1.01 Entry Into a Material Definitive Agreement.
Item 2.01 Completion of Acquisition or Disposition of Assets
Item 3.02 Unregistered Sales of Equity Securities
Item 5.01 Changes in Control of Registrant.
Item 5.02 Departure of Directors or Principal Officers; Election
of Directors; Appointment of Principal Officers
On August 16, 2006 we entered into and consummated a share exchange
with all of the shareholders of China Direct Investments, Inc. ("CDI"). Pursuant
to the share exchange, we acquired 100% of the issued and outstanding shares of
CDI's common stock, in exchange for 10,000,000 shares of our common stock, which
at closing represented approximately 95% of the issued and outstanding shares of
our common stock. As a result of the transaction, CDI became our wholly owned
subsidiary. Under the terms of the share exchange, the CDI shareholders received
one (1) shares of our common stock for each share of CDI common stock owned by
them prior to the transaction. In addition, all issued and outstanding options
of CDI exercisable into 9.046,000 shares of CDI's common stock were cancelled
and exchanged for identical options of Evolve exercisable into 9,046,000 shares
of common stock of Evolve, at exercise prices ranging from $.01 to $10.00 and
portions vesting periodically over the next three years. This share exchange,
which was structured to be a tax-free exchange under the Internal Revenue Code
of 1987, as amended, resulted in a change in our control, and was a reverse
merger for accounting purposes with CDI as the accounting survivor. Alvin
Siegel, our then sole officer and director resigned at the closing of the share
exchange and Yuejian(James) Wang, Marc Siegel and David Stein, who are the
officers and or directors of CDI, were appointed as follows: James
Wang as Chief Executive Office and director, Marc Siegel as President and
director, David Stein as Chief Operating Officer and director, and Jenny
Liu as Vice President of Finance. The biographical information for these persons
are described below under "Management." In addition, Evolve entered into
employment agreements with each of the new officers, descriptions of which are
described below under "Executive Compensation." No individuals or entities
received any compensation, including finder's fees, in connection with the share
exchange. The Share Exchange Agreement contains customary representations and
warranties and cross-indemnification provisions.
This transaction, which resulted in CDI becoming a wholly owned
subsidiary of our company, was exempt from registration under the Securities Act
of 1933, as amended in reliance on an exemption provided by Section 4(2) of that
Act. The participants were either accredited investors or non-accredited
investors who had such knowledge and experience in financial, investment and
business matters that they were capable of evaluating the merits and risks of
the prospective investment in our securities. No general solicitation or
advertising was used in connection with this transaction, and the certificates
evidencing the shares that were issued contained a legend restricting their
transferability absent registration under the Securities Act or the availability
of an applicable exemption therefrom. The participants had access to business
and financial information concerning our company and they each represented to us
that they were acquiring the shares for investment purposes only, and not with a
view towards distribution or resale except in compliance with applicable
securities laws.
A copy of the Share Exchange Agreement is filed as Exhibit 10.8 to this
report.
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Item 1.01 Entry into a Material Definitive Agreement.
On August 16, 2006, our Board of Directors authorized and holders of a
majority of our outstanding common stock approved and adopted our 2006 Equity
Compensation Plan. The purpose of the plan is to encourage stock ownership by
our officers, directors, key employees and consultants, and to give these
persons a greater personal interest in the success of our business and an added
incentive to continue to advance and contribute to us. We have currently
reserved 10,000,000 of our authorized but unissued shares of common stock for
issuance under the plan, and a maximum of 10,000,000 shares may be issued,
unless the plan is subsequently amended (subject to adjustment in the event of
certain changes in our capitalization), without further action by our Board of
Directors and stockholders, as required. Subject to the limitation on the
aggregate number of shares issuable under the plan, there is no maximum or
minimum number of shares as to which a stock grant or plan option may be granted
to any person. Shares used for stock grants and plan options may be authorized
and unissued shares or shares reacquired by us, including shares purchased in
the open market. Shares covered by plan options which terminate unexercised will
again become available for grant as additional options, without decreasing the
maximum number of shares issuable under the plan, although such shares may also
be used by us for other purposes. As of August 17, 2006 there are outstanding
options to purchase 9,046,000 shares under the 2006 Equity Compensation Plan.
The plan is administered by our Board of Directors or an underlying
committee. The Board of Directors or the committee determines from time to time
those of our officers, directors, key employees and consultants to whom stock
grants or plan options are to be granted, the terms and provisions of the
respective option agreements, the time or times at which such options shall be
granted, the type of options to be granted, the dates such plan options become
exercisable, the number of shares subject to each option, the purchase price of
such shares and the form of payment of such purchase price. All other questions
relating to the administration of the plan, and the interpretation of the
provisions thereof and of the related option agreements, are resolved by the
Board or committee.
Plan options may either be options qualifying as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended, or
non-qualified options. Our officers, directors, key employees and consultants
are eligible to receive stock grants and non-qualified options under the plan;
only our employees are eligible to receive incentive options. In addition, the
plan allows for the inclusion of a reload option provision which permits an
eligible person to pay the exercise price of the option with shares of common
stock owned by the eligible person and receive a new option to purchase shares
of common stock equal in number to the tendered shares. Furthermore,
compensatory stock grants may also be issued.
Any incentive option granted under the plan must provide for an
exercise price of not less than 100% of the fair market value of the underlying
shares on the date of grant, but the exercise price of any incentive option
granted to an eligible employee owning more than 10% of our outstanding common
stock must not be less than 110% of fair market value on the date of the grant.
The term of each plan option and the manner in which it may be exercised is
determined by the Board of Directors or the committee, provided that no option
may be exercisable more than ten years after the date of its grant and, in the
case of an incentive option granted to an eligible employee owning more than 10%
of the common stock, no more than five years after the date of the grant. The
exercise price of non-qualified options shall be determined by the Board of
Directors or the Committee, but shall not be less than the par value of our
common stock on the date the option is granted. The per share purchase price of
shares issuable upon exercise of a Plan option may be adjusted in the event of
certain changes in our capitalization, but no such adjustment shall change the
total purchase price payable upon the exercise in full of options granted under
the Plan.
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All incentive stock options expire on or before the 10th anniversary of
the date the option is granted; however, in the case of incentive stock options
granted to an eligible employee owning more than 10% of the common stock, these
options will expire no later than five years after the date of the grant.
Non-qualified options expire 10 years and one day from the date of grant unless
otherwise provided under the terms of the option grant.
All plan options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee. If an optionee dies while our
employee or within three months after termination of employment by us because of
disability, or retirement or otherwise, such options may be exercised, to the
extent that the optionee shall have been entitled to do so on the date of death
or termination of employment, by the person or persons to whom the optionee's
right under the option pass by will or applicable law, or if no such person has
such right, by his executors or administrators.
In the event of termination of employment because of death while an
employee or because of disability, the optionee's options may be exercised not
later than the expiration date specified in the option or one year after the
optionee's death, whichever date is earlier, or in the event of termination of
employment because of retirement or otherwise, not later than the expiration
date specified in the option or one year after the optionee's death, whichever
date is earlier. If an optionee's employment by us terminates because of
disability and such optionee has not died within the following three months, the
options may be exercised, to the extent that the optionee shall have been
entitled to do so at the date of the termination of employment, at any time, or
from time to time, but not later than the expiration date specified in the
option or one year after termination of employment, whichever date is earlier.
If an optionee's employment terminates for any reason other than death or
disability, the optionee may exercise the options to the same extent that the
options were exercisable on the date of termination, for up to three months
following such termination, or on or before the expiration date of the options,
whichever occurs first. In the event that the optionee was not entitled to
exercise the options at the date of termination or if the optionee does not
exercise such options (which were then exercisable) within the time specified
herein, the options shall terminate. If an optionee's employment shall terminate
for any reason other than death, disability or retirement, all right to exercise
the option shall terminate not later than 90 days following the date of such
termination of employment.
The plan provides that, if our outstanding shares are increased,
decreased, exchanged or otherwise adjusted due to a share dividend, forward or
reverse share split, recapitalization, reorganization, merger, consolidation,
combination or exchange of shares, an appropriate and proportionate adjustment
shall be made in the number or kind of shares subject to the plan or subject to
unexercised options and in the purchase price per share under such options. Any
adjustment, however, does not change the total purchase price payable for the
shares subject to outstanding options. In the event of our proposed dissolution
or liquidation, a proposed sale of all or substantially all of our assets, a
merger or tender offer for our shares of common stock, the Board of Directors
may declare that each option granted under the plan shall terminate as of a date
to be fixed by the Board of Directors; provided that not less than 30 days
written notice of the date so fixed shall be given to each participant holding
an option, and each such participant shall have the right, during the period of
30 days preceding such termination, to exercise the participant's option, in
whole or in part, including as to options not otherwise exercisable.
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The Board of Directors or committee may amend, suspend or terminate the
plan at any time. However, no such action may prejudice the rights of any holder
of a stock grant or optionee who has prior thereto been granted options under
the plan. Further, no amendment to the plan which has the effect of increasing
the aggregate number of shares subject to the plan (except for adjustments due
to changes in our capitalization), or changing the definition of "eligible
person" under the plan, may be effective unless and until approved by our
stockholder in the same manner as approval of the plan was required. Any such
termination of the plan shall not affect the validity of any stock grants or
options previously granted thereunder. Unless the Plan is approved by the
Company's stockholders within one year of the Effective Date, all incentive
stock options shall automatically be converted into non-qualified stock options.
Unless the plan shall previously have been suspended or terminated by the Board
of Directors, the plan, as it relates to grants of incentive stock options,
terminates on August 16, 2016.
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in
Fiscal Year
Evolve has filed a Certificate of Amendment to its Certificate of
Incorporation which changes the name of the company to China Direct, Inc. The
effective date of this corporate action will be the close of business on
September 18, 2006. The action was approved by the company's Board of Directors
and by the holders of a majority of its issued and outstanding capital stock by
written consent on August 16, 2006.
FORM 10-SB DISCLOSURE
Item 2.01(f) of Form 8-K states that if the registrant was a shell
company like we were immediately before the transaction disclosed under Item
2.01 (i.e. the reverse acquisition), then the registrant must disclose the
information that would be required if the registrant were filing a general form
for registration of securities on Form 10 or, as in our case, Form 10-SB.
Accordingly, we are providing below the information that would be
included in a Form 10-SB if we were to file a Form 10-SB. Please note that the
information provided below relates to the combined Company after the acquisition
of CDI, except that information relating to periods prior to the date of the
reverse acquisition only relate to the Company unless otherwise specifically
indicated.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Current Report on Form 8-K contains
forward-looking statements which reflect the views of the Registrant and its new
members of management with respect to future events and financial performance.
These forward-looking statements, including statements regarding the future
plans of the Registrant, the development of the products and technologies owned
by the Registrant and its subsidiary, and the market and need for those
products, are subject to certain uncertainties and other factors that could
cause actual results to differ materially from such statements. Forward-looking
statements are identified by words such as "anticipates," "believes,"
"estimates," "expects," "plans," "projects," "targets" and similar expressions.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date the statement was made. The
Registrant undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
-5-
All share and per share information contained in this annual report
gives effect to the 250 for 1 (250:1) reverse stock split effective January 31,
2003, a one for eight (1:8) forward stock split effective December 3, 2004, and
a 100 for 1 (100:1) reverse stock split effective June 28, 2006.
ITEM 1. DESCRIPTION OF BUSINESS
During fiscal 2005 our operations consisted of two Internet based
businesses, StogiesOnline.com and AuctionStore.com. StogiesOnline.com was an
online distributor and retailer of brand name premium cigars. AuctionStore.com
was an eBay(R) Trading Assistant and Internet-based seller of consigned
merchandise whose primary medium of sales is eBay(R). While we reported sales
from these operations of $114,904 for the nine months ended September 30, 2005,
as a result of competition in the marketplace and a lack of sufficient working
capital, during October 2005 we determined that our business model was
unprofitable and decided to discontinue the balance of our operations.
As a result of the discontinuation of our operations we sought to
acquire assets or shares of an entity actively engaged in business which
generates revenues, in exchange for our securities. On August 16, 2006 we
entered into and consummated a share exchange with all of the shareholders of
China Direct Investments, Inc. ("CDI"). Pursuant to the share exchange, we
acquired 100% of the issued and outstanding shares of CDI's common stock, in
exchange for 10,000,000 shares of our common stock, which at closing represented
approximately 95% of the issued and outstanding shares of our common stock. As a
result of the transaction, CDI became our wholly owned subsidiary.
CHINA DIRECT INVESTMENTS, INC.
China Direct Investments, Inc. provides specialized business consulting
services exclusively to Chinese companies seeking access to the U.S. capital
markets. Based upon both our experiences during our first year of operation as
well as the professional experience of our principals, during the second quarter
of fiscal 2006 we expanded the scope of our company through the establishment of
two additional operating divisions as discussed below. Our mission is to create
a platform to support, develop and nurture business opportunities arising from
the opening of markets in the People's Republic of China (the "PRC" or "China").
We believe that the combined resources of our three divisions, CDI Holdings, CDI
Consulting and CDI International Trading, working in tandem will create a
resource equipped to offer comprehensive business solutions to Chinese companies
enabling them to successfully access the U.S. markets.
Our three operating divisions include:
* CDI Holdings. The goal of CDI Holdings, one of our newly established
operating divisions, is to acquire majority interests in a variety of Chinese
companies engaged in operations which we believe will benefit from the
continuing growth of the Chinese economy. Examples of industries in which we
will focus our efforts include manufacturing, technology, mining, healthcare,
packaging, food & beverage, and import & export. We initially intend to target
companies that are small to medium sized entities, generally including companies
with less than $100 million (U.S.) in annual revenue, which we believe offer the
greatest opportunities for growth.
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We believe that China, which gained acceptance to the World Trade
Organization in 2001, is one of the world's largest and fastest growing
economies. We believe that the rapid development of the economy is upgrading the
quality of small to medium sized entities. We believe that China's increasingly
deregulated markets, new emerging technologies and changing social perspectives
have created a whole new class of young energetic entrepreneurs with great
ambitions, local market expertise, solid business development track records, but
often limited financial resources. We believe there is tremendous growth
potential in this sector. We believe, despite robust economic conditions and
great perspectives for the future, growth of Chinese private businesses are
greatly hindered by inadequacies of their financial sector, which is generally
recognized to still be in need of further reforms and improvements. We believe
the financial system in China, controlled by the government, does not have
sufficiently developed mechanisms to efficiently allocate capital. We believe
the financial markets are geared primarily towards the larger well-established
and best-connected firms, which are generally state-owned entities, the
privileged remnants of the old communist economy. We believe access to capital
by smaller companies is often limited to black market debt instruments with
interest rates exceeding 30% annually. Consequently, we believe many private
entities, which in effect stimulate economic growth and provide new local
employment opportunities, have been forced to look for alternative funding. We
believe that as the Chinese economy continues to grow and smaller companies
continue to need capital to participate in this growth, as a result of the
limited options available to them these small to medium sized companies will
seek alternative ways to finance their internal growth.
Our business model for CDI Holdings envisions the acquisition of a
majority interest of a Chinese entity, in a share exchange, with the amount of
our common stock issued in the transaction directly related to the shareholder
equity of the acquisition target. We would then utilize resources available to
us by virtue of our public company status to provide the necessary capital to
our subsidiary to enable it to grow its business and operations. Based upon our
early stage discussions with several investment banking firms, we believe that
we would be able to use the assistance of an investment banking firm to raise
additional capital as needed upon terms which would be acceptable to us.
At this time while we have preliminarily identified several potential
acquisition targets, we do not have binding agreements or letters of intent with
any companies nor do we have any firm commitments from any third parties to
provide additional working capital to our company.
* CDI Consulting. CDI Consulting is a full service advisory division
specializing in small Chinese-based companies which are traded on the U.S.
public markets. We offering a comprehensive suite of services tailored to the
specific needs of our clients. The menu of services offered by CDI Consulting
includes:
* U.S. representative offices
* Translation - English/Chinese
* General business consulting services
* Merger and acquisition strategy planning and analysis
* Advice on U.S. capital markets, including assessment of potential
sources of investment capital
* Coordination of professional resources
* Corporate asset evaluation
* Public relations and seminars
* Advice and structure assistance for strategic alliances, partnerships
and joint ventures
* Modeling/valuation analysis
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We enter into agreements with our clients which are generally for 12
months and the amount of our fee is based upon the scope of the services we
provide under the engagement. For the year ended December 31, 2005 and the six
months ended June 30, 2006, we had consulting agreements with and earned
revenues from, the following clients:
12/31/2005 6/30/2006
Linkwell Corporation $ 301,150 20% $ -
Sunwin International Neutraceuticals, Inc. $ 362,278 24% $ 93,150 24.08%
Dragon International Group Corp. $ 44,000 3% $ 90,000 37.49%
Dragon Capital Group Corp. $ 795,000 52% $ 145,000 23.27%
CIIC (Shanghai) $ 39,480 10.21%
Linkwell Corporation (OTCBB: LWLL), a Florida corporation, which is
located in Shanghai, China, specializes in the development, production, sale,
and distribution of disinfectant health care products ("Linkwell"). On August
24, 2005, Linkwell engaged us as a consultant to advise its management in areas
related to marketing and operational support in the U.S., media and public
relations, mergers and acquisitions, financial advisory and SEC disclosure
compliance. In addition, we also provide Linkwell with translation services for
both English and Chinese documents. Under the terms of our one year agreement,
we received 2,000,000 shares of common stock of Linkwell, valued at $160,000, as
compensation for our services, and we were granted three year warrants to
purchase 2,125,000 shares common stock of Linkwell at an exercise price of $0.20
per share commencing in January 2006. Linkwell also agreed to pay us additional
fees for our services as may be mutually agreed upon
Sunwin International Neutraceuticals, Inc. (OTCBB: SUWN) a Nevada
corporation, manufactures and sells stevioside, a natural sweetener, veterinary
products and herbs used in traditional Chinese medicine, with all of their
operations located in the People's Republic of China ("Sunwin"). In January 2006
we entered into a three year agreement with Sunwin pursuant to which we have
been engaged to provide support to Sunwin in a variety of areas, including
general business consulting, translation services, management of professional
resources, identification of potential acquisition targets and investment
sources, development of marketing plans and coordination of its public
disclosure. As compensation for our services, we received an aggregate of
3,670,000 shares of Sunwin's common stock, which included shares to be issued to
us as compensation under a prior June 2005 agreement, for an aggregate
compensation value of $558,900. The agreement may be terminated by either party
upon 30 days notice, however, the compensation paid to us is non refundable.
-8-
Dragon International Group Corp. (OTCBB: DRGG), a Nevada
corporation, manufactures and distributes paper and integrated packaging paper
products with all of their operations located in the People's Republic of China
("Dragon International"). In January 2006 we entered into a three year agreement
with Dragon International pursuant to which we have been engaged to provide
support to Dragon International in a variety of areas, including general
business consulting, translation services, management of professional resources,
identification of potential acquisition targets and investment sources,
development of marketing plans and coordination of its public disclosure. As
compensation for our services, we received an aggregate of 6,000,000 shares of
Dragon International's common stock, for an aggregate compensation value of
$54,000. The agreement may be terminated by either party upon 30 days
notice, however, the compensation paid to us is non refundable.
Dragon Capital Group Corp., (PINK SHEETS: DRGV), a Nevada
corporation, is a holding company for emerging technology companies in China
("Dragon Capital"). In January 2005 we entered into a three year agreement with
Dragon Capital pursuant to which we have been engaged to provide support to
Dragon Capital in a variety of areas, including general business consulting,
translation services, management of professional resources, identification of
potential acquisition targets and investment sources, development of marketing
plans and coordination of its public disclosure. As compensation for our
services, we received an aggregate of 30,000,000 shares of Dragon Capital's
common stock, for an aggregate compensation value of $735,000. The agreement
may be terminated by either party upon 30 days notice, however, the compensation
paid to us is non refundable.
CIIC Investment Banking Services (Shanghai) Company Limited, a
Chinese limited liability company, is a consulting company assisting Chinese
entities to access the U.S. capital markets ("CIIC Shanghai"). In February 2005
we entered into a three year mutual agreement with CIIC Shanghai pursuant to
which we have been engaged to provide support to CIIC Shanghai, and we engaged
CIIC Shanghai to provide us with support, each to provide such services in a
variety of areas, including general business consulting, translation services,
management of professional resources, identification and strategy planning of
potential acquisition targets and investment sources, development of marketing
plans, due diligence on potential clients, and assistance with GAAP auditing.
CIIC Shanghai and CDI shall pay fees and expenses to each other as determined on
a case-by-case basis. The agreement may be terminated by either party upon 30
days notice, however, the compensation paid to either party is non refundable.
Marc Siegel, president of CDI and Evolve, is also the chairman of the board and
a 20% owner of CIIC Shanghai. Dr. Yuejian (James) Wang, CEO of CDI and Evolve,
is also a director of CIIC Shanghai.
CDI International Trading. CDI International Trading is the second of
our recently formed operating divisions and it was created to support
international trade efforts of future subsidiaries and our consulting-client
companies. CDI International Trading intends to represent these manufacturers
and exporters in the marketing of their products in the U.S. and arranging their
import requirements. We anticipate that the menu of services to be provided by
CDI International Trading will include:
-9-
Import Export Licenses
Warehousing
Freight Forwarding
Customs
Distribution
Logistics
CDI International Trading will generate revenues from management of the
import export functions. In certain cases CDI will generate a fixed fee based on
the management of the import export process. In certain cases CDI will generate
a fee based on the amount of product sold, distributed, shipped, etc.
Marketing
We have established what we believe to be effective relationships and
contacts with various governmental agencies, public institutions, and private
industries in China at both the national and provincial levels. In addition, we
have established a relationship with China International Intellectech
Corporation ("CIIC") through a relationship we have with CIIC Investment Banking
Services (Shanghai) Company Limited, a joint venture principally owned by CIIC
and owned 20% by Marc Siegel, our president, director and a principal
shareholder. CIIC is headquartered in Beijing, is one of the 120 key enterprises
directly under the management of the State-owned Assets Supervision and
Administration Commission of the State Council of China, and since 2003 has been
rated as an outstanding service company by the State-owned Assets Supervision
and Administration Commission of the State Council, becoming one of the 56
first-class entities directly under the management of the Central Government.
CIIC has 60 subsidiaries in the PRC and abroad with annual revenues exceeding $1
billion in 2005. We believe the CIIC name is a well-recognized brand in China.
CIIC Investment Banking Services (Shanghai) Company Limited primarily serves as
a marketing company and sources private companies in China seeking to access the
U.S. capital markets. This is done through a variety of marketing techniques;
sponsor symposiums, individual relationships and trade conferences. We also have
developed a business conference program in China. We also sponsor a series of
business conferences which seek to educate the private sector in China on ways
to access the U.S. Capital markets. The business conference program has been
instrumental in promoting the name of China Direct Investments, Inc. to the
private sector in China. We believe that these relationships and the
continuation of our business conference program in China will assist our
marketing efforts to continue to grow our client base as well as providing
opportunities to identify potential acquisition targets for CDI Holdings.
Competition
We are a young company with a limited operating history for our CDI
Consulting division and no operating history for our other two, newly formed
divisions. The majority of our operational focus is on identifying and closing
one or more acquisitions for our CDI Holdings division. In identifying,
evaluating and selecting target businesses, CDI Holdings may encounter intense
competition from other entities having a business objective similar to ours,
including leveraged buyout and other private equity funds, operating businesses
and other entities and individuals, both foreign and domestic, competing for
business combinations with Chinese-based companies. Many of these entities are
well established and have extensive experience identifying and effecting
business combinations directly or through affiliates. Most of these competitors
possess greater financial, marketing, technical, human and other resources than
we do, and our financial resources will be relatively limited when contrasted
with those of many of these competitors. While we believe there are numerous
potential target businesses that may be available to us through the leverage of
our relationships with our consulting clients as well as an alliance with
CIIC Investment Banking Services (Shanghai) Company, Limited , our
ability to compete in acquiring certain sizable target businesses will be
limited by our available financial resources.
-10-
CDI Consulting competes with a range of companies, from large
management consulting companies that offer a broad range of consulting services,
to small firms and independent contractors that provide specialized services.
Some of our competitors have significantly more financial resources, larger
professional staffs and greater brand recognition than we do. Since our
consulting business depends in a large part on professional relationships, our
business has low barriers of entry for competitors. We believe that our ability
to successfully compete for new consulting clients and to retain our existing
clients is dependent upon our ability to offer a wide range of services and to
effectively respond to our client's needs on a timely and cost effective basis.
We cannot assure you that we will compete successfully for new business
opportunities or retain our existing clients.
Our CDI International division will compete against a number of
existing import and export companies. The vast majority of these competitors
have longer operating histories than our company in this specialized area. We
do not, however, presently intend to provide these services to companies other
than our subsidiaries and consulting clients.
Government regulation
Doing Business in the PRC
If we are successful in acquiring one or more operating companies which
are located in China, we will be subject to the PRC legal system. Since 1979,
many laws and regulations addressing economic matters in general have been
promulgated in the PRC. Despite development of its legal system, the PRC does
not have a comprehensive system of laws. In addition, enforcement of existing
laws may be uncertain and sporadic, and implementation and interpretation
thereof inconsistent. The PRC judiciary is relatively inexperienced in enforcing
the laws that exist, leading to a higher than usual degree of uncertainty as to
the outcome of any litigation. Even where adequate law exists in the PRC, it may
be difficult to obtain swift and equitable enforcement of such law, or to obtain
enforcement of a judgment by a court of another jurisdiction. The PRC's legal
system is based on written statutes and, therefore, decided legal cases are
without binding legal effect, although they are often followed by judges as
guidance. The interpretation of PRC laws may be subject to policy changes
reflecting domestic political changes. As the PRC legal system develops, the
promulgation of new laws, changes to existing laws and the preemption of local
regulations by national laws may adversely affect foreign investors. The trend
of legislation over the past 20 years has, however, significantly enhanced the
protection afforded foreign investors in enterprises in the PRC. However, there
can be no assurance that changes in such legislation or interpretation thereof
will not have an adverse effect upon our future business operations or
prospects.
Economic Reform Issues
Since 1979, the Chinese government has reformed its economic systems.
Many reforms are unprecedented or experimental; therefore they are expected to
be refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. We cannot
predict if this refining and readjustment process may negatively affect our
operations in future periods.
-11-
Over the last few years, China's economy has registered a high growth
rate. Recently, there have been indications that rates of inflation have
increased. In response, the Chinese government recently has taken measures to
curb this excessively expansive economy. These measures have included
devaluations of the Chinese currency, the Renminbi, restrictions on the
availability of domestic credit, reducing the purchasing capability of certain
of its customers, and limiting re-centralization of the approval process for
purchases of some foreign products. These austerity measures alone may not
succeed in slowing down the economy's excessive expansion or control inflation,
and may result in severe dislocations in the Chinese economy. The Chinese
government may adopt additional measures to further combat inflation, including
the establishment of freezes or restraints on certain projects or markets. There
can be no assurance that the reforms to China's economic system will continue or
that there will not be changes in China's political, economic, and social
conditions and changes in policies of the Chinese government, such as changes in
laws and regulations, measures which may be introduced to control inflation,
changes in the rate or method of taxation, imposition of additional restrictions
on currency conversion and remittance abroad, and reduction in tariff protection
and other import restrictions.
China's Accession into the WTO
On November 11, 2001, China signed an agreement to become a member of
the World Trade Organization ("WTO"), the international body that sets most
trade rules, further integrating China into the global economy and significantly
reducing the barriers to international commerce. China's membership in the WTO
was effective on December 11, 2001. China has agreed, upon its accession to the
WTO, to reduce tariffs and non-tariff barriers, remove investment restrictions,
provide trading and distribution rights for foreign firms, and open various
service sectors to foreign competition. China's accession to the WTO may
favorably affect our business in that reduced market barriers and a more
transparent investment environment will facilitate increased investment
opportunities in China, while tariff rate reductions and other enhancements will
enable us to develop better investment strategies for our clients. In addition,
the WTO's dispute settlement mechanism provides a credible and effective tool to
enforce members' commercial rights.
Investment Company Act of 1940
U.S. companies that have more than 100 shareholders or are publicly
traded in the U.S. and are, or hold themselves out as being, engaged primarily
in the business of investing, reinvesting or trading in securities are subject
to regulation under the Investment Company Act of 1940. While we do not believe
China Direct is an "investment company" within the scope of the Investment
Company Act of 1940, historically we have accepted shares of a consulting
client's securities as compensation for our services. During the time China
Direct was privately held, the holding of these securities did not make us
subject to the Investment Company Act of 1940 as we did not meet the shareholder
numerical test. Following the share exchange with the Registrant, Evolve One,
Inc., however, while our business model has not changed, by virtue of the
percentage of the value of marketable equity securities we hold (which were
received as compensation for our services and not purchased as an investment)
under certain circumstances we could be subject to the provisions of the
Investment Company Act of 1940.
-12-
Because Investment Company Act regulation is, for the most part,
inconsistent with our strategy of providing business consulting services and
overseeing the operations of our subsidiaries, we cannot feasibly operate our
business as a registered investment company. Our board of directors has adopted
a resolution stating that it is not our intent to become subject to the
Investment Company Act of 1940 and authorizing our officers to take such actions
as are necessary, including the periodic liquidation of any marketable equity
securities we may own to reduce those holdings below the threshold level as
prescribed by the Investment Company Act of 1940. If we are deemed to be, and
are required to register as, an investment company, we will be forced to comply
with substantive requirements under the Investment Company Act of 1940,
including:
* limitations on our ability to borrow;
* limitations on our capital structure;
* restrictions on acquisitions of interests in associated companies;
* prohibitions on transactions with affiliates;
* restrictions on specific investments; and
* compliance with reporting, record keeping, voting, proxy disclosure
and other rules and regulations.
Employees
As of August 16, 2006 we have 6 full time employees, all based in the
U.S. We believe our employee relations to be good.
Legal proceedings
We are not a party to any pending or threatened legal proceedings.
History of our company
China Direct was incorporated under the laws of the State of Florida
on January 18, 2005.
On August 16, 2006 CDI and the holders of all the issued and
outstanding shares of CDI entered into and consummated a share exchange with the
Registrant, Evolve One, Inc. Pursuant to the share exchange, the Registrant
acquired 100% of the issued and outstanding shares of CDI's common stock, in
exchange for 10,000,000 shares of the Registrant's common stock, which at
closing represented approximately 95% of the issued and outstanding shares of
the Registrant's common stock. As a result of the transaction, CDI became a
wholly owned subsidiary of the Registrant.
-13-
HISTORY OF EVOLVE
We were incorporated on June 7, 1999 in Delaware initially under the
name Caprock Corporation to engage in any lawful corporate undertaking,
including, but not limited to, selected mergers and acquisitions. On November
26, 1999, International Internet, Inc., a Delaware corporation, acquired 100% of
our issued and outstanding stock from TPG Capital Corporation, our sole
stockholder, pursuant to a stock purchase agreement in exchange for 5,000 shares
of common stock of International Internet, Inc. In December 1999 Caprock was
merged into International Internet with International Internet being the
surviving company. Effective November 21, 2000, International Internet changed
its name to Evolve One, Inc.
Our original business was operated as a developmental stage company in
Mr. Cigar, Inc. which was formed in May 1997. Mr. Cigar was in the business of
licensing, selling and/or operating cigar vending machines. We formed
StogiesOnline.com, Inc. in April 1999. StogiesOnline was an online distributor
and retailer of brand name premium cigars within the United States. As a result
of the initial success of the StogiesOnline website, we refocused our resources
in 1999 into the Internet cigar sales market and other specialty goods. We sold
the vending equipment and business of Mr. Cigar in December 1999. As described
earlier in this section, in October 2005 we discontinued the operations of
StogiesOnline.com.
In February 1999, we formed GoldOnline.com, Inc. for the purpose of
acquiring the domain name GoldOnline.com. The domain name was acquired for
$25,000 and 320 shares of our common stock. In June 1999, we sold 100% of the
issued and outstanding stock in GoldOnline.com, Inc. for 10,000,000 shares of
the common stock of GoldOnline International, Inc. resulting in no gain or loss
to us.
We formed Web Humidor.com Corp. in April 1999. for the purpose of
acquiring the domain name WebHumidor.com. The domain name was acquired for
$3,000 and 30,000 shares of WebHumidor.com, Corp. common stock and 32 shares of
our common stock. This subsidiary remains inactive.
We acquired American Computer Systems ("ACS") effective September 30,
1999 for $150,000. We sold 80% of our investment effective March 31, 2001 for
$500,000, and on September 11, 2001 we sold the remaining 20% interest to an ACS
officer in exchange for discharge of any liabilities of ACS.
-14-
We acquired 90% of the capital stock of TheBroadcastWeb.com, Inc. in
June 1999 for $18,000 cash and 12 shares of our common stock. On December 14,
2001, we sold our interest to NYCLE Acquisition Corp. Under the terms of the
transaction, the purchaser assumed substantially all of the on-going liabilities
of TheBroadcastWeb.com, Inc. and we received certain advertising time which was
valued at approximately $100,000, consisting of two ad spots per hour, per
format for a two year period. The purchaser did not assume an intra-company
payable or any liabilities for outstanding federal, state and local taxes as
well as payroll obligations incurred prior to December 15, 2001.
On September 28, 2001, we formed A1DiscountPerfume Inc. and in October
2001, launched a new e-commerce site specializing in men's and women's
fragrances. As a result of an increase in charge backs related to the
unauthorized use of credit cards by third parties to make online purchases of
merchandise from A1DiscountPerfume, as well as significant competition within
this market segment, as of December 31, 2004 we discontinued the operations of
A1Discount Perfume Inc.
On June 25, 2004, we purchased the URL www.Auctionstore.com for $6,500.
On July 22, 2004 we formed, Auctionstore.com which was to function as an
Internet-based seller of consigned merchandise whose primary medium of sales is
eBay(TM). In May 2005 we formed a new subsidiary, AuctionStore Franchise Corp.,
to market and service franchises of AuctionStore.com. This subsidiary is
inactive. As described earlier in this section, in October 2005 we discontinued
the operations of AuctionStore.com.
RISK FACTORS
Before you invest in our securities, you should be aware that there are various
risks. You should consider carefully these risk factors, together with all of
the other information included in this Current Report on Form 8-K before you
decide to purchase our securities. If any of the following risks and
uncertainties develop into actual events, our business, financial condition or
results of operations could be materially adversely affected and you could lose
all of your investment in our company.
We have limited history of operations and we cannot assure you that our
business model will be successful in the future or that our operations will
be profitable.
China Direct began operations in January 2005 and, accordingly,
investors have a limited history of operations upon which to evaluate our
business. While we reported comprehensive income of $506,133 and $1,214,972 for
the fiscal year ended December 31, 2005 and the six months ended June 30, 2006,
respectively, our operating results for future periods will include significant
expenses, including marketing costs, and administrative and general overhead
expenses, which we will incur as we implement our business model to expand our
operations, as well as increased legal and accounting fees we will incur as a
public company following the reverse merger. As a result, we are unable to
predict whether we will achieve profitability in the future. There can be no
assurances whatsoever that we will be able to successfully implement our
business model, identify and close acquisitions of operating companies,
penetrate our target markets or attain a wide following for our services. We are
subject to all the risks inherent in an early stage enterprise and our prospects
must be considered in light of the numerous risks, expenses, delays, problems
and difficulties frequently encountered in those businesses.
-15-
The success of our business model is dependent upon our ability to identify
and close acquisitions of operating companies in China. The acquisition of
new businesses is costly and such acquisitions may not enhance our financial
condition.
Our primary business and operational focus is on our CDI Holdings
division. Our growth strategy is to acquire companies and identify and acquire
assets and technologies from businesses in China that have services, products,
technologies, industry specializations or geographic coverage that extend or
complement our existing business. The process to undertake a potential
acquisition is time-consuming and costly. We expect to expend significant
resources to undertake business, financial and legal due diligence on our
potential acquisition targets and there is no guarantee that we will acquire the
company after completing due diligence. The process of identifying and
consummating an acquisition could result in the use of substantial amounts of
cash, potentially dilutive issuances of equity securities and exposure to
undisclosed or potential liabilities of acquired companies. If we are successful
in closing one or more acquisitions, there are no assurances that the operations
of these business will enhance our future financial conditions including to the
extent that the businesses acquired in these transactions do not remain
competitive, some or all of the goodwill related to that acquisition could be
charged against our future earnings, if any.
Our management may be unable to effectively integrate our acquisitions and to
manage our growth and we may be unable to fully realize any anticipated
benefits of these acquisitions.
We are subject to various risks associated with our growth strategy,
including the risk that we will be unable to identify and recruit suitable
acquisition candidates in the future or to integrate and manage the acquired
companies. We face particular challenges in that our acquisition strategy is
based on Chinese-based target companies. Acquired companies' histories, the
geographical location, business models and business cultures will be different
from ours in many respects. Even if we are successful in identifying and closing
acquisitions of companies, our directors and senior management will face
significant challenges in their efforts to integrate the business of the
acquired companies or assets and to effectively manage our continued growth. Any
future acquisitions will be subject to a number of challenges, including:
* the diversion of management time and resources and the potential
disruption of our ongoing business;
* difficulties in maintaining uniform standards, controls,
procedures and policies; potential unknown liabilities
associated with acquired businesses;
* the difficulty of retaining key alliances on attractive terms
with partners and suppliers; and
* the difficulty of retaining and recruiting key personnel and
maintaining employee morale.
There can be no assurance that our efforts to integrate the operations
of any acquired assets or companies will be successful, that we can manage our
growth or that the anticipated benefits of these proposed acquisitions will be
fully realized.
-16-
The Investment Company Act of 1940 will limit the value of securities we can
accept as payment for our business consulting services which may limit our
future revenues.
All of our revenues to date have been generated from our business
consulting services. We have historically accepted stock as payment for our
these services and may continue to do so in the future, but only to the extent
that it does not cause us to become an investment company under the Investment
Company Act 1940. To the extent that we are required to reduce the amount of
stock we accept as payment for our business consulting services to avoid
becoming an investment company, our future revenues from our business consulting
services may substantially decline if our client companies cannot pay our fees
in cash which will materially adversely effect our financial condition and
results of operations in future periods. Any future change in our fee structure
for our business consulting services could also severely limit our ability to
attract business-consulting clients in the future.
We may be unable to pay our income taxes on a timely basis.
For the six months ended June 30, 2006 we recorded an income tax
expense of $118,189 and for the period of January 18, 2005 (inception) to June
30, 2005 we recorded an income tax benefit of $(73,039). As we report profitable
operations we are required to record income tax expenses on those operations.
However, as the majority of our revenues are paid to us in securities, some of
which are not freely saleable by us at the time received, our revenue model
creates a risk that we will not have sufficient cash resources to satisfy our
tax obligations as they become due. At June 30, 2006 our balance sheet reflects
a liability for income tax which is payable on revenues we have recognized of
$100,503, together with a liability for income tax which will be due on deferred
revenues when recognized of $975,196. We will need to raise additional working
capital to pay income taxes. Based upon our early stage discussions with several
investment banking firms, we believe that we will be able to raise additional
capital as needed upon acceptable terms; however, we cannot assure you that we
will be able to raise the working capital as needed in the future on terms
acceptable to us, if at all. If we do not raise funds as needed, we may be
unable to timely pay our income taxes.
We cannot assure you that the current Chinese policies of economic reform will
continue. Because of this uncertainty, there are significant economic risks
associated with doing business in China.
Although the majority of productive assets in China are owned by the
Chinese government, in the past several years the government has implemented
economic reform measures that emphasize decentralization and encourage private
economic activity. In keeping with these economic reform policies, the PRC has
been openly promoting business development in order to bring more business into
the PRC. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
* the Chinese government will continue its pursuit of economic reform
policies;
* the economic policies, even if pursued, will be successful;
* economic policies will not be significantly altered from time to
time; and
* business operations in China will not become subject to the
risk of nationalization.
-17-
We cannot assure you that we will be able to capitalize on these
economic reforms, assuming the reforms continue. Because our business model is
dependent upon the continued economic reform and growth in China, any change in
the Chinese governments policies could materially adversely effect our ability
to implement our business model. China's economy has experienced significant
growth in the past decade, but such growth has been uneven across geographic and
economic sectors and has recently been slowing. Even if the Chinese government
continues its policies of economic reform, there are no assurances that economic
growth in that country will continue our that we will be able to take advantage
of these opportunities in a fashion that will provide financial benefit to our
company.
We will need additional financing which we may not be able to obtain on
acceptable terms.
We will need to raise additional working capital to implement our
business model. While our business model contemplates the issuance of equity
securities for the stock of the acquired company, capital may be needed for the
acquisition of companies. Capital will also be needed for the effective
integration, operation and expansion of these businesses. Our future capital
requirements, however, depend on a number of factors, including the financial
condition of an acquisition target and its needs for capital, our ability to
grow revenues from other sources, our ability to manage the growth of our
business and our ability to control our expenses. Based upon our early stage
discussions with several investment banking firms, we believe that we will be
able to raise additional capital as needed upon acceptable terms; however, we
cannot assure you that we will be able to raise the working capital as needed in
the future on terms acceptable to us, if at all. If we do not raise funds as
needed, we will be unable to fully implement our business model.
Additional capital raising efforts in future periods may be dilutive to our
then current stockholders or result in increased interest expense in
future periods.
In our future capital raising efforts we may seek to raise additional
capital through the sale of equity and debt securities or a combination thereof.
If we raise additional capital through the issuance of debt, this will result in
increased interest expense. If we raise additional funds through the issuance of
equity or convertible debt securities, the percentage ownership of our company
held by existing stockholders will be reduced and those stockholders may
experience significant dilution. In addition, new securities may contain certain
rights, preferences or privileges that are senior to those of our common stock.
The value of the equity securities we occasionally accept as compensation are
subject to adjustment which could result in losses to us in future periods.
Historically we have accepted equity securities of consulting clients
as compensation for our consulting services. These securities are reflected on
our balance sheet as "investment in marketable securities held for sale." We
evaluate quarterly the carrying value of each investment for a possible increase
or decrease in value. Because we do not want to be considered an investment
company, it is to our benefit to keep the carrying values of these securities as
low as possible. This review may result in an adjustment to their carrying value
which could adversely affect our operating results for the corresponding
quarters in that we might be required to reduce our carrying value of the
investments. In addition, if we are unable to liquidate these securities, we
will be required to write off the investments which would adversely affect our
financial position.
-18-
Acquisition efforts in future periods may be dilutive to our then current
stockholders.
We intend to consummate acquisitions in the future through the issuance of
equity or convertible debt securities. As a result, the percentage ownership of
our company held by existing stockholders will be reduced and those stockholders
may experience significant dilution. In addition, new securities may contain
certain rights, preferences or privileges that are senior to those of our common
stock.
The Company is dependent upon its management and its ability to hire key
personnel.
The success of the Company will be largely dependent on the personal
efforts of Yuejian (James) Wang, Marc Siegel and David Stein. Although we have
employment agreements with these officers, the loss of the services of any of
them would have a material adverse effect on our business and prospects. In
addition, in order for us to undertake our operations as contemplated, it will
be necessary for us to locate and hire experienced personnel who are bilingual
and knowledgeable in the US capital markets, the China markets and GAAP
accounting standards. Our failure to attract and retain such experienced
personnel on acceptable terms would have a material adverse impact on our
ability to grow our business.
If we experience customer concentration, we may be exposed to all of the risks
faced by our material customers.
For the six months ended June 30, 2006, revenues from four of our
clients represented approximately 37 %, approximately 23%, approximately 24% and
approximately 10% of our total net revenues. For the fiscal year ended December,
31 2005, revenues from three of our clients represented approximately 52%,
approximately 24% and approximately 20% of our total net revenues, two of these
clients represented 24% and 23% at June 30, 2006. Unless we maintain multiple
client relationships, it is likely that we will experience periods during which
we will be dependent on a limited number of clients. Dependence on a few clients
could make it difficult to negotiate attractive fees for our services and could
expose us to the risk of substantial losses if a single dominant client stops
conducting business with us. Moreover, to the extent that we are dependent on
any single client, we are subject to the risks faced by that client to the
extent that such risks impede the client's ability to stay in business and make
timely payments to us.
We have not voluntarily implemented various corporate governance measures,
in the absence of which, stockholders may have more limited protections
against interested director transactions, conflicts of interest and similar
matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002,
has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges and Nasdaq are
those that address board of directors' independence, audit committee oversight,
and the adoption of a code of ethics. Although we have adopted a Code of Ethics,
we have not yet adopted any of these other corporate governance measures and,
since our securities are not yet listed on a national securities exchange or
Nasdaq, we are not required to do so. We have not adopted corporate governance
measures such as an audit or other independent committees of our board of
directors. If we expand our board membership in future periods to include
additional independent directors, we may seek to establish an audit and other
committees of our board of directors. It is possible that if we were to adopt
some or all of these corporate governance measures, stockholders would benefit
from somewhat greater assurances that internal corporate decisions were being
made by disinterested directors and that policies had been implemented to define
responsible conduct. For example, in the absence of audit, nominating and
compensation committees comprised of at least a majority of independent
directors, decisions concerning matters such as compensation packages to our
senior officers and recommendations for director nominees may be made by a
majority of directors who have an interest in the outcome of the matters being
decided. Prospective investors should bear in mind our current lack of corporate
governance measures in formulating their investment decisions.
-19-
Because our stock currently trades below $5.00 per share, and is quoted on the
OTC Bulletin Board, our stock is considered a "penny stock" which can
adversely affect its liquidity.
For so long as the trading price of our common stock is less than $5.00
per share, our common stock is considered a "penny stock," and trading in our
common stock is subject to the requirements of Rule 15g-9 under the Securities
Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements. The broker/dealer must make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with
any trades involving a "penny stock," including the delivery, prior to any penny
stock transaction, of a disclosure schedule explaining the penny stock market
and its associated risks. These requirements severely limit the liquidity of
securities in the secondary market because few broker or dealers are likely to
undertake these compliance activities. In addition to the applicability of the
penny stock rules, other risks associated with trading in penny stocks could
also be price fluctuations and the lack of a liquid market. Finally, as a penny
stock we may not be entitled to the protections provided by the Private
Securities Litigation Reform Act of 1995.
Provisions of our articles of incorporation and bylaws may delay or prevent a
take-over which may not be in the best interests of our stockholders.
Provisions of our articles of incorporation and bylaws may be deemed to
have anti-takeover effects, which include when and by whom special meetings of
our stockholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Nevada Revised Statutes also may
be deemed to have certain anti-takeover effects which include that control of
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless these voting rights are approved by a majority of a
corporation's disinterested stockholders.
In addition, our articles of incorporation authorize the issuance of up
to 10,000,000 shares of preferred stock with such rights and preferences as may
be determined from time to time by our board of directors, of which no shares
are presently issued and outstanding. Our board of directors may, without
stockholder approval, issue preferred stock with dividends, liquidation,
conversion, voting or other rights that could adversely affect the voting power
or other rights of the holders of our common stock.
-20-
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this prospectus contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, our ability to implement our strategic
initiatives, economic, political and market conditions and fluctuations,
government and industry regulation, interest rate risk, U.S. and global
competition, and other factors. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should consider the areas
of risk described in connection with any forward-looking statements that may be
made herein. Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review this prospectus
in its entirety, including the risks described in "Risk Factors." Except for our
ongoing obligations to disclose material information under the Federal
securities laws, we undertake no obligation to release publicly any revisions to
any forward-looking statements, to report events or to report the occurrence of
unanticipated events. These forward-looking statements speak only as of the date
of this prospectus, and you should not rely on these statements without also
considering the risks and uncertainties associated with these statements and our
business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction
with our financial statements and the accompanying notes appearing elsewhere in
this Report on Form 8-K.
OVERVIEW
CDI Consulting is a full service advisory division specializing in
small Chinese-based companies which are traded on the U.S. public markets. We
offer a comprehensive suite of services tailored to the specific needs of our
clients. The menu of services offered by CDI Consulting includes:
* U.S. representative offices
* Translation - English/Chinese
* General business consulting services
* Merger and acquisition strategy planning and analysis
* Advice on U.S. capital markets, including assessment of
potential sources of investment capital
* Coordination of professional resources
* Corporate asset evaluation
* Public relations and seminars
* Advice and structure assistance for strategic alliances,
partnerships and joint ventures
* Modeling/valuation analysis
-21-
We enter into agreements with our consulting clients which provide for
a fixed fee to us for our services. The amount of fee varies based upon the
scope of the services we render. Historically, a significant portion of our fees
have been paid in shares of our client's securities which are valued at fair
market value for the purposes of our revenue recognition. Depending upon the
particular client, we may receive either unregistered shares with registration
rights or a client may issue shares directly to one of our executive officers
which are covered under a registration statement and, accordingly, freely
saleable. Our policy is to sell securities we receive as compensation in
anticipation of short-term market movements and not to hold these securities as
investments.
We currently have a limited number of client companies, including one
client company which is a related party, and, accordingly, are dependent on
revenues generated from a few clients. For the period of January 18, 2005
(inception) to December 31, 2005 three of our client companies represented
approximately 99% of our revenues and the six months ended June 30, 2006fourof
our clients represented approximately 94%of our revenues.. Included in our total
revenues are revenues from a related party which represented approximately 55%
and approximately 37.5% of our total revenues for the period of January 18, 2005
(inception) to December 31, 2005 and the six months ended June 30, 2006,
respectively. As hereinafter described, we are expanding our business model
which, if successful, will remove our dependence on a limited number of clients.
The fees due under the contracts with our consulting clients are
amortized over the term of the agreement. Our balance sheet at June 30, 2006
appearing elsewhere herein reflects both deferred revenues - short term, which
will be recognized by us during the next 12 months, and deferred revenues - long
term which will be recognized beyond the 12 month period. In instances where the
securities accepted for payment are issued directly to one of our executive
officers, we recognize the revenue represented by those securities consistent
with our revenue recognition policy and the net value of those securities, after
deduction of any costs of those revenues, are then deemed compensation paid to
the particular executive officer.
Our cost of revenues include direct costs we incur in rendering the
services to our client companies, which include marketing, legal and accounting
fees directly related to the particular client. In addition, we may engage
certain third party consultants to assist us in providing the contracted
services to our client company and the costs of those third party consultants
are included in our cost of revenues. Our arrangements with our consulting
clients generally provide that our fee will cover the costs of attorneys,
accounting personnel and auditors working on behalf of the client company. As
these professional generally will not provide services on a fixed fee basis, and
the scope of the services necessary for a particular client company can vary
from project to project, our cost of revenues can ultimately be significantly
higher than we initially projected which can adversely impact our gross profit
margins.
-22-
While it is not our policy to hold securities we accept as payment for
services as long-term investments, we are not always able to immediately
liquidate such securities as a result of either market conditions or
restrictions on resale imposed by Federal securities laws. These unsold
securities comprise substantially all of our assets. Our balance sheet reflects
investment in trading securities, which are securities which are freely saleable
by us, and investments in marketable securities held for sale - related party,
which represent securities which are not freely saleable under Federal
securities laws. Realized gains or losses on securities are recognized at the
time the securities are sold. Unrealized gains or losses on trading securities
are recognized on a monthly basis in our statement of operations based upon the
changes in the fair market value of the securities. Unrealized gains or losses
on investment in marketable securities held for sale are recognized as a
component of comprehensive income on a monthly basis based on changes in the
fair market value of the securities. These changes in valuations of the
securities can have the effect of significantly increasing our net income and
comprehensive income, if the price of the securities increases from the original
value assigned to it at the time the related revenue was recognized. Conversely,
if the price were to decline, such decreases could negatively impact our net
income and comprehensive income.
Based upon both our experiences during our first year of operation as
well as the professional experience of our principals, during the second quarter
of fiscal 2006 we expanded the scope of our company through the establishment of
two additional operating divisions. Our business model for CDI Holdings
envisions the acquisition of a majority interest of a Chinese entity in a share
exchange, with the amount of our common stock issued in the transaction directly
related to the shareholder equity of the acquisition target. We would then
utilize resources available to us by virtue of our public company status to
provide the necessary capital to our subsidiary to enable it to grow its
business and operations. Based upon our early stage discussions with several
investment banking firms, we believe that we would be able to use the assistance
of an investment banking firm to raise additional capital as needed upon terms
which would be acceptable to us. CDI International Trading will generate
revenues from management of the import export functions. In certain cases CDI
will generate a fixed fee based on the management of the import export process.
In certain cases CDI will generate a fee based on the amount of product sold,
distributed, shipped, etc.
Our mission is to create a platform to support, develop and nurture
business opportunities arising from the opening of markets in the People's
Republic of China. We believe that the combined resources of our three
divisions, CDI Holdings, CDI Consulting and CDI International Trading, working
in tandem will create a resource equipped to offer comprehensive business
solutions to Chinese companies enabling them to successfully access the U.S.
markets.
-23-
RESULTS OF OPERATIONS
Six months ended June 30, 2006 as compared to the period of January 18, 2005
(inception) to June 30, 2005
Six Months Ended January 18, 2005 Increase/ Increase/
June 30, 2006 (inception) to (Decrease) (Decrease)
June 30,2005 $ 2006 vs 2005 % 2006 vs 2005
--------------------------------------------------------------------------------------
(unaudited) (unaudited)
--------------------------------------------------------------------------------------
Revenues $241,832 $314,850 $(73,018) (23.2)%
Revenues - related party 145,000 391,500 $(246,500) (63.0)%
Total revenues $386,832 $706,350 $(319,518) (45.2)%
Cost of revenues 148,794 25,503 $123,291 483%
Gross profit 238,038 680,847 $(442,809) (65.0)%
Operating expenses:
Selling, general and
administrative expenses -
related parties 11,252 127,576 $(116,324) (91.2)%
Selling, general and
administrative 842,088 368,830 $473,258 128%
Total operating expenses 853,340 496,406 $356,934 71.9%
Operating (loss) income (615,302) 184,441 $(799,743) NM
--------------------------------------------------------------------------------------
Other income (expense):
Unrealized gain (loss) on
trading securities 273,500 0 273,500 100%
Realized gain on sale of
trading securities 43,345 0 43,345 100%
Net (loss) income before
income tax (298,457) 184,441 $(482,898) NM
Income tax benefit (expense) (118,189) (73,039) 45,150 NM
--------------------------------------------------------------------------------------
Net (Loss) Income (180,268) 111,402
Unrealized gain on marketable
securities held for sale,
net of income tax 1,395,240 1,040,573 $ 354,667 34.1%
--------- ---------
Comprehensive income $1,214,972 $1,151,975 $ 62,517 5.4%
======================================================================================
NM = not meaningful
-24-
Revenues
Our revenues decreased $319,518 to $386,832 for the six months ended
June 30, 2006 as compared to revenues of $706,350 for period of January 18, 2005
(inception) to June 30, 2005. Revenues from a company which is an affiliate of
one of our executive officers and directors represented approximately 37.5% and
approximately 55.4%, respectively, of our total revenues for the six months
ended June 30, 2006 and 2005. Included in our revenues for the six months ended
June 30, 2006 are cash revenues of $145,000 and revenues attributable to the
value of securities we received as compensation for our services of $241,832.
For the period of January 18, 2005 (inception) to June 30, 2005, we received
cash revenues of $55,250 and revenues attributable to the value of securities we
received as compensation for our services of $651,100. This decrease of
approximately 45% in our revenues from period to period is primarily
attributable to consulting agreements with longer terms during the six-month
ended June 30, 2006 for which fees are recognized over a longer period. At June
30, 2006 we had deferred revenue - short term of $366,300 which will be
recognized over the following 12 months, and deferred revenue - long term of
$549,450 which will be recognized in periods after June 30, 2007.
While we continue to market our consulting services, until we raise
additional working capital to fund the hiring of additional employees and the
expansion of our infrastructure in order to permit us to expand our client base
it is unlikely that we will accept engagements from additional consulting
clients, thereby limiting our ability to generate revenues in future periods. In
addition, and as described elsewhere herein, it is our intention to diversify
our operations which includes the acquisition of one or more operating
companies. If these acquisitions are consummated, our revenues in future periods
will also include revenues attributable to the operations of those subsidiaries.
As our ability to acquire operating subsidiaries is subject to a number of
condition, most of which are beyond our control, we cannot assure you that we
will ever be able to successfully implement our expanded business model or
increase our revenues in future periods.
Cost of revenues and gross profit
Our costs of revenues increased to $148,794, or approximately 38.5% of
revenues, for the six months ended June 30, 2006 as compared to $25,503, or
approximately 3.6% of revenues, for the period of January 18, 2005 (inception)
to June 30, 2005. As a result of this significant increase in cost of revenues
as a percentage of sales, our gross profit margin decline to approximately 61.5%
for the six months ended June 30, 2006 from approximately 96.4% for the period
of January 18, 2005 (inception) to June 30, 2005. Our costs of revenues for the
six months ended June 30, 2006 primarily included costs associated with
marketing expenses, legal and accounting fees and third party consultants, while
our costs of revenues for the period of January 18, 2005 (inception) to June 30,
2005 primarily included legal fees. Because the scope of services can vary under
our contracts with our consulting clients, while we will incur additional costs
of revenues in future periods related to existing contracts, we are unable to
estimate the amount of such expenses. These costs of revenues in future periods
will be expensed as incurred and, accordingly, while the revenues from existing
contracts will be recognized ratably over the term of the agreement, the gross
profit margin on revenues from these deferred revenues can vary from period to
period.
-25-
Total operating expenses
Our total operating expenses for six months ended June 30, 2006
increased $356,934, or approximately 72%, from period of January 18, 2005
(inception) to June 30, 2005. Our operating expenses generally consist of
selling, general and administrative expenses (SG&A) including officers' and
employees' compensation, professional fees, and travel expenses. The increase in
total SG&A for the six months ended June 30, 2006 from the period of January 18,
2005 (inception) to June 30, 2005 is primarily attributable to compensation
expense of $324,000 related to the value of stock options granted to our
executive officers under the terms of employment agreements during the six
months ended June 30, 2006 for which we did not have a comparable expense during
the period of January 18, 2005 (inception) to June 30, 2005.
Included in SG&A are expenses paid to related parties. For the six
months ended June 30, 2006 our SG&A - related parties represents rent expense of
approximately $11,000 on our principal executive offices which we rent on a
month to month basis from a company affiliated with one of our executive
officers and directors. SG&A - related parties for the six months ended June 30,
2005 included rent expense of approximately $11,000 together with approximately
$117,000 which represents the value of shares we received as compensation for
services rendered to a consulting client which were assigned to another entity
which is affiliated to an executive officer and director. This affiliated entity
introduced the consulting client to our company.
We anticipate that our operating expenses will continue to increase in
future periods as we expand our operations and implement our business model.
Included in these anticipated increases are salaries and benefits for additional
employees, increased marketing and advertising expenses and increased
professional fees. We cannot, however, at this time predict the amount of any
of these increases.
Other income (expense)
Other income for six months ended June 30, 2006 represented an
unrealized gain on trading securities of $273,500 and a realized gain on sale of
trading securities of $43,345, as compared to an unrealized (loss) on trading
securities of $(138,175) for the period of January 18, 2005 (inception) to June
30, 2005. As described elsewhere herein, the gain or loss is a function of the
market price of the underlying security and these non-cash gains or losses can
have a significant impact on our results of operations.
-26-
Income tax benefit (expense)
For the six months ended June 30, 2006 we recorded an income tax
expense of $118,189; for the period of January 18, 2005 (inception) to June 30,
2005 we recorded an income tax benefit of $(73,039). As we report profitable
operations we are required to record income tax expenses on those operations.
However, as the majority of our revenues are paid to us in securities, some of
which are not freely saleable by us at the time received, our revenue model
creates a risk that we will not have sufficient cash resources to satisfy our
tax obligations as they become due. At June 30, 2006 our balance sheet reflects
a liability for income tax which is payable on revenues we have recognized of
$100,503, together with a liability for income tax which will be due on deferred
revenues when recognized of $975,196.
Net (loss) income
For the six months ended June 30, 2006 we reported a net loss of
$180,268 as compared to net income of $111,402 for the period of January 18,
2005 (inception) to June 30, 2005. This net loss is primarily attributable to
higher revenues and gross profit margins in the fiscal 2005 period coupled with
significantly higher operating expenses in the fiscal 2006 period.
Unrealized gain on marketable securities held for sale, net of income tax
As described elsewhere herein, if we are unable to sell securities we
have received as compensation for our services these securities are classified
on our balance sheet as marketable securities held for sale. Unrealized gain on
marketable securities held for sale, net of income tax, represents the change in
the fair value of these securities as of the end of the financial reporting
period. For the six months ended June 30, 2006 we recognized an unrealized gain
of $1,395,240 on marketable securities held for sale, net of income tax, as
compared to an unrealized gain of $1,040,573 for the period of January 18, 2005
(inception) to June 30, 2005. At June 30, 2006 the marketable securities held
for sale - related party represents securities we received as compensation from
one of our client companies which is a related party.
Comprehensive income
We reported comprehensive income of $1,214,972 for the six months ended
June 30, 2006 as compared to $1,151,975 for the period of January 18, 2005
(inception) to June 30, 2005. Comprehensive income is the sum of our net income
plus unrealized gains on marketable securities held for sale, net of income tax.
Period of January 18, 2005 (inception) to December 31, 2005 ("2005 Period")
Revenues
We reported revenues of $1,538,428 in revenues for the 2005 Period,
which included cash revenues of approximately $236,250 and revenues attributable
to the value of securities issued as compensation for our services of
approximately $1,302,178. During the 2005 Period we were engaged by four client
companies to provide consulting services, and the revenue from each of these
agreements was recognized in the 2005 Period as a result of the terms of the
respective agreement. For the 2005 Period, revenues from a company which is an
affiliate of one of our executive officers and directors represented
approximately 55% of our total revenues.
-27-
Cost of revenues and gross profit
Our cost of revenues for the 2005 Period was $109,522 which resulted in
gross profit to us of $1,428,906 for the 2005 Period. Our costs of revenues for
the 2005 Period primarily included costs associated with marketing expenses,
legal and accounting fees and third party consultants. Generally, in the early
stage of a consulting agreement the professional fees will be lower than in
later stages of the engagement as we will not incur direct costs associated with
the filing by a client company of a registration statement with the SEC and, in
the instance of a client company which has undertaken a reverse merger with a
publicly traded shell company, the principals of the shell company may have paid
certain of the professional fees associated with the reverse merger as part of
the overall business terms of the transaction.
Total operating expenses
Our total operating expenses for the 2005 Period are comprised of SG&A
expenses which totaled $698,472. Approximately $400,000 of SG&A expenses for the
2005 Period are executive compensation representing the value of securities
issued directly to our executive officers by our client companies as
compensation to us under contracts. The balance of SG&A expenses included
general overhead expense, travel, professional fees and consulting expenses.
SG&A expenses for the 2005 Period included $141,188 paid to related
parties which included approximately $24,000 in rental expense and approximately
$117,000 which represented the value of shares we received as compensation for
services rendered to a consulting client which were assigned to another entity
which is affiliated to an executive officer and director and an introduction
fee.
Other income (expense)
Other income for the 2005 Period included an unrealized gain on trading
securities of $28,650 and a realized gain on sale of trading securities of
$6,176.
Income tax expense
For the 2005 Period we recorded an income tax expense of $(304,428). As
described elsewhere herein, as the majority of our revenues are paid to us in
securities, some of which are not freely saleable by us at the time received,
our revenue model creates a risk that we will not have sufficient cash resources
to satisfy our tax obligations as they become due. At December 31, 2005 our
balance sheet reflects a liability for income tax which is payable of $293,083,
together with a liability for a deferred income tax payable of $41,045.
Net income
For the 2005 Period we reported net income of $460,832.
Unrealized gain on marketable securities held for sale, net of income tax
For the 2005 Period we recognized an unrealized gain of $45,300 on
marketable securities held for sale, net of income tax.
-28-
Comprehensive income
We reported comprehensive income, which is the sum of our net income
plus unrealized gains on marketable securities held for sale, net of income tax,
of $506,132 for the 2005 Period.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis. At June 30, 2006, we had cash on hand of approximately
$66,000. and working capital of approximately $2,434,000. Our current assets
primarily include approximately $256,267 in prepaid executive compensation which
represents prepaid bonuses which will be expensed ratably over the term of the
employment agreement (subject to forfeiture if the agreement is terminated),
$616,000 in investment in trading securities and approximately $3,120,000 in
investments in marketable securities held for sale - related party. Our current
liabilities primarily consist of $366,300 of deferred revenues - short term
which will be recognized during the next 12 months, $100,503 of income tax
payable, $143,430 due on demand to our executive officers for funds advanced to
us for working capital and $975,196 of deferred income tax payable. While the
value of investment in marketable securities held for sale - related party
represent substantially all of our current assets, we are not presently able to
liquidate these securities and generate cash to pay our operating expenses. As
these securities were issued to us by a related party which is a non-reporting
company whose securities are quoted on the Pink Sheets, under Federal securities
laws these securities cannot be readily resold by us generally absent a
registration of those securities under the Securities Act of 1933. We have been
advised by the client company that it does not presently have an intention to so
register such shares. Accordingly, while under generally accepted accounting
principles we are required to reflect the fair value of these securities on our
balance sheet, they are not readily convertible into cash.
Net cash used in operating activities for six months ended June 30,
2006 increased to $352,870 from $41,109 for the period of January 18, 2005
(inception) to June 30, 2005. This change, which includes our net loss for the
for six months ended June 30, 2006 of $180,268, is primarily attributable to
non-cash adjustments to reconcile our net loss to net cash used in operating
activities including the value of securities received for our services and the
value of securities assigned to employees and consultants as compensation for
their services to us, as well as changes in our operating assets and liabilities
including increases in our prepaid executive compensation and deferred tax
liabilities which were offset by increases in deferred revenues.
Net cash provided by investing activities was $111,337 for the six
months ended June 30, 2006 as compared to net cash used by investing activities
of $12,423 for the period of January 18, 2005 (inception) to June 30, 2005. This
change is primarily attributable to $115,345 we received from the sale of
trading securities during the six months ended June 30, 2006. These securities
had been received by us as compensation for our services.
-29-
Net cash provided by financing activities for the six months ended June
30, 2006 was $267,698 and includes $8,637 advanced to us by our executive
officers for working capital and $259,061 of capital contributed by those
officers. For the period of January 18, 2005 (inception) to June 30, 2005
proceeds lent to us by our executive officers was $64,286. The amounts due these
officers are reflected on our balance sheet at June 30, 2006.
As described earlier in this section, we are in the process of
expanding our operations which should diversify our revenue sources. If we are
to fully implement our business plan, including the acquisition of operating
companies, our dependence on revenues from a limited number of clients, as well
as the challenges which of a revenue model in which revenue is received in the
form of equity which may not be readily convertible into cash, should be
dissipated. In order to pursue the expansion of our business plan, our use of
cash will be substantial for the foreseeable future and will exceed our cash
flow from operations during the next 12 months. As we are not able to readily
liquidate the marketable securities held for sale - related party we are holding
we do not presently have sufficient cash resources to satisfy our obligations,
including our tax liabilities, hire additional employees and otherwise increase
our levels of operations.
It is our intent to seek additional capital in the private and/or
public equity markets during fiscal 2006. If we raise additional working capital
through the issuance of equity securities, existing stockholders will in all
likelihood experience significant dilution. If we raise additional working
capital through the issuance of debt, our interest expense will increase and
adversely affect our ability to report profitable operations in future periods.
Further, we may not be able to obtain additional financing when needed or on
terms favorable to us. Because we have no commitment for additional capital, we
cannot guarantee you that we will be successful in raising such additional
funds. If we are unable to generate sufficient cash when and as needed, we would
not only be unable to fully implement our business model to expand our
operations and acquire additional companies, we could be unable to satisfy our
current obligations and operating expenses.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 2 to
the accompanying audited financial statements for the period ended December 31,
2005. We believe that the application of these policies on a consistent basis
enables our company to provide useful and reliable financial information about
the company's operating results and financial condition. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates.
-30-
We account for stock options issued to employees in accordance with the
provisions of SFAS No. 123(R), "Share-Based Payment," In December 2004, the FASB
issued SFAS No. 123(R) which replaces SFAS No. 123 and supersedes APB Opinion
No. 25. Under SFAS No. 123(R), companies are required to measure the
compensation costs of share-based compensation arrangements based on the
grant-date fair value and recognize the costs in the financial statements over
the period during which employees are required to provide services. Share-based
compensation arrangements include stock options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. In March 2005 the SEC issued Staff Accounting Bulletin No. 107, or "SAB
107". SAB 107 expresses views of the staff regarding the interaction between
SFAS No. 123(R) and certain SEC rules and regulations and provides the staff's
views regarding the valuation of share-based payment arrangements for public
companies. SFAS No. 123(R) permits public companies to adopt its requirements
using one of two methods. On April 14, 2005, the SEC adopted a new rule amending
the compliance dates for SFAS 123R. Companies may elect to apply this statement
either prospectively, or on a modified version of retrospective application
under which financial statements for prior periods are adjusted on a basis
consistent with the pro forma disclosures required for those periods under SFAS
123. Effective January 1, 2006, the Company has fully adopted the provisions of
SFAS No. 123R and related interpretations as provided by SAB 107. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. The Company applies this statement prospectively. The valuation of such
share-based payments requires significant judgment. We exercise our judgment in
determining the various assumptions associated with the associated share-based
payments as well as the expected volatility related to their fair value. We base
our estimate of the share-based payments on our interpretation of the underlying
agreements and historical volatility of our stock price.
We account for our investment in equity securities pursuant to
Statement of Financial Accounting Standards ("SFAS") No.115. This standard
requires such investments in equity securities that have readily determinable
fair values be measured at fair value in the balance sheet and that unrealized
holding gains and losses for investments in available-for-sale equity securities
and investments in trading equity securities be recorded as a component of
stockholders' equity and statement of operations, respectively. Furthermore, it
provides that if factors leads us to determine that the fair value of certain
financial instruments is impaired, that we should adjust the carrying value of
such investments to its fair value.
Revenue Recognition
We generally provide our services pursuant to written agreements which
may vary in duration. Revenues are recognized over the terms of the agreements.
Our revenues are derived from a certain predetermined fixed fee for the services
it provides to our customers. The fee will vary based on the scope of its
services.
A significant portion of the services we provide are paid in shares and
other equity instruments issued by our clients. These instruments are classified
as marketable securities on the balance sheet, if still held at the financial
reporting date. These instruments are stated at fair value in accordance with
the provision of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115) and EITF 00-8 "Accounting by a grantee for an equity instrument to be
received in conjunction with providing goods or services." Primarily all of the
equity instruments are received from small public companies.
-31-
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. FIN 48 requires that entities
recognize the impact of a tax position in their financial statements, if that
position is more likely than not to be sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. The Company is still assessing
the impact the adoption of FIN 48 will have on its financial statements.
ITEM 3. DESCRIPTION OF PROPERTY
Our principal executive office is located in approximately 1,200 square feet of
office space which we sublease under an unwritten arrangement that can be
terminated at will from two related parties, one related party owned by Marc
Siegel, our president and director, and one related party owned by Yuejian
(James) Wang, our Chief Executive officer and director for approximately
$2,800 a month.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
At August 14, 2006, there were 10,526,120 shares of our common stock issued and
outstanding. The following table sets forth, as of that date information known
to us relating to the beneficial ownership of these shares by:
- each person who is the beneficial owner of more than 5% of the
outstanding shares of the class of stock;
- each director;
- each executive officer; and
- all executive officers and directors as a group.
Unless otherwise indicated, the business address of each person listed
is in care of 5301 N. Federal Highway, Suite 120, Boca Raton, FL, 33487. We
believe that all persons named in the table have sole voting and investment
power with respect to all shares beneficially owned by them. Under securities
laws, a person is considered to be the beneficial owner of securities he owns
and that can be acquired by him within 60 days from August 14, 2006 upon the
exercise of options, warrants, convertible securities or other understandings.
We determine a beneficial owner's percentage ownership by assuming that options,
warrants or convertible securities that are held by him, but not those held by
any other person and which are exercisable within 60 days of that date have been
exercised or converted.
-32-
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- --------
Yuejian (James) Wang (1) 4,800,000 42%
Marc Siegel (2) 4,800,000 42%
David Stein (3 ) 2,483,114 23%
Yi (Jenny) Liu (4) 0 na
All officers and directors as
a group (four persons)(5) 12,083,114 97%
(1) Includes options to purchase 400,000 shares of our common stock with an
exercise price of $0.01 per share and options to purchase 400,000 shares of our
common stock with an exercise price of $2.50 per share. Does not include
1,400,000 shares issuable upon exercise of options which have not vested.
(2) Includes options to purchase 400,000 shares of our common stock with an
exercise price of $0.01 per share and options to purchase 400,000 shares of our
common stock with an exercise price of $2.50 per share. Does not include
1,400,000 shares issuable upon exercise of options which have not vested.
(3) Includes options to purchase 200,000 shares of our common stock with an
exercise price of $0.01 per share and options to purchase 200,000 shares of our
common stock with an exercise price of $2.50 per share. Does not include 700,000
shares issuable upon exercise of options which have not vested.
(4) Does not include 48,000 shares issuable upon exercise of options which have
not vested.
(5) Includes footnotes (1) through (4)
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
EXECUTIVE OFFICERS AND DIRECTORS
Name Age Title
Yuejian (James) Wang, Ph.D. 44 CEO, Chairman of the Board of Directors
Marc Siegel 46 President, Director
David Stein 34 Chief Operating Officer, Director
Yi (Jenny) Liu 34 Vice President, Finance
Yuejian (James) Wang, Ph.D., Chief Executive Officer and Chairman of the Board.
Dr. Wang has served as our CEO and Chairman of the Board of Directors since
August 16, 2006. Dr.. Wang, a founder of China Direct Investments, Inc., has
served as its CEO and Chairman of its Board of Directors since its inception in
January 2005. From 2001 to 2004, he was President and Chairman of the Board of
Directors of Genesis Technology Group, Inc. (OTCBB: GTEC), a business
development firm that fosters bilateral commerce between Western and Chinese
companies. From 2000 until 2001, Dr. Wang was President, Chief Operating Officer
and director of China Net & Technologies, Inc., a technology firm. From 2000
until 2001, Dr. Wang was Vice President, Chief Operating Officer and director of
-33-
Tensleep Corporation (OTCBB: TENS), a California-based integrated Internet
company that acquired and licensed technology, identified, acquired and
developed development-stage technology and service entities and focused on the
Internet infrastructure market-PC, application-ready devices. From January 2000
until November 2000, Dr. Wang was President of Master Financial Group, Inc., a
St. Paul, Minnesota-based company which was a wholly-owned subsidiary of
Tensleep Corporation that provided consulting services for small private and
public entities in the area of corporate finance, investor relations and
business management. Between 1997 and 2000, Dr. Wang was a research scientist
and Assistant Professor, Lab Director at the University of Minnesota, School of
Medicine. Dr. Wang received a Bachelor of Science degree from the University of
Science and Technology of China in Hefei, China in 1985, a Master of Science
Degree from the Shanghai Second Medical University, Shanghai, China in 1988, and
his Ph.D. degree from the University of Arizona in 1994, Tucson, Arizona.
Marc Siegel, President and Director.
Mr. Siegel has served as our President and Director since August 16, 2006. Mr.
Siegel, a founder of China Direct Investments, Inc., has served as its President
and director since its inception in January 2005. Mr. Siegel serves as general
partner of Edge Capital Partners, Ltd., an exclusive private investment fund. In
2003 Mr. Siegel founded, and he is currently president of, Edge, LLC a private
multi faceted investment consulting firm. Prior to Edge, LLC, from January 2001
to October 2002, Mr. Siegel served as President of vFinance Investments, Inc.,
an NASD member and full service financial services organization, where his
responsibilities included investment banking, supervisor of all trading
activities, and retail sales. Prior to vFinance, Inc., in 1997 Mr. Siegel
founded First Level Capital, Inc., an NASD member merchant banking company. Mr.
Siegel served as CEO of First Level Capital, Inc. until it was acquired by
vFinance, Inc. in December 2000. Prior to establishing First Level Capital,
Inc., from July 1997 to September 1997, Mr. Siegel was a partner of Grady &
Hatch & Co., Inc. where he served as President and Managing Director. From
September 1993 until June 1997, Mr. Siegel was responsible for sales and
marketing, recruiting, motivating and leading an 80-person sales force, which he
directly supervised at Commonwealth Associates. From September 1985 to 1993, Mr.
Siegel was at Lehman Brothers, Inc. Initially Mr. Siegel worked at Lehman's
Atlanta office where he served as its sales manager. Subsequently from 1990 to
1992, he served as sales manager/branch manager of its Houston and New York
offices. Mr. Siegel received a Bachelor of Arts degree and graduated "Cum Laude"
from Tulane University in 1981. Mr. Siegel holds the following licenses; NASD
Series 7 (Full Registration General Securities Representative); Series 8
(General Securities Sale Supervisor) Series 24 (General Securities Principal)
Series 55 (Limited Representative Equity Trader) Series 63 (Uniform Securities
Agent State Law Examination) and Series 65 (Uniform Investment Advisor Law)
examination qualified and since Mr. Siegel is not currently employed by a NASD
member firm the licenses are considered inactive.
In April, 2005, Mr. Siegel entered into a Consent Order with the Securities and
Exchange Commission (Administrative Proceeding File No. 3-11896) suspending him
from association in a supervisory or proprietary capacity with any broker/dealer
for a period of 12 months and included payment of a $25,000 penalty. Mr. Siegel
was formerly President of vFinance Investments, Inc., an NASD member
broker/dealer. In that capacity, Mr. Siegel had responsibility for establishing
and implementing policies and procedures for supervision of vFinance's traders.
During November and December 2001, a trader then associated with vFinance
assisted a stock promoter in manipulating the market for securities without the
knowledge of either vFinance or Mr. Siegel. The SEC determined that Mr. Siegel,
who had no disciplinary history, had failed reasonably to supervise the trader,
a registered representative subject to his supervision.
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David Stein, Chief Operating Officer.
Mr. Stein has served as our Chief Operating Officer and Director since August
16, 2006. Mr. Stein, a founder of China Direct Investments, Inc, has served as
its Chief Operating Officer, responsible for the inter management of the U.S.
operations since its inception in January 2005and as a director since June 2006.
From 2001 until 2005, Mr. Stein was Vice President of Investment Banking at
vFinance Investments, Inc. a division of vFinance, Inc., an NASD member and full
service financial services organization. Mr. Stein has been a broker with Lehman
Brothers from August 1993 to August 1994, PaineWebber, Inc. from August 1994 to
April 1999, and Morgan Stanley, from April 1999 to July 2000. . Mr. Stein has
been involved in equity and debt offerings at the public and private level. Mr.
Stein holds a NASD Series 7 (Full Registration General Securities
Representative) and since Mr. Stein is not currently employed by a NASD member
firm the licenses are considered inactive. Mr. Stein graduated from the School
of Management at Boston University with a bachelor of science degree in business
administration.
Yi (Jenny) Liu, Vice President of Finance
Ms. Liu has served as our Vice President of Finance since August 16, 2006. Ms.
Liu is responsible for management of financial reporting as well as internal
accounting controls for our clients and subsidiaries. Ms. Liu, has served as
Vice President of Finance of China Direct Investments, Inc. since June 5, 2006.
From 2001until 2006 Ms. Liu was a supervisor with Hill, Taylor LLC, a
Chicago-based public accounting firm, where her significant assignments included
audits of public and private companies, tax preparation, management consulting,
staff instruction, and recruiting. From 1995-2000 Ms. Liu was Accounting Manager
with Mitsui Company, a Japanese company which manufactures and sells consumer
electronics, primarily monitors and semiconductors, operating in the Shanghai
office. Ms. Liu received a Bachelor of Science degree from Shanghai University
of Engineering Science, Shanghai, China in 1995, and a Master of Business
Administrative degree from University of Illinois at Chicago in 2001, Chicago,
Illinois. Since April 2006, Ms. Liu has been a registered CPA in the State of
Illinois.
Consultants
On March 1, 2006, CDI entered into a one-year agreement with Richard
Galterio pursuant to which Mr. Galterio has been engaged to provide general
business consulting and to identify, evaluate and structure potential mergers
and acquisitions. As compensation for his services, CDI issued him an aggregate
of 1,450,000 options to purchase shares of our common stock as follows:
1,000,000 options exercisable at $.30 per share and vesting 1/1/07, 100,000
options exercisable at $2.50 per share and vesting 1/1/07, 100,000 options
exercisable at $5.00 per share and vesting 1/1/07, 125,000 options exercisable
at $7.50 per share and vesting 1/1/08, and 125,000 options exercisable at $10.00
per share and vesting 1/1/09, for an aggregate compensation value of $ $219,500
for financial reporting purposes. These options were exchange for identical
options in Evolve pursuant to the Share Exchange Agreement. These options,
however, shall become null and void unless: a) Mr. Galterio joins CDI on or
before September 30, 2006; and b) Mr. Galterio renders at least three months of
full time service to CDI as an employee. Upon the occurrence of both the
foregoing events, the options shall become fully vested and exercisable. For Mr.
Galterio's mergers and acquisitions work performed on transactions introduced by
us, we will pay him 5% of the gross transaction value. Mr. Galterio currently is
a principal and chief operating officer of Skyebanc, Inc., a NASD member firm.
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DIRECTORS' COMPENSATION
While we do not have an established compensation policy for our
directors, from time to time we may issue members of our Board of Directors
options as compensation for their services to us in those positions. During
fiscal 2005 we issued an aggregate of 1,000 shares of our common stock valued at
$9,000 to Messrs. Robert Sands and Lonnie Sciambi, who were then members of our
Board of Directors, as compensation for their services.
DIRECTOR INDEPENDENCE, AUDIT COMMITTEE OF THE BOARD OF DIRECTORS AND AUDIT
COMMITTEE FINANCIAL EXPERT
As our Board of Directors is comprised of only one individual we do not
have any directors who are "independent" within the meaning of definitions
established by the Securities and Exchange Commission. We anticipate that if we
are successful in closing a business combination with an operating entity, that
our future Board of Directors will include members who are independent. We do
not currently have any committees of our Board of Directors. We are not
currently subject to any law, rule or regulation requiring that all or any
portion of our Board of Directors include "independent" directors, nor are we
required to establish or maintain an Audit Committee of our Board of Directors.
Our sole director is not an "audit committee financial expert" within
the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee
financial expert" is an individual member of the audit committee or Board of
Directors who:
o understands generally accepted accounting principles and financial
statements,
o is able to assess the general application of such principles in
connection with accounting for estimates, accruals and reserves,
o has experience preparing, auditing, analyzing or evaluating
financial statements comparable to the breadth and complexity to our financial
statements,
o understands internal controls over financial reporting, and
o understands audit committee functions.
CODE OF ETHICS
Effective November 18, 2002, our Board of Directors adopted a Code of
Business Conduct and Ethics that applies to, among other persons, our President
(being our principal executive officer) as well as all employees. As adopted,
our Code of Business Conduct and Ethics sets forth written standards that are
designed to deter wrongdoing and to promote:
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o honest and ethical conduct, including the ethical handling of actual
or apparent conflicts of interest between personal and professional
relationships;
o full, fair, accurate, timely, and understandable disclosure in
reports and documents that we file with, or submit to, the SEC and in other
public communications made by us;
o compliance with applicable governmental laws, rules and regulations;
o the prompt internal reporting of violations of the Code of Business
Conduct and Ethics to an appropriate person or persons identified in the Code of
Business Conduct and Ethics; and
o accountability for adherence to the Code of Business Conduct and
Ethics.
Our Code of Business Conduct and Ethics requires, among other things,
that all of our company's personnel are accorded full access to our President
with respect to any matter that may arise relating to the Code of Business
Conduct and Ethics. Further, all of our company's personnel are to be accorded
full access to our Board of Directors if any such matter involves an alleged
breach of the Code of Business Conduct and Ethics by our President.
In addition, our Code of Business Conduct and Ethics emphasizes that
all employees, and particularly managers and/or supervisors, have a
responsibility for maintaining financial integrity within our company,
consistent with generally accepted accounting principles, and federal,
provincial and state securities laws. Any employee who becomes aware of any
incidents involving financial or accounting manipulation or other
irregularities, whether by witnessing the incident or being told of it, must
report it to his or her immediate supervisor or to our company's President. If
the incident involves an alleged breach of the Code of Business Conduct and
Ethics by the President, the incident must be reported to any member of our
Board Of Directors. Any failure to report such inappropriate or irregular
conduct of others is to be treated as a severe disciplinary matter. It is
against our company policy to retaliate against any individual who reports in
good faith the violation or potential violation of our company's Code of
Business Conduct and Ethics by another.
We will provide a copy of the Code of Business Conduct and Ethics to
any person without charge, upon request. Requests can be sent to 5301 N. Federal
Highway, Suite 120, Boca Raton, FL, 33487.
ITEM 6. EXECUTIVE COMPENSATION
The following table summarizes all compensation recorded by us in each
of the last three fiscal years for our Chief Executive Officer and each other
executive officers serving as such (the "Named Executive Officers") whose annual
compensation exceeded $100,000.
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SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation
-------------------------------------- ---------------------------------------------
Name Other Securities All other
and Annual Restricted underlying LTIP compen-
principal Fiscal Salary Bonus Compen- stock options/ payouts sation
position Year ($) ($) sation($) awards($) SARs(#) ($) ($)
------------------- ------ -------- ------ -------- --------- ---------- --------- -------
Irwin Horowitz (1) 2005 $ 12,000 $ 0 $ 0 $ 0 550,000 $ 0 $ 0
Gary Schultheis (2) 2005 $ 2,000 $ 0 $ 0 $ 0 100,000 $ 0 $ 0
2004 $ (4) $ 0 $ 0 $ 0 320 $ 0 $ 0
2003 $100,000 $5,572 $ 0 $ 0 0 $ 0 $ 0
Herbert Tabin (3) 2005 $ 2,000 $ 0 $ 0 $ 0 100,000 $ 0 $ 0
2004 $ (4) $ 0 $ 0 $ 0 320 $ 0 $ 0
2003 $100,000 $5,572 $ 0 $ 0 0 $ 0 $ 0
(1) Dr. Horowitz served as our President and Chief Executive Officer from
January 22, 2005 to May 25, 2006. In January 2005 we granted Dr. Horowitz
options to purchase 500,000 shares of our common stock with an exercise price of
$30.00 per share expiring in January 2013 valued at $3,500,000 and in March 2005
we granted him options to purchase 50,000 shares of our common stock with an
exercise price of $0.1 per share valued at $700,000 as additional compensation.
Excludes compensation paid to Diversifax Inc., a company of which Dr. Horowitz
is an officer, director and principal shareholder, under the terms of a
management agreement. See "Certain Relationships and Related Transactions"
described below.
(2) Mr. Schultheis served as our President from February 1998 until January
2005. As compensation under the Separation and Severance Agreement entered into
with Mr. Schultheis in January 2005 we paid him $6,144 and issued him options to
purchase 100,000 shares of our common stock at an exercise price of $30.00 per
share expiring in January 2013 which were valued at $700,000. During fiscal 2004
we granted Mr. Schultheis options to purchase 320 shares of our common stock
with an exercise price of $.16375 per share expiring in January 2009 as
additional compensation.
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(3) Mr. Tabin served as our Director of Marketing from February 1998 until
January 2005. As compensation under the Separation and Severance Agreement
entered into with Mr. Tabin in January 2005 we paid him $6,144 and issued him
options to purchase 100,000 shares of our common stock at an exercise price of
$30.00 expiring in January 2013 which were valued at $700,000. During fiscal
2004 we granted Mr. Tabin options to purchase 320 shares of our common stock
with an exercise price of $.16375 per share expiring in January 2009 as
additional compensation.
(4) In 2004 and 2003 we accrued $248,074 and $230,000 in salaries for Messrs.
Schultheis and Tabin in accordance with the terms of their employment agreement.
On December 20, 2004 Messrs. Schultheis and Tabin forgave $478,074 of these
accrued salaries.
EMPLOYMENT AGREEMENTS
In August 2006 we entered into an employment agreement with Dr.
Wang to serve as our CEO and a member of our board of directors. Dr.
Wang had previously been a party to an employment agreement with China Direct
Investments, Inc. which terminated on the closing date of the stock purchase
agreement
Under the terms of his employment agreement which expires on December 31,
2009, Dr. Wang will receive an annual base salary of $100,000 for fiscal 2006,
which escalates during the term of the agreement to $150,000 for fiscal 2007,
$200,000 for fiscal 2008 and $250,000 for fiscal 2009. He was also granted
five-year options to purchase 2,200,000 shares of our common stock a portion of
which vest over a three year period and are exercisable at prices ranging from
$0.01 to $10.00 per share as additional compensation. These options were
identical to options he had previously held in China Direct Investments, Inc.
which were exchanged for options in our company pursuant to the terms of the
stock purchase agreement. Dr. Wang is entitled to annual bonuses as determined
by the board of directors based upon their evaluation of a variety of factors
including our revenues, net income and other financial and operating factors the
Board deems appropriate. Throughout the first quarter of 2006, CDI assigned a
portion of shares it received by two of its clients to Dr. Wang as a prepaid
bonus, subject to forfeiture if the agreement under which CDI received the
shares is terminated, valued at an aggregate of $236,832. Dr. Wang is also
entitled to participate in any of our employee benefit plans and he will be
reimbursed for reasonable business expenses incurred by him on our behalf. The
employment agreement also contains customary confidentiality and non-compete
provisions.
Dr. Wang's employment may be terminated upon his death or
disability, and with or without cause. In the event we should terminate his
employment upon his death or disability, for cause (as defined in the agreement)
or if he should resign, he is entitled to payment of his base salary through the
date of termination, any earned but unpaid bonuses, reimbursement for any
unreimbursed business expenses and any employment benefits, if any, that he is
then legally entitled to receive. At our option we may terminate his employment
without cause in which event he is entitled to payment of his base salary
through the date of termination and for a period of the earlier of 18 months or
the expiration date of the agreement, any earned but unpaid bonuses,
reimbursement for any unreimbursed business expenses, any employment benefits,
if any, that he is then legally entitled to receive and all unvested options
will immediately vest and become exercisable.
-39-
In August 2006 we entered into an employment agreement with Mr. Marc
Siegel to serve as our President and a member of our board of directors. Mr.
Siegel had previously been a party to an employment agreement with China
Direct Investments, Inc., which terminated on the closing date of the stock
purchase agreement
Under the terms of his employment agreement, which expires on December
31, 2009, Mr. Siegel will receive an annual base salary of $100,000 for fiscal
2006, which escalates during the term of the agreement to $150,000 for fiscal
2007, $200,000 for fiscal 2008 and $250,000 for fiscal 2009. He was also granted
five-year options to purchase 2,200,000 shares of our common stock a portion of
which vest over a three year period and are exercisable at prices ranging from
$0.01 to $10.00 per share as additional compensation. These options were
identical to options he had previously held in China Direct Investments, Inc.
which were exchanged for options in our company pursuant to the terms of the
stock purchase agreement. Mr. Siegel is entitled to annual bonuses as determined
by the board of directors based upon their evaluation of a variety of factors
including our revenues, net income and other financial and operating factors the
Board deems appropriate. Throughout the first quarter of 2006, CDI assigned a
portion of shares it received by two of its clients to Mr. Siegel as a prepaid
bonus, subject to forfeiture if the agreement under which CDI received the
shares is terminated, valued at an aggregate of $366,252. Mr. Siegel is also
entitled to participate in any of our employee benefit plans and he will be
reimbursed for reasonable business expenses incurred by him on our behalf. The
employment agreement also contains customary confidentiality and non-compete
provisions.
Mr. Siegel's employment may be terminated upon his death or
disability, and with or without cause. In the event we should terminate his
employment upon his death or disability, for cause (as defined in the agreement)
or if he should resign, he is entitled to payment of his base salary through the
date of termination, any earned but unpaid bonuses, reimbursement for any
unreimbursed business expenses and any employment benefits, if any, that he is
then legally entitled to receive. At our option we may terminate his employment
without cause in which event he is entitled to payment of his base salary
through the date of termination and for a period of the earlier of 18 months or
the expiration date of the agreement, any earned but unpaid bonuses,
reimbursement for any unreimbursed business expenses, any employment benefits,
if any, that he is then legally entitled to receive and all unvested options
will immediately vest and become exercisable.
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In August 2006 we entered into an employment agreement with Mr.
David Stein to serve as our Chief Operating Officer, secretary and a member
of our board of directors. Mr. Stein had previously been a party to an
employment agreement with China Direct Investments, Inc., which terminated on
the closing date of the stock purchase agreement
Under the terms of his employment agreement, which expires on December 31,
2009, Mr. Stein will receive an annual base salary of $75,000 for fiscal 2006,
which escalates during the term of the agreement to $100,000 for fiscal 2007 and
fiscal 2008 and $125,000 for fiscal 2009. He was also granted five-year options
to purchase 1,100,000 shares of our common stock a portion of which vest over a
three year period and are exercisable at prices ranging from $0.01 to $10.00 per
share as additional compensation. These options were identical to options he had
previously held in China Direct Investments, Inc. which were exchanged for
options in our company pursuant to the terms of the stock purchase agreement.
Mr. Stein is entitled to annual bonuses as determined by the board of directors
based upon their evaluation of a variety of factors including our revenues, net
income and other financial and operating factors the Board deems appropriate.
Throughout the first quarter of 2006, CDI assigned a portion of shares it
received by two of its clients to Mr. Stein as a prepaid bonus, subject to
forfeiture if the agreement under which CDI received the shares is terminated,
valued at an aggregate of $165,716. Mr. Stein is also entitled to participate in
any of our employee benefit plans and he will be reimbursed for reasonable
business expenses incurred by him on our behalf. The employment agreement also
contains customary confidentiality and non-compete provisions.
Mr. Stein's employment may be terminated upon his death or
disability, and with or without cause. In the event we should terminate his
employment upon his death or disability, for cause (as defined in the agreement)
or if he should resign, he is entitled to payment of his base salary through the
date of termination, any earned but unpaid bonuses, reimbursement for any
unreimbursed business expenses and any employment benefits, if any, that he is
then legally entitled to receive. At our option we may terminate his employment
without cause in which event he is entitled to payment of his base salary
through the date of termination and for a period of the earlier of 18 months or
the expiration date of the agreement, any earned but unpaid bonuses,
reimbursement for any unreimbursed business expenses, any employment benefits,
if any, that he is then legally entitled to receive and all unvested options
will immediately vest and become exercisable.
On January 26, 2005 we entered into a three-year employment agreement
with Dr. Irwin Horowitz to serve as our President and Chief Executive Officer.
On May 25, 2006, Dr. Horowitz resigned and Evolve and Dr. Horowitz agreed that
each party shall have no further rights and obligations under the employment
agreement.
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SEPARATION AND SEVERANCE AGREEMENTS
In January 2002, we entered into employment agreements with Mr. Gary
Schultheis, our then President, and Mr. Herb Tabin, our then Director of
Marketing. The terms of the contracts were identical and expired in January
2009. The annual salary under each of the agreements was $150,000, which was to
be increased by 10% each year, and provided for the annual granting of stock
options to purchase 320 shares of our common stock at an exercise price of the
average of closing price for the five trading days preceding the anniversary
date less 15% percent each year.
On January 26, 2005 Messrs. Schultheis and Tabin each entered into
separate Separation and Severance Agreements with us pursuant to which they
provided their resignations and also agreed to the termination of their
employment agreements. Each individual received options to purchase up to
100,000 shares of common stock at an exercise price of $30.00 per share expiring
January 26, 2013, and both were paid the sum of $6,144 to defray health
insurance premiums for the ensuing six months. The Separation and Severance
Agreements contain restrictions against either Messrs. Schultheis or Tabin
soliciting or doing business with our past or current customers for a period of
three years. We also agreed to indemnify each of Messrs. Schultheis and Tabin in
any matters arising from their employment with our company, subject to certain
limitations.
STOCK OPTION INFORMATION
The following table sets forth certain information with respect to
stock options granted in fiscal 2005 to the Named Executive Officers.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 2005
(INDIVIDUAL GRANTS)
NO. OF SECURITIES % OF TOTAL OPTIONS/SARs
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME SARs GRANTED IN FISCAL YEAR PRICE DATE
---- ------------------ ----------------------- -------- ------------
Dr. Irwin Horowitz 550,000 66.9% (1) (1)
Gary Schultheis 100,000 12.2% $30.00 January 2013
Herb Tabin 100,000 12.2% $30.00 January 2013
(1) Includes options to purchase 500,000 shares of our common stock with an
exercise price of $30.00 per share expiring in January 2013 and options to
purchase 50,000 shares of our common stock with an exercise price of $0.1
expiring in March 2013.
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The following table sets forth certain information regarding stock
options held as of December 31, 2005 by the Named Executive Officers.
AGGREGATE OPTION EXERCISES IN YEAR ENDED DECEMBER 31, 2005
AND YEAR-END OPTION VALUES
NO. OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE DECEMBER 31, 2005 DECEMBER 31, 2005(1)
ON REALIZED --------------------------- ---------------------------
NAME EXERCISE $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ---------- ------------- ------------- -------------
Dr. Irwin Horowitz 320 $ 0 550,000 0 $ 230,000 n/a
Gary Schultheis 0 n/a 100,000 0 $ (1) n/a
Herb Tabin 0 n/a 100,000 0 $ (1) n/a
(1) The dollar value of the unexercised in-the-money options is calculated based
upon the difference between the option exercise price and $0.047 per share,
being the last sale price of our common stock on December 31, 2005 as reported
by the OTC Bulletin Board. As the exercise price of the outstanding options are
$30.00 per share, based upon the trading price of our common stock on December
31, 2005 none of these outstanding options are in the money at December 31,
2005.
(2) Dr. Horowitz holds options to purchase 500,000 shares of common stock with
an exercise price of $30.00 per share which were out of the money at December
31, 2005 and options to purchase 50,000 shares of common stock with an exercise
price of $0.1 per share which were valued at $230,000 at December 31, 2005.
STOCK OPTION PLANS
We presently have three stock option plans, our Evolve One, Inc. Stock
Option Plan (the "1999 Plan"), our 2005 Equity Compensation Plan (the "2005
Plan") and our 2006 Equity Compensation Plan (the "2006 Plan"). The purpose of
the each of the 1999 Plan, the 2005 Plan and 2006 Plan is to advance the
interests of our company by providing an incentive to attract, retain and
motivate highly qualified and competent persons who are important to us and upon
whose efforts and judgment the success of our company is largely dependent,
including our officers and directors, key employees, consultants and independent
contractors. Our officers, directors, key employees and consultants are eligible
to receive awards under the each of the plans. Only our employees are eligible
to receive incentive options.
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Our plans are administered by our Board of Directors. The Board of
Directors determines, from time to time, those of our officers, directors,
employees and consultants to whom plan options will be granted, the terms and
provisions of the plan options, the dates such plan options will become
exercisable, the number of shares subject to each plan option, the purchase
price of such shares and the form of payment of such purchase price. All other
questions relating to the administration of our plans, and the interpretation of
the provisions thereof are to be resolved at the sole discretion of the Board of
Directors.
The Board of Directors may amend, suspend or terminate either the 1999
Plan, the 2005 Plan or the 2006 Plan at any time, except that no amendment shall
be made which:
o increases the total number of shares subject to the plan or changes
the minimum purchase price therefore (except in either case in the event of
adjustments due to changes in our capitalization),
o affects outstanding options or any exercise right thereunder,
o extends the term of any option beyond 10 years, or
o extends the termination date of the plan.
Unless the plan is earlier suspended or terminated by the Board of
Directors, each plan terminates 10 years from the date of the plan's adoption.
Any termination of the plan does not affect the validity of any options
previously granted thereunder.
Evolve One, Inc. Stock Option Plan
In November 1999, our Board of Directors adopted our 1999 Plan, which
was approved by a majority of the stockholders at a meeting on November 11,
1999. Under the 1999 Plan we have reserved 80,000 shares of common stock for the
grant of qualified incentive options or non-qualified options. On August 14,
2006, we had options to purchase an aggregate of 480 shares of common stock
outstanding under the 1999 Plan at exercise prices ranging from $0.0125 to
$56.25 per share.
The term of each option and the manner in which it may be exercised is
determined by the Board of Directors, provided that no option may be exercisable
more than 10 years after the date of its grant and, in the case of an incentive
option granted to an eligible employee owning more than 10% of our common stock,
no more than five years after the date of the grant.
Plan options granted under the 1999 Plan may either be options
qualifying as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or options that do not so qualify. Any
incentive option granted under the 1999 Plan must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of such grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our common stock must be at least 110%
of such fair market value as determined on the date of the grant. Non-qualified
options must provide for an exercise price of not less than 85% of the fair
market value of our common stock on the date of grant.
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The per share purchase price of shares subject to options granted under
the 1999 Plan may be adjusted in the event of certain changes in our
capitalization, but any such adjustment will not change the total purchase price
payable upon the exercise in full of options granted under the 1999 Plan. All
options are nonassignable and nontransferable, except by will or by the laws of
descent and distribution and, during the lifetime of the optionee, may be
exercised only by such optionee. Previously granted options are subject to early
termination in the event of the death, disability or mental incapacity of the
option holder, or in the instance of options granted to employees, the
termination of that employee's employment with our company.
2005 Equity Compensation Plan and 2006 Equity Compensation Plan
On May 6, 2005, our Board of Directors authorized the 2005 Plan
covering 1,000,000 shares of common stock. .Since the 2005 Plan was not approved
by our stockholders prior to May 6, 2006, incentive stock options may not be
awarded under the 2005 Plan and any incentive stock options previously awarded
under the 2005 Plan shall be converted into non-qualified options upon terms and
conditions determined by the Board, as nearly as is reasonably practicable in
its sole determination, the terms and conditions of the incentive stock options
being so converted. As of August 14, 2006, we had options to purchase an
aggregate of 200,500 shares of common stock outstanding under the 2005 Plan at
exercise prices ranging from $7.50 to $30.00 per share.
On August 16, 2006, our Board of Directors authorized the 2006 Plan
covering 10,000,000 shares of common stock, which was approved by a majority of
our shareholders on August 16, 2006. As of August 16, 2006, we had options to
purchase an aggregate of 9,046,000 shares of common stock outstanding under the
2006 Plan at exercise prices ranging from $0.01 to $10.00 per share.
Plan options under the 2005 Plan may only be issued as non-qualified
options. Plan options under the 2006 Plan may either be options qualifying as
incentive stock options under Code or non-qualified options. In addition, both
the 2005 Plan and 2006 Plan allows for the inclusion of a reload option
provision, which permits an eligible person to pay the exercise price of the
option with shares of common stock owned by the eligible person and receive a
new option to purchase shares of common stock equal in number to the tendered
shares. Furthermore, compensatory stock amounts may also be issued.
Additionally, deferred stock grants and stock appreciation rights may also be
granted under the 2005 Plan and 2006 Plan. Any incentive option granted under
the 2006 Plan must provide for an exercise price of not less than 100% of the
fair market value of the underlying shares on the date of grant, but the
exercise price of any incentive option granted to an eligible employee owning
more than 10% of our outstanding common stock must not be less than 110% of fair
market value on the date of the grant.
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Subject to the limitation on the aggregate number of shares issuable
under the 2005 Plan or 2006 Plan, there is no maximum or minimum number of
shares as to which a stock grant or plan option may be granted to any person.
Shares used for stock grants and plan options may be authorized and unissued
shares or shares reacquired by us, including shares purchased in the open
market. Shares covered by plan options which terminate unexercised will again
become available for grant as additional options, without decreasing the maximum
number of shares issuable under the 2005 Plan or 2006 Plan, although such shares
may also be used by us for other purposes.
The 2005 Plan and 2006 Plan provide that, if our outstanding shares are
increased, decreased, exchanged or otherwise adjusted due to a share dividend,
forward or reverse share split, recapitalization, reorganization, merger,
consolidation, combination or exchange of shares, an appropriate and
proportionate adjustment shall be made in the number or kind of shares subject
to the plan or subject to unexercised options and in the purchase price per
share under such options. Any adjustment, however, does not change the total
purchase price payable for the shares subject to outstanding options. In the
event of our proposed dissolution or liquidation, a proposed sale of all or
substantially all of our assets, a merger or tender offer for our shares of
common stock, the Board of Directors may declare that each option granted under
the plan shall terminate as of a date to be fixed by the Board of Directors;
provided that not less than 30 days written notice of the date so fixed shall be
given to each participant holding an option, and each such participant shall
have the right, during the period of 30 days preceding such termination, to
exercise the participant's option, in whole or in part, including as to options
not otherwise exercisable.
The 2005 Plan and 2006 Plan provide that, with respect to incentive
stock options, the aggregate fair market value (determined as of the time the
option is granted) of the shares of common stock, with respect to which
incentive stock options are first exercisable by any option holder during any
calendar year shall not exceed $100,000. The purchase price for shares subject
to incentive stock options must be at least 100% of the fair market value of our
common stock on the date the option is granted, except that the purchase price
must be at least 110% of the fair market value in the case of an incentive
option granted to a person who is a "10% stockholder." A "10% stockholder" is a
person who owns (within the meaning of Section 422(b)(6) of the Code of 1986) at
the time the incentive option is granted, shares possessing more than 10% of the
total combined voting power of all classes of our outstanding shares. The 2005
Plan and 2006 Plan provide that fair market value shall be determined by the
Board in accordance with procedures which it may from time to time establish. If
the purchase price is paid with consideration other than cash, the Board will
determine the fair value of such consideration to us in monetary terms. The
exercise price of non-qualified options shall be determined by the Board of
Directors, but cannot be less than the par value of our common stock on the date
the option is granted.
All plan options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee, except as provided by the
board of the Committee. If an optionee shall die while our employee or within
three months after termination of employment by us because of disability, or
retirement or otherwise, such options may be exercised, to the extent that the
optionee shall have been entitled to do so on the date of death or termination
of employment, by the person or persons to whom the optionee's right under the
option pass by will or applicable law, or if no such person has such right, by
his executors or administrators. Options are also subject to termination by the
Board under certain conditions.
-46-
In the event of termination of employment because of death while an
employee, or because of disability, the optionee's options may be exercised not
later than the expiration date specified in the option or one year after the
optionee's death, whichever date is earlier, or in the event of termination of
employment because of retirement or otherwise, not later than the expiration
date specified in the option or one year after the optionee's death, whichever
date is earlier. If an optionee's employment by us terminates because of
disability and such optionee has not died within the following three months, the
options may be exercised, to the extent that the optionee shall have been
entitled to do so at the date of the termination of employment, at any time, or
from time to time, but not later than the expiration date specified in the
option or one year after termination of employment, whichever date is earlier.
If an optionee's employment shall terminate for any reason other than death or
disability, optionee may exercise the options to the same extent that the
options were exercisable on the date of termination, for up to three months
following such termination, or on or before the expiration date of the options,
whichever occurs first. In the event that the optionee was not entitled to
exercise the options at the date of termination or if the optionee does not
exercise such options (which were then exercisable) within the time specified
herein, the options shall terminate. If an optionee's employment shall terminate
for any reason other than death, disability or retirement, all right to exercise
the option shall terminate not later than 90 days following the date of such
termination of employment, except as otherwise provided under the plan.
Non-qualified options are not subject to the foregoing restrictions unless
specified by the Board of Directors or Committee.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 16, 2006, we entered into a stock exchange agreement with
China Direct Investments, Inc. David Stein, a principal shareholder of the
company and a principal shareholder of China Direct Investments, Inc., received
2,000,000 share of common stock of the company and 1,100,000 options of the
company pursuant to the Stock Exchange Agreement.
Following the Share Exchange Agreement, we will sublease our office
space from two related parties, one related party owned by Marc Siegel, our
president and director, and one related party owned by Yuejian (James) Wang, our
Chief Executive officer and director. Prior to the Share Exchange, China Direct
Investments subleased this same office space from the two related parties. CDI
incurred approximately $11,000 and $11,000 in rental expense pursuant to this
subleasing arrangement during the six-month ended June 30, 2006 and 2005,
respectively.
CDI assigned 900,000 shares it received by one of its clients to CIIC
Investment Banking Services (Shanghai) Company Limited, a joint venture
principally owned by CIIC and owned 20% by Marc Siegel, our president and
director, in consideration for services rendered. This amount represented an
introduction fee for CIIC Investment Banking Services (Shanghai) Company Limited
introducing CDI to Sunwin. The value of the shares assigned amounted to $117,000
during the six-month period ended June 30, 2005.
-47-
CIIC Investment Banking Services (Shanghai) Company Limited, a company
owned 20% by Marc Siegel our president and director, paid us $39,480 for
consulting services rendered by CDI to CIIC Investment Banking Services
(Shanghai) Company Limited.
As of June 30, 2006 the officers and directors of CDI loaned CDI the
following amounts: Marc Siegel $9,978.13, Yuejian (James) Wang $132,897.94 and
David Stein $555.00 for general working capital. The amounts due to the officers
are non-interest bearing, unsecured, and payable on demand.
CDI provides consulting services to Dragon Capital Group Corp. Lisheng
(Lawrence) Wang is president and chairman of the board of Dragon Capital Group
Corp. and the brother of Yuejian (James) Wang, our chairman of the board and
chief executive officer. Robert Zhuang, a vice president and director of Dragon
Capital Group Corp., is also an officer of CIIC, a company owned 20% by Marc
Siegel, our president and director, and a company that CDI received
approximately 10% of revenues for the six months ended June 30, 2006. Mr. Zhuang
is also the brother of Yuejian (James( Wang, our chairman and chief executive
officer. The Company recognized $145,000 and $391,500 in revenues during the
six-month period ended June 30, 2006 and 2005, respectively, for services
provided to this related party, of which $367,500 was recognized pursuant to the
receipt of shares of common stock of the related party. The fair value of such
shares amounted to $3,120,000 at June 30, 2006.
On March 15, 2005, we entered into a Management Agreement with
Diversifax Inc. Dr. Irwin Horowitz, our former Chief Executive Officer is a
principal stockholder and Chief Executive Officer of Diversifax Inc. and Mr.
Lonnie L. Sciambi, a former member of our Board of Directors, is also a member
of the Board of Directors of Diversifax Inc.
Under the terms of the agreement, Diversifax Inc. made available to our
company its facilities at 39 Stringham Avenue, Valley Stream, New York; the
services on a part-time basis of seven persons employed by Diversifax Inc. for
approximately 100 hours per week; equipment, hardware and software of Diversifax
Inc. and related utilities and overhead functions at that facility. The term of
the agreement was for six months and could be terminated prior to the conclusion
of its term on 10 days' prior written notice by either party, or the agreement
may be renewed for a successive six-month term.
In consideration for the management services and facilities provided by
Diversifax during the initial six-month term, we issued Diversifax 35,951 shares
of our common stock. In addition, in the event the market price of our common
stock on the six-month anniversary date was below $15.00 per share, we agreed to
issue to Diversifax additional shares of our common stock so that the common
shares provided to Diversifax plus such additional shares of common stock would
be equal in value to $435,000. In addition, Diversifax was to receive 10% of the
total amount of the monies received as a result of their efforts with regard to
auctions being completed for accounts they have introduced to AuctionStore.com,
our wholly-owned subsidiary. Payment of the percentage fee was to be made in
cash or stock as determined by Diversifax. Following the termination of the
agreement we continued to utilize these services under an oral arrangement and
in January 2006 we issued Diversifax 32,539 shares of our common stock in full
settlement of services through December 31, 2005. We recorded an expense of
$527,728 as the value of the shares we issued to Diversifax in fiscal 2005 for
these services.
-48-
On March 22, 2005 we entered into a subscription agreement with Mr.
Robert Sands, a former member of our Board of Directors, for the sale of 20
units of our securities for an aggregate price of $100,000. Each unit had a cost
of $5,000 and consisted of 1,000 shares of common stock and one three year
option consisting of 1,000 shares of common stock exercisable at $25.00 cents
per share. We rejected the subscription agreement and recorded the proceeds as a
loan payable at March 31, 2005. The loan was unsecured, non-interest bearing and
due on demand.
During May 2005, Dr. Irwin Horowitz loaned us $100,000 for working
capital. The loan was non-interest bearing, unsecured and payable on demand. As
described below, this loan was converted into equity in June 2005.
In June 2005, we sold units of our securities in a private placement
resulting in gross proceeds of us of $320,000. The purchasers included four
accredited investors and one unaccredited family member of Dr. Horowitz. As
consideration we received $220,000 in cash and the conversion of a $100,000 loan
payable. In this transaction we issued 192,000 shares of our common stock and an
equal number of warrants exercisable at $15.00 per share for a term ending in
May 2008. Dr. Horowitz and Diversifax Inc. purchased an aggregate $200,000 of
units in this offering and received 120,000 shares of common stock and warrants
to purchase 120,000 shares. Mr. Sands converted the $100,000 note payable
described earlier in this section into 60,000 shares of common stock and 60,000
common stock purchase warrants as part of the offering.
We previously issued a $100,000 demand line of credit to Onspan
Networking, Inc., an affiliated entity of which Messrs. Gary Schultheis and Herb
Tabin, our former officers and directors, were officers and directors, under
which Onspan Networking, Inc. was allowed to borrow on an unsecured basis at 5%
annually. On June 19, 2003 Onspan Networking, Inc. borrowed $675,000 under this
line of credit. On March 30, 2004, Onspan Networking, Inc. borrowed an
additional $6,000 under this line of credit, for a total of $681,000. On April
5, 2004 Onspan Networking, Inc. repaid the additional $6,000. On May 27, 2004,
Onspan Networking, Inc. repaid the original balance outstanding under the line
of credit, including accrued interest. This line of credit expired upon
repayment on May 27, 2004. Under the terms of the demand line of credit Onspan
Networking, Inc. granted us options to purchase 67,500 shares of its common
stock with an exercise price of $.10 per share. Onspan Networking, Inc. also
granted us options to purchase 607,500 shares of its common stock with an
exercise price of $.30 per share.
In December 2004 Messrs. Gary Schultheis and Herbert Tabin, our former
officers and directors, forgave an aggregate of $478,074 due them for accrued
but unpaid compensation and the amount was contributed to our capital.
On October 15, 2004, we sold 13,600 shares of our common stock in a
private transaction. Purchasers included OnSpan Networking Inc., which purchased
12,000 shares of common stock for $27,000, as well as Mr. Martin Scott, a former
director, and Dr. Irwin Horowitz, who was then a member of our Board of
Directors. Each of Mr. Scott and Dr. Horowitz purchased 800 shares of common
stock for $1,800.
-49-
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 1,000,000,000 shares of
common stock, par value $.0001 per share, of which on August 8, 2006 there are
10,526,120 issued and outstanding and 10,000,000 shares of preferred stock, par
value $.0001 per share, of which none have been designated or issued. The
following statements relating to the capital stock set forth the material terms
of the Company's securities; however, reference is made to the more detailed
provisions of, and such statements are qualified in their entirety by reference
to, the Certificate of Incorporation and the By-laws, copies of which are filed
as exhibits to this registration statement.
COMMON STOCK
Holders of shares of common stock are entitled to one vote for each share
on all matters to be voted on by the stockholders. Holders of common stock do
not have cumulative voting rights. Holders of common stock are entitled to share
ratably in dividends, if any, as may be declared from time to time by the Board
of Directors in its discretion from funds legally available therefor. In the
event of a liquidation, dissolution or winding up of the Company, the holders of
common stock are entitled to share pro rata all assets remaining after payment
in full of all liabilities. All of the outstanding shares of common stock are
fully paid and non-assessable.
Holders of common stock have no preemptive rights to purchase the
Company's common stock. There are no conversion or redemption rights or sinking
fund provisions with respect to the common stock.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of shares
of preferred stock in series and, by filing a certificate pursuant to the
applicable law of Delaware, to establish from time to time the number of shares
to be included in each such series, and to fix the designation, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof without any further vote or action by the
shareholders. Any shares of preferred stock so issued would have priority over
the common stock with respect to dividend or liquidation rights. Any future
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
shareholders and may adversely affect the voting and other rights of the holders
of common stock. At present, the Company has no plans to issue any preferred
stock nor adopt any series, preferences or other classification of preferred
stock.
-50-
The issuance of shares of preferred stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of preferred stock might impede
a business combination by including class voting rights that would enable the
holder to block such a transaction, or facilitate a business combination by
including voting rights that would provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power of the holders of the
common stock. Although the Board of Directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of the stockholders of the Company, the Board of Directors could act in a manner
that would discourage an acquisition attempt or other transaction that some, or
a majority, of the stockholders might believe to be in their best interests or
in which stockholders might receive a premium for their stock over the then
market price of such stock. The Board of Directors does not at present intend to
seek stockholder approval prior to any issuance of currently authorized stock,
unless otherwise required by law or stock exchange rules. The Company has no
present plans to issue any preferred stock.
WARRANTS
We have issued and outstanding warrants to purchase a total of 180,000 shares
of our common stock, including:
o 90,000 shares at an exercise price of $7.50 per share, and
o 90,000 shares at an exercise price of $15.00 per share,
Other than the exercise price, all warrants are identical. The warrants
will be subject to adjustment in the event of stock splits, dividends and
similar events.
TRANSFER AGENT
The Company's transfer agent is Olde Monmouth Stock Transfer Co., Inc.,
200 Memorial Parkway, Atlantic Highlands, New Jersey 07716-1655, and its
telephone number is (732) 872-2727.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board under the symbol
"EVOO." The following table sets forth the high and low closing sale prices for
our common stock as reported on the OTCBB and for the last two fiscal years and
the subsequent interim period. These prices do not include retail mark-ups,
markdowns or commissions, and may not necessarily represent actual transactions.
High Low
Fiscal 2004 ---- ---
First quarter ended March 31, 2004 $2.00 $1.6
Second quarter ended June 30, 2004 $5.00 $1.56
Third quarter ended September 30, 2004 $2.00 $1.48
Fourth quarter ended July 31, 2004 $7.80 $1.75
Fiscal 2005
First quarter ended March 31, 2005 $5.30 $8.50
Second quarter ended June 30, 2005 $7.00 $6.60
Third quarter ended September 30, 2005 $24.0 $12.00
Fourth quarter ended December 31, 2005 $13.0 $3.80
Fiscal 2006
First quarter ended March 31, 2006 $4.00 $2.60
Second quarter ended June 30, 2006 $9.00 $2.25
On August 15, 2006, the last reported sale prices of the common stock
on OTCBB was $4.00 per share. As of August 14, 2006 there were approximately
2,035 stockholders of record of the common stock.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. Under Delaware
law, we may declare and pay dividends on our capital stock either out of our
surplus, as defined in the relevant Delaware statutes, or if there is no such
surplus, out of our net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. If, however, the capital of our
company, computed in accordance with the relevant Delaware statutes, has been
diminished by depreciation in the value of our property, or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, we are prohibited from declaring and
paying out of such net profits any dividends upon any shares of our capital
stock until the deficiency in the amount of capital represented by the issued
and outstanding stock.
-52-
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth securities authorized for issuance under
our equity compensation plans, including individual compensation arrangements,
by us under our Evolve One, Inc. Stock Option Plan, our 2005 Equity Compensation
Plan (which plan has not received shareholder approval), and our 2006 Equity
Compensation Plan
Weighted
Number of average Number of
securities to be exercise securities remaining
issued upon price of available for future
exercise of outstanding issuance under equity
of outstanding options, compensation plans
options, warrants warrants (excluding securities
Plan category and rights and rights reflected in column a))
(a) (b) (c)
------------- ----------------- ----------- --------------------
Plans approved by our
stockholders (1) 9,046,480 $28.13 1,032,000
Plans not approved by
our stockholders(2) 750,500 $27.90 799,500
(1) Includes 480 shares underlying options granted under our Evolve One, Inc.
Stock Option Plan and 9,046,000 shares underlying options granted under our 2006
Equity Compensation Plan.
(2) Includes 200,500 shares underlying options granted under our 2005 Equity
Compensation Plan and options to purchase 550,000 shares of our common stock
granted to Dr. Horowitz which are not included in either plan.
ITEM 2. LEGAL PROCEEDINGS.
There is no litigation pending or threatened by or against us.
-53-
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On April 11, 2005, we dismissed Goldstein Lewin & Co. as our
independent registered public accounting firm. Goldstein Lewin & Co. had been
the independent registered public accounting firm for and audited our
consolidated financial statements as of December 31, 2004 and 2003. The reports
of Goldstein Lewin & Co. on our financial statements for the past two fiscal
years contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles,
except such reports were modified as to the effects, if any, for adjustments
related to the verification of shares of an investment held by us and an
explanatory paragraph relating to our ability to continue as a "going concern"
as a result of our continuing losses and accumulated deficit and lack of
sufficient capital for completion of its business plan. The decision to change
accountants was approved unanimously by the Board of Directors.
In connection with the audit for the two most recent fiscal years and
in connection with Goldstein Lewin & Co.'s review of the subsequent interim
periods preceding dismissal on April 11, 2005, there have been no disagreements
between our company and Goldstein Lewin & Co. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which, if not resolved to the satisfaction of Goldstein Lewin & Co.,
would have caused Goldstein Lewin & Co. to make reference thereto in their
report on our financial statements for these fiscal years. During the two most
recent fiscal years and prior to the date hereof, we had no reportable events
(as defined in Item 304(a)(1) of Regulation S-B).
On April 13, 2005 we engaged Webb & Company, P.A. as our independent
registered public accounting firm. We had not consulted with Webb & Company,
P.A. regarding the application of accounting principles to any contemplated or
completed transactions nor the type of audit opinion that might be rendered on
our financial statements, and neither written nor oral advice was provided that
would be an important factor considered by us in reaching a decision as to an
accounting, auditing or financial reporting issues.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, we have sold securities which were not
registered as follows:
In October 2004, we sold an aggregate of 13,600 shares of our common
stock to three accredited investors in a private transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities Act")
in reliance on an exemption provided by Section 4(2) of the Securities Act. We
received proceeds of $30,600 and did not pay a commission in the transaction.
The purchasers included OnSpan Networking Inc., a related party in which certain
then majority stockholders of our company were also officers and directors, as
well as two former directors of our company.
-54-
Between March and December 2005 we issued an aggregate of approximately
68,690 shares of our common stock valued at $527,728 to Diversifax, Inc., a
company of which out then CEO was a principal shareholder and executive officer,
as compensation for services rendered to us under the terms of a Management
Agreement we entered into in March 2005. Under the terms of the agreement,
Diversifax made make available to us its facilities in Valley Stream, New York;
the services on a part-time basis of seven persons which were employed by
Diversifax for approximately 100 hours per week, equipment, hardware and
software; and related utilities and overhead functions at that facility. The
recipient was an accredited investor and the issuances were exempt from
registration under the Securities Act in reliance on exemptions provided by
Section 4(2) of that act.
In June 2005, we sold units consisting of 192,000 shares of our common
stock and three year common stock purchase warrants exercisable at $15.00 per
share to purchase an additional 192,000 shares of our common stock to four
accredited investors and one unaccredited family member of the then chief
executive officer of our company. We received proceeds of $320,000 and did not
pay a commission in the transaction. Members of our management invested $200,000
of this amount and received 120,000 shares and warrants to purchase an
additional 120,000 shares. Inasmuch as the investors were all members of
management and accredited investors or, in one instance, was a relative of a
member of management, the issuance of the shares was exempt from registration
under the Securities Act by virtue of an exemption provided by Section 4(2) of
that act.
During November 2005 we issued 1,000 shares of our common stock valued
at $9,000 to two members of our Board of Directors as compensation for their
services. The recipients were accredited investors and the issuance of the
shares was exempt from registration under the Securities Act by virtue of an
exemption provided by Section 4(2) of that act.
On August 16, 2006, we issued an aggregate of 10,000,000 shares of our
common stock to three accredited investors and 9,046,000 options to 11
accredited investors pursuant to a stock exchange agreement for the acquisition
of all of the outstanding shares of common stock of China Direct Investments,
Inc. ("CDI"), in a private transaction exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act") in reliance on an
exemption provided by Section 4(2) of the Securities Act. We did not pay a
commission in the transaction. David Stein, a principle shareholder of Evolve
was also a principal shareholder of CDI.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
the personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 (relating to
liability for unauthorized acquisitions or redemptions of, or dividends on,
capital stock) of the General Corporation Law of the State of Delaware, or (iv)
for any transaction from which the director derived an improper personal
benefit. Our Certificate of Incorporation contains such a provision.
-55-
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933, AS AMENDED, MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING
US PURSUANT TO THE FOREGOING PROVISIONS, IT IS THE OPINION OF THE SECURITIES AND
EXCHANGE COMMISSION THAT SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS
EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
Item 9.01 Financial Statements and Exhibits
(a) The following financial statements of China Direct Investments, Inc. for the
periods specified in Rule 3-05(b) of Regulation S-K, are filed herewith:
o Consolidated Balance Sheet at June 30, 2006 (unaudited)
o Consolidated Statement of Operations for the three and six
months ended June 30, 2006 (unaudited)
o Consolidated Statements of Cash Flows for the three and six
months ended June 30, 2006 (unaudited)
o Notes to Consolidated Financial Statements at June 30, 2006
(unaudited)
o Report of Independent Registered Public Accounting Firm
o Consolidated Balance Sheet at December 31, 2005
o Consolidated Statements of Operations for the years ended
December 31, 2005 and 2004
o Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2005 and 2004
o Consolidated Statements of Cash Flows the years ended December
31, 2005 and 2004
o Notes to Consolidated Financial Statements at December 31,
2005
(b) The following pro forma financial information for Evolve One, Inc.
and subsidiaries as required by Article 11 of Regulation S-X is filed herewith:
o Pro Forma Consolidated Balance Sheet at June 30, 2006 (unaudited)
o Pro Forma Consolidated Statement of Operations for the three and
six months ended June 30, 2006 (unaudited)
-56-
o Notes to unaudited Pro Form Financial Statements
(c) Exhibits
3.3 Certificate of Amendment to the Certificate of Incorporation filed
with the Delaware Secretary of State on August 17, 2006.
10.8 Stock Exchange Agreement dated August 16, 2006 by and between the
company, China Direct Investments, Inc. ("CDI"), and the
shareholders of CDI.
10.9 Employment Agreement dated August 16, 2006 by and between the company
and Yuejian (James) Wang
10.10 Employment Agreement dated August 16, 2006 by and between the company
and Marc Siegel
10.11 Employment Agreement dated August 16, 2006 by and between the company
and David Stein
10.12 Employment Agreement dated August 16, 2006 by and between the company
and Jenny Liu
10.13 Employment Agreement dated August 16, 2006 by and between the company
and Qingchen Zhao.
10.14 2006 Equity Compensation Plan
10.15 Consulting Agreement dated March 2, 2006 by and between CDI and Richard
Galterio
10.16 Consulting Agreement dated August 24, 2005 by and between CDI and
Linkwell Corporation.
10.17 Consulting Agreement dated January 2006 by and between CDI and Sunwin
International Neutraceuticals, Inc.
10.18 Consulting and Management Agreement dated January 1, 2005 by and
between CDI and Dragon Capital Group Corp
10.19 Consulting and Management Agreement dated January 10, 2006 by and
between CDI and Dragon International Group Corp
10.20 Mutual Consulting Agreement dated February 1, 2005 by and between CDI
and CIIC
-57-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EVOLVE ONE, INC.
By: /s/ Yuejian (James) Wang
--------------------------------
Yuejian (James) Wang, CEO
DATED: August 17, 2006
-58-
CHINA DIRECT INVESTMENTS, INC.
BALANCE SHEET
June 30, 2006
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 66,148
Prepaid executive compensation 256,267
Investment in trading securities 616,000
Investment in marketable securities held for sale-related party 3,120,000
------------------
Total current assets 4,058,415
Property and equipment, net of accumulated depreciation of $3,125 17,890
Prepaid expenses 384,400
Other assets 26,975
------------------
Total assets $ 4,487,680
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 26,618
Accrued compensation 11,967
Deferred revenues-short term 366,300
Income tax payable 100,503
Due to executive officers 143,430
Deferred income tax payable 975,196
------------------
Total current liabilities 1,624,014
Deferred revenues-long term 549,450
Stockholders' Equity:
Common stock; $.001 par value, 200,000,000 shares authorized,
10,000,000 issued and outstanding 10,000
Additional paid-in capital 583,111
Accumulated comprehensive income 1,457,845
Retained earnings 263,260
------------------
Total stockholders' equity 2,314,216
------------------
Total liabilities and stockholders' equity $ 4,487,680
==================
See Notes to Unaudited Financial Statements.
F-2
CHINA DIRECT INVESTMENTS, INC.
STATEMENTS OF OPERATIONS
For the
period from For the For the
For the six-month inception three-month three-month
period ended (January 18) to period ended period ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
----------------- --------------- ------------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 241,832 $ 314,850 $ 135,417 $ 308,350
Revenues-related party 145,000 391,500 45,000 183,750
-------------- --------------- --------------- ---------------
Total-revenues 386,832 706,350 180,417 492,100
Cost of revenues 148,794 25,503 133,534 25,503
-------------- --------------- --------------- ---------------
Gross profit 238,038 680,847 46,883 466,597
Operating expenses:
Selling, general, and administrative
expenses-related parties 11,252 127,576 5,552 122,288
Selling, general and administrative 842,088 368,830 503,648 330,577
-------------- --------------- --------------- ---------------
Total operating expenses 853,340 496,406 509,200 452,865
-------------- --------------- --------------- ---------------
Operating (loss) income (615,302) 184,441 (462,317) 13,732
Other income (expense):
Unrealized gain(loss) on trading securities 273,500 - (138,175) -
Realized gain on sale of trading securities 43,345 - - -
-------------- --------------- --------------- ---------------
Net (loss) income before income tax (298,457) 184,441 (600,492) 13,732
Income tax benefit (expense) (118,189) (73,039) 237,795 (5,438)
-------------- --------------- --------------- ---------------
Net (loss) income (180,268) 111,402 (362,697) 8,294
Unrealized gain on marketable securities held
for sale, net of income tax 1,395,240 1,040,573 253,680 9,060
-------------- --------------- --------------- ---------------
Comprehensive income $ 1,214,972 $ 1,151,975 $ (109,017) $ 17,354
============== =============== =============== ===============
Basic (loss) earnings per common share $ (0.02) $ 0.01 $ (0.04) $ 0.00
============== =============== =============== ===============
Diluted (loss) earnings per common share $ (0.02) $ 0.01 $ (0.04) $ 0.00
============== =============== =============== ===============
Basic weighted average common
shares outstanding 10,000,000 10,000,000 10,000,000 10,000,000
============== =============== =============== ===============
Diluted weighted average common shares
outstanding 10,000,000 10,874,521 10,000,000 10,874,521
============== =============== =============== ===============
See Notes to Unaudited Financial Statements
F-3
CHINA DIRECT INVESTMENTS , INC.
STATEMENTS OF CASH FLOWS
For the six-month period ended:
June 30, 2006 June 30, 2005
------------------ ------------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net (loss) income $ (180,268) $ 111,402
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation 1,918 950
Realized gain on sale of investment in trading securities (43,345) -
Unrealized gain on investment in trading securities (273,500) -
Fair value of shares issued to founders - 10,000
Fair value of shares received for services (1,098,900) (416,750)
Fair value of shares received for services-related party - (735,000)
Fair value of warrants received for services - (33,428)
Fair value of investments assigned to employees and consultants for services 837,200 175,600
Fair value of investments assigned to a related party - 117,000
Fair value of options issued to consultants 324,050 -
Changes in operating assets and liabilities:
Prepaid expenses (640,667) -
Other assets (26,975) -
Accounts payable and accrued expenses (1,911) 5,000
Accrued compensation 6,967 -
Deferred revenues 915,750 651,078
Deferred income tax liability (232,647) -
Income tax payable 59,458 73,039
------------------ ------------------
Net cash used in operating activities (352,870) (41,109)
------------------ ------------------
Cash flows provided by investing activities:
Proceeds from the disposition of investment in trading securities 115,345 -
Purchases of property and equipment (4,008) (12,423)
------------------ ------------------
Net cash provided by (used in) investing activities 111,337 (12,423)
------------------ ------------------
Cash flows from financing activities:
Proceeds from advances from executive officers 8,637 64,286
Capital contributed by officers 259,061 -
------------------ ------------------
Net cash provided by financing activities 267,698 64,286
------------------ ------------------
Net increase in cash 26,165 10,754
Cash, beginning of period 39,983 -
------------------ ------------------
Cash, end of period $ 66,148 $ 10,754
================== ==================
Supplemental disclosures of cash flow information:
Cash paid for taxes $ 55,000 $ -
================== ==================
Cash paid for interest $ - $ -
================== ==================
See Notes to Unaudited Financial Statements.
F-4
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
Note 1-Organization and Description of Business
China Direct Investments, Inc. (the "Company") was formed in Florida in January
2005. The Company provides business consulting services to small publicly-traded
Chinese companies and small Chinese companies that want to go public. The
Company's operations are located in South Florida.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and the footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of
recurring accruals, considered for a fair presentation have been included.
Operating results for the six months ended June 30, 2006 are not necessarily
indicative of the results that may be expected for fiscal 2006.
Note 2- Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and
cash equivalents and investments in marketable securities held for sale and
trading securities.
The Company's cash and cash equivalents accounts are held at financial
institutions and are insured by the Federal Deposit Insurance Corporation
("FDIC") up to $100,000. During the six-month period ended June 30, 2006, the
Company has reached bank balances exceeding the FDIC insurance limit. To reduce
its risk associated with the failure of such financial institutions, the Company
periodically evaluates the credit quality of the financial institutions in which
it holds deposits.
Three publicly-traded Chinese companies accounted for 58%, 21%, and 21%,
respectively, of the Company's investment in trading securities at June 30,
2006. One publicly traded Chinese company accounted for the Company's investment
in marketable securities held for sale at June 30, 2006.
Customer Concentration
Four of the Company's customers accounted for 37%, 24%, 23% and 10%,
respectively, of its revenues during the six-month period ended June 30, 2006.
Two of the Company's customers accounted for 55% and 34%, respectively, of its
revenues during the period from inception ( January 18, 2005) to June 30, 2005.
The Company minimizes its customer concentration risks by diversifying its
existing customer base.
F-5
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
Product Concentration
All of the Company's revenues are derived from fees earned from business
consulting services.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, investment in marketable
securities, accounts payable and accrued expenses, income tax payable and due to
executive officers approximate their fair value due to their short-term
maturities. The carrying value of securities held for sale are reflected at
their fair value based on their quoted stock price.
Marketable Securities
The Company classifies its existing marketable equity securities as trading
securities and available for sale in accordance with SFAS No. 115. These
securities are carried at fair market value. Realized gains or losses are
recognized in the statement of operations when the marketable securities are
sold. Gains or losses on securities sold are based on the specific
identification method. Unrealized gains or losses of trading securities are
recognized in the statement of operations on a monthly basis based on changes in
the fair value of the security as quoted on national or inter-dealer stock
exchanges. Unrealized gains or losses of marketable securities held for sale are
recognized as an element of comprehensive income on a monthly basis based on
changes in the fair value of the security as quoted on national or inter-dealer
stock exchanges.
Prepaid Executive Compensation
Prepaid executive compensation consists of the fair value of shares of the
Company's clients which were assigned to the Company's officers for services to
be rendered to such clients over the course of 36-month agreements.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives of three to five years.
Maintenance and repairs are charged to expense as incurred. Significant renewals
and betterments are capitalized.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
F-6
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
future benefits indicated by such assets. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some or the
entire deferred tax asset will not be realized.
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates made by management include, but are not
limited to, the realization of receivables. Actual results will differ from
these estimates.
Basic and Diluted Earnings per Share
Basic earnings per share are calculated by dividing income or loss available to
stockholders by the weighted-average number of common shares outstanding during
each period. Diluted earnings per share are computed using the weighted average
number of common and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents consist of shares issuable upon the
exercise of stock options and warrants (calculated using the modified-treasury
stock method). The outstanding options amounted to 9,046,000 at June 30, 2006
and June 30, 2005.
The following sets forth the computation of basic and diluted earnings per
share:
Six-month From Inception
period ended (January 18, 2005)
June 30, 2006 to June 30, 2005
-------------- -----------------
Numerator:
Net (loss) income $ (180,268) $ 111,402
=========== ========
Denominator:
Denominator for basic earnings per share-
Weighted average shares outstanding 10,000,000 10,000,000
Effect of dilutive employee stock options - 874,521
----------- ------------
Denominator for diluted earnings per share-
Weighted average shares outstanding 10,000,000 10,874,521
========== ==========
Basic (loss) earnings per share $ (0.02) $ 0.01
========== ==========
Diluted (loss) earnings per share $ (0.02) $ 0.01
========== ==========
F-7
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 104 "Revenue Recognition".
The Company generally provides its services pursuant to written agreements which
may vary in duration. Revenues are recognized over the terms of the agreements.
The Company's revenues are derived from a certain predetermined fixed fee for
the services it provides to its customers. The fee will vary based on the scope
of its services.
A significant portion of the services the Company provides are paid in shares
and other equity instruments issued by its clients. These instruments are
classified as marketable securities on the balance sheet, if still held at the
financial reporting date. These instruments are stated at fair value in
accordance with the provision of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
No. 115) and EITF 00-8 "Accounting by a grantee for an equity instrument to be
received in conjunction with providing goods or services." Primarily all of the
equity instruments are received from small public companies.
The stock and the stock purchase warrants received are typically restricted as
to resale, though the Company generally receives a registration right within one
year. Company policy is to resell these securities in anticipation of short -
term market movements. The Company recognizes revenue for such stock purchase
warrants when received based on the Black-Scholes valuation model. The Company
recognizes unrealized gains or losses in the statement of operations based on
the changes in value in the stock purchase warrants as determined by the Black-
Scholes valuation model. Realized gains or losses are recognized in the
statement of operations when the related stock purchase warrant is exercised and
sold. The Company recognized revenues amounting to $183,150 and $651,100 in
connection with the receipt of equity instruments during the six-month period
ended June 30, 2006 and the period from Inception (January 18, 2005) to June 30,
2005, respectively. Additionally, the Company deferred revenues of $915,750 in
connection with the receipt of equity instruments at June 30, 2006
F-8
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
Note 2- Summary of Significant Accounting Policies-Continued
Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
companies are required to measure the compensation costs of share-based
compensation arrangements based on the grant-date fair value and recognize the
costs in the financial statements over the period during which employees are
required to provide services. Share-based compensation arrangements include
stock options, restricted share plans, performance-based awards, share
appreciation rights and employee share purchase plans. In March 2005 the SEC
issued Staff Accounting Bulletin No. 107, or "SAB 107". SAB 107 expresses views
of the staff regarding the interaction between SFAS No. 123(R) and certain SEC
rules and regulations and provides the staff's views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
123R. Companies may elect to apply this statement either prospectively, or on a
modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods under SFAS 123. Effective January 1,
2006, the Company has fully adopted the provisions of SFAS No. 123R and related
interpretations as provided by SAB 107. As such, compensation cost is measured
on the date of grant as the excess of the current market price of the underlying
stock over the exercise price. Such compensation amounts, if any, are amortized
over the respective vesting periods of the option grant. The Company applies
this statement prospectively.
Segment reporting
The Company operates in one segment, business consulting services. The Company's
chief operating decision-maker evaluates the performance of the Company based
upon revenues and expenses by functional areas as disclosed in the Company's
statements of operations.
Recent Pronouncements
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in tax positions. FIN 48 requires that entities
recognize the impact of a tax position in their financial statements, if that
position is more likely than not to be sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. The Company is still assessing
the impact the adoption of FIN 48 will have on its financial statements.
F-9
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
Note 3-Due to Executive Officers
The due to executive officers amounts to approximately $143,000 at June 30,
2006. The due to executive officers is non-interest bearing, unsecured, and
payable on demand.
Note 4- Stockholders' Equity
Stock Option Plan
The following pro forma information regarding stock-based compensation has been
determined as if the Company had accounted for its employee stock options under
the fair value method pursuant to SFAS 123. For purposes of the proforma
calculations, the fair value of each option granted in 2005 was estimated at
the date of grant using the Black-Scholes model with the following assumptions:
risk-free interest rate: 4.0%,; dividend yield: none;volatility: 73% ;
expected lives: 5 years.
The Company issued 5,500,000 options to its executive officers during fiscal
2005 at a weighted average exercise price of $5.00. No value was attributed to
such options based on the aforementioned assumptions. Additionally, there are no
adjustments to the proforma net income or earnings per share for the period from
Inception (January 18, 2005) to June 30, 2005.
During the six-month period ended June 30, 2006, the Company issued 3,546,000
options to consultants. These options vested over a period not exceeding one
year and had exercise price ranging from $0.01 to $10.00. The fair value of each
options granted during the six-month period ended June 30, 2006 was estimated at
the date of grant using the Black-Scholes model with the following assumptions:
: risk-free interest rate: 5.1%; dividend yield: none; volatility: 73% ;
expected lives: 5 years. The fair value of such options amounted to $457,380 of
which $324,050 was recognized as sales and general and administrative expenses
during the six-month period ended June 30, 2006.
F-10
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
Note 4- Stockholders' Equity-continued
Common Stock
At inception, the Company issued 10,000,000 shares to its three founders. The
shares were valued at their par value and amounted to $10,000. The fair value of
the shares was recognized as sales and genral and administrative expenses during
the six-month ended June 30, 2005.
During the six-month period ended June 30, 2006, the executive officers of the
Company contributed $259,061 to the Company.
Note 5-Marketable Securities
Marketable securities, as shown in the accompanying balance sheet, consist of
securities held for sale or trading securities. Their value at date received and
estimated fair market value at June 30, 2006 are as follows:
January 1, 2006 Date received Unrealized gain June 30, 2006
----------------- ----------------- -------------------- -------------------------
Investment in trading
securities-common stock $ 80,800 $ 261,700 $ 273,500 $ 616,000
Investment in marketable
securities held for sale $ 810,000 $ - $ 2,310,000 $ 3,120,000
----------------- ----------------- -------------------- -------------------------
F-11
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 2006 and 2005
(Unaudited)
Note 6- Related Party Transactions
The Company subleases its office space from a related party owned by an officer
and director. The Company incurred approximately $11,000 and $11,000 in rental
expense pursuant to this subleasing arrangement during the six-months ended June
30, 2006 and 2005, respectively.
The Company assigned shares received by one of its clients to a related party
partially owned by an officer and director in consideration for services
rendered. The value of the shares assigned amounted to $117,000 during the
six-month period ended June 30, 2005 and was recognized as sales, general and
administrative expenses.
One of the Company's clients is a related party company which chairman of the
board is the brother of an officer and director of the Company. The Company
recognized $145,000 and $391,500 in revenues during the six-month period ended
June 30, 2006 and 2005, respectively, for services provided to this related
party, of which $367,500 was recognized pursuant to the receipt of shares of
common stock of the related party. The fair value of such shares amounted to
$3,120,000 at June 30, 2006.
Note 7- Subsequent Event
On August 16,2006 The Company merged with Evolve One, Inc. (" Evolve")under a
Stock Exchange Agreement (the " Agreement"). Pursuant to the Agreement, Evolve
is aquiring all the issued and outstanding shares of common stock of the Company
and as consideration, the existing shareholders of the Company received
10,000,000 shares of Evolve.
F-12
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
China Direct Investment, Inc.
5301 N Federal Hwy #120
Boca Raton, FL 33487
We have audited the accompanying balance sheet of China Direct Investment,
Inc. as of December 31, 2005, and the related statements of operations,
stockholders' equity and cash flows from January 18, 2005 (Inception) to
December 31, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purposes of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amount and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of China Direct Investment,
Inc. as of December 31, 2005, and the results of their operations and their cash
flows from January 18, 2005 (Inception) to December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.
/s/Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
August 4, 2006
F-13
CHINA DIRECT INVESTMENTS, INC.
BALANCE SHEET
December 31, 2005
ASSETS
Current Assets:
Cash and cash equivalents $ 39,983
Investment in trading securities 152,800
Investment in marketable securities held for sale-related party 810,000
------------------
Total current assets 1,002,783
Property and equipment, net of accumulated depreciation of $1,207 15,800
------------------
Total assets $ 1,018,583
==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 28,529
Accrued compensation 5,000
Income tax payable 293,083
Due to executive officers 134,793
Deferred income tax payable 41,045
------------------
Total current liabilities 502,450
Stockholders' Equity:
Common stock; $.001 par value, 200,000,000 shares authorized,
10,000,000 issued and outstanding 10,000
Accumulated comprehensive income 45,300
Retained earnings 460,833
------------------
Total stockholders' equity 516,133
------------------
Total liabilities and stockholders' equity $ 1,018,583
==================
See Notes to Financial Statements.
F-14
CHINA DIRECT INVESTMENTS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 2005 (INCEPTION)
TO DECEMBER 31, 2005
Revenues $ 689,428
Revenues-related party 849,000
-----------------
1,538,428
Cost of revenues 109,522
-----------------
Gross profit 1,428,906
Operating expenses:
Selling, general and administrative-related parties 141,188
Selling, general and administrative 557,283
-----------------
Total operating expenses 698,471
-----------------
Operating income 730,435
Other income (expense):
Unrealized gain on trading securities 28,650
Realized gain on sale of trading securities 6,176
-----------------
Net income before income tax 765,261
Income tax expense (304,428)
-----------------
Net income $ 460,833
=================
Unrealized gain on marketable securities
held for sale, net of income 45,300
-----------------
Comprehensive income $ 506,133
=================
Basic earnings per common share $ 0.05
=================
Diluted earnings per common share $ 0.04
=================
Basic weighted average common
shares outstanding 10,000,000
=================
Diluted weighted average common shares outstanding 10,874,521
=================
See Notes to Financial Statements.
F-15
CHINA DIRECT INVESTMENTS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period from January 18, 2005 (Inception) to December 31, 2005
Accumulated
Common Stock Comprehensive Retained
Shares $ Income Earnings Total
---------------- --------------- -------------- --------------- ---------
Opening balance, January 18, 2005(Inception) - $ - $ - $ - $ -
Issuance of common stock to founders 10,000,000 10,000 - - 10,000
Unrealized income on investment held
for sale, net of income tax - - 45,300 - 45,300
Net income - - - 460,833 460,833
--------------- --------------- ---------------- --------------- ---------
Ending balance, December 31, 2005 10,000,000 $ 10,000 $ 45,300 $ 460,833 $ 516,133
================ =============== ================ =============== =========
See Notes to Financial Statements
F-16
CHINA DIRECT INVESTMENTS , INC.
STATEMENTS OF CASH FLOWS
For the period from January 18, 2005 (Inception) to December 31, 2005
Cash flows from operating activities:
Net income $ 460,833
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation 1,207
Unrealized gain on trading securities (28,650)
Realized gain on sale of investment in trading securities (6,176)
Fair value of shares issued to founders 10,000
Fair value of shares received for services (416,750)
Fair value of shares received for services-related party (735,000)
Fair value of warrants received for services (33,428)
Fair value of investments assigned to officers and consultants for services 175,600
Fair value of investments assigned to related parties 117,000
Changes in operating assets and liabilities:
Accounts payable and accrued expenses 28,529
Accrued compensation 5,000
Deferred income tax payable 11,345
Income tax payable 293,083
------------------
Net cash used in operating activities (117,407)
------------------
Cash flows from investing activities:
Exercise of warrants (75,000)
Proceeds from the disposition of investment in trading securities 114,604
Purchases of property and equipment (17,007)
------------------
Net cash provided by investing activities 22,597
------------------
Cash flows from financing activities:
Proceeds from advances from executive officers 134,793
Proceeds from advances from customers 220,000
Repayments of advances to customers (220,000)
------------------
Net cash provided by financing activities 134,793
------------------
Net increase in cash 39,983
Cash, beginning of period -
------------------
Cash, end of period $ 39,983
==================
Supplemental disclosures of cash flow information:
Cash paid for taxes $ -
==================
Cash paid for interest $ -
==================
See Notes to Financial Statements.
F-17
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Note 1-Organization and Description of Business
China Direct Investments, Inc. (the "Company") was formed in Florida in January
2005. The Company provides business consulting services to small publicly-traded
Chinese companies and small Chinese companies that want to go public. The
Company's operations are located in South Florida.
Note 2- Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Concentration of Credit Risks
The Company is subject to concentrations of credit risk primarily from cash and
cash equivalents and investments in marketable securities held for sale and
trading securities.
The Company's cash and cash equivalents accounts are held at financial
institutions and are insured by the Federal Deposit Insurance Corporation
("FDIC") up to $100,000. During 2005, the Company has reached bank balances
exceeding the FDIC insurance limit. To reduce its risk associated with the
failure of such financial institutions, the Company periodically evaluates the
credit quality of the financial institutions in which it holds deposits.
The Company's investments in securities held for sale and trading securities are
held in publicly-traded Chinese companies. Two of the investments in trading
securities accounted for 84% and 16%, respectively, of its investments in
trading securities at December 31, 2005.
Customer Concentration
Three of the Company's customers accounted for 55%, 24% and 20% of its revenues
during fiscal 2005. The Company minimizes its customer concentration risks by
diversifying its existing customer base.
Product Concentration
All of the Company's revenues are derived from fees earned from business
consulting services.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, investment in marketable
securities, accounts payable and accrued expenses, income tax payable and due to
executive officers approximate their fair value due to their short-term
maturities. The carrying value of securities held for sale is reflected at its
fair value based on their quoted stock price.
F-18
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Note 2- Summary of Significant Accounting Policies-Continued
Marketable Securities
The Company classifies its existing marketable equity securities as trading
securities and available for sale in accordance with SFAS No. 115. These
securities are carried at fair market value. Realized gains or losses are
recognized in the statement of operations when the marketable securities are
sold. Gains or losses on securities sold are based on the specific
identification method. Unrealized gains or losses of trading securities are
recognized in the statement of operations on a monthly basis based on changes in
the fair value of the security as quoted on national or inter-dealer stock
exchanges. Unrealized gains or losses of marketable securities held for sale are
recognized as an element of comprehensive income on a monthly basis based on
changes in the fair value of the security as quoted on national or inter-dealer
stock exchanges.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives of three to five years.
Maintenance and repairs are charged to expense as incurred. Significant renewals
and betterments are capitalized.
Property and equipment consist of the following as of December 31, 2005:
Computer equipment and software $ 3,254
Office furniture and equipment 13,753
----------
17,007
Accumulated depreciation (1,207)
----------
$ 15,800
Depreciation expense amounted to approximately $1,200 during fiscal 2005.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company's assets and liabilities result in a deferred tax asset, SFAS No.
109 requires an evaluation of the probability of being able to realize the
future benefits indicated by such assets. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some or the
entire deferred tax asset will not be realized.
F-19
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Note 2- Summary of Significant Accounting Policies-Continued
Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Significant estimates made by management include, but are not
limited to, the realization of receivables. Actual results will differ from
these estimates.
Basic and Diluted Earnings per Share
Basic earnings per share are calculated by dividing income available to
stockholders by the weighted-average number of common shares outstanding during
each period. Diluted earnings per share are computed using the weighted average
number of common and dilutive common share equivalents outstanding during the
period. Dilutive common share equivalents consist of shares issuable upon the
exercise of stock options and warrants (calculated using the modified-treasury
stock method). The outstanding options amounted to 5,500,000 at December 31,
2005.
The following sets forth the computation of basic and diluted earnings per
share:
2005
Numerator:
Net income $ 460,833
===========
Denominator:
Denominator for basic earnings per share-
Weighted average shares outstanding 10,000,000
Effect of dilutive employee stock options 874,521
----------
Denominator for diluted earnings per share-
Weighted average shares outstanding 10,874,521
===========
Basic earnings per share $ 0.05
===========
Diluted earnings per share $ 0.04
===========
F-20
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Note 2- Summary of Significant Accounting Policies-Continued
Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 104 "Revenue Recognition".
The Company generally provides its services pursuant to written agreements which
may vary in duration. Revenues are recognized over the terms of the agreements.
The Company's revenues are derived from a certain predetermined fixed fee for
the services it provides to its customers. The fee will vary based on the scope
of its services.
A significant portion of the services the Company provides are paid in shares
and other equity instruments issued by its clients. These instruments are
classified as marketable securities on the balance sheet, if still held at the
financial reporting date. These instruments are stated at fair value in
accordance with the provision of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS
No. 115) and EITF 00-8 "Accounting by a grantee for an equity instrument to be
received in conjunction with providing goods or services." Primarily all of the
equity instruments are received from small public companies.
The stock and the stock purchase warrants received are typically restricted as
to resale, though the Company generally receives a registration right within one
year. Company policy is to resell these securities in anticipation of short -
term market movements. The Company recognizes revenue for such stock purchase
warrants when received based on the Black-Scholes valuation model. The Company
recognizes unrealized gains or losses in the statement of operations based on
the changes in value in the stock purchase warrants as determined by the Black-
Scholes valuation model. Realized gains or losses are recognized in the
statement of operations when the related stock purchase warrant is exercised and
sold. For the year ended December 31, 2005 the Company recognized $1,302,178 of
revenue in connection with the receipt of equity instruments.
Stock-Based Compensation
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying
F-21
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Note 2- Summary of Significant Accounting Policies-Continued
stock over the exercise price. Such compensation amounts, if any, are amortized
over the respective vesting periods of the option grant. The Company adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
and SFAS 148, "Accounting for Stock-Based Compensation -Transition and
Disclosure", which permits entities to provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants as if the
fair-valued based method defined in SFAS No. 123 had been applied. The Company
accounts for stock options and stock issued to non-employees for goods or
services in accordance with the fair value method of SFAS 123.
Segment reporting
The Company operates in one segment, business consulting services. The Company's
chief operating decision-maker evaluates the performance of the Company based
upon revenues and expenses by functional areas as disclosed in the Company's
statements of operations.
Recent Pronouncements
In December 2004, the FASB issued SFAS 123 (revised 2004) "Share-Based Payment".
This Statement requires that the cost resulting from all share-based
transactions be recorded in the financial statements. The Statement establishes
fair value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-based measurement
in accounting for share-based payment transactions with employees. The Statement
also establishes fair value as the measurement objective for transactions in
which an entity acquires goods or services from non-employees in share-based
payment transactions. The Statement replaces SFAS 123 "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25 "Accounting for
Stock Issued to Employees". The provisions of this Statement will be effective
for the Company beginning in the first quarter of 2006. The Company is currently
evaluating the impact this new Standard will have on its financial position,
results of operations or cash flows.
F-22
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Note 5-Due to Executive Officers
The due to executive officers amounts to approximately $135,000 at December 31,
2005. The due to executive officers is non-interest bearing, unsecured, and
payable on demand.
Note 7- Stockholders' Equity
Stock Option Plan
The following pro forma information regarding stock-based compensation has been
determined as if the Company had accounted for its employee stock options under
the fair value method pursuant to SFAS 123. For purposes of the proforma
calculations, the fair value of each option granted in 2005 was estimated at
the date of grant using the Black-Scholes model with the following assumptions
used: risk-free interest rate: 4.0%, respectively; dividend yield: none;
volatility: 73% ; expected lives: 5 years.
The Company issued 5,500,000 options to its executive officers during fiscal
2005 at a weighted average exercise price of $5.00. No value was attributed to
such options based on the aforementioned assumptions.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for grants under those
plans consistent with the method of SFAS No. 123, the Company's cash flows would
have remained unchanged; however net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
2005
Net income as reported: $460,833
Add: Compensation expense recognized for options
Granted below market value -
Deduct: Total stock-base employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (-)
--------
Net income pro forma $460,833
========
Earnings per share:
Basic $ 0.05
=========
Diluted $ 0.04
=========
F-23
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Note 7- Stockholders' Equity-continued
A summary of the activity during fiscal 2005 of the Company's stock option plan
is presented below:
Weighted
Average
Options Exercise Price
Outstanding at January 18, 2005 - $ -
Granted 5,500,000 5.00
Exercised - -
Expired or cancelled - -
------------ ---------
Outstanding at December 31, 2005 5,500,000 $5.00
=========== =======
Exercisable at December 31, 2005 - $ -
=========== ======
The weighted average remaining contractual life and weighted average exercise
price of options outstanding at December 31, 2005, for selected exercise price
ranges, is as follows:
Options outstanding:
Range of exercise prices Number of options Weighted average Weighted average
remaining contractual exercise price
life
---------------------------- -------------------------- -------------------------- --------------------------
$0.01 1,000,000 5 years $ 0.01
---------------------------- -------------------------- -------------------------- --------------------------
$2.50 1,000,000 5 years $2.50
---------------------------- -------------------------- -------------------------- --------------------------
$5.00 1,000,000 5 years $5.00
---------------------------- -------------------------- -------------------------- --------------------------
$7.50 1,250,000 5 years $7.50
---------------------------- -------------------------- -------------------------- --------------------------
$10.00 1,250,000 5 years $10.00
---------------------------- -------------------------- -------------------------- --------------------------
Common Stock
At inception, the Company issued 10,000,000 shares to its three founders. The
shares were valued at their par value and amounted to $10,000. The Company
recognized a sales, general and administrative expense of $10,000 in connection
with this issuance.
Note 8- Commitments
The Company entered into employment agreements with its three founders. The
3-year employment agreements, which all have similar terms, provide base
salaries to its founders aggregating $275,000 during the first two years of
employment and $330,000 for the third year of employment. Additionally, the
employment agreements provide for annual discretionary bonuses of approximately
25% of the base salary and a variable bonus plan amounting to 25% of the
Company's consolidated net income. Furthermore, the Company granted 5,500,000
options to its founders at prices ranging from $0.01 to $10.00 per share.
F-24
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
Note 8- Commitments-continued
The Company subleases its executive offices from a related party partially owned
by one of our officers and directors under a 3-year leasing arrangement
providing for a monthly base rent of $2,767. The minimum annual payments under
such commitment for the next five years are as follows:
Year Minimum Annual Payments
---- -----------------------
2006 $33,564
2007 28,570
2008 and thereafter -
The Company's rental expense amounted to approximately $24,000 during fiscal
2005.
Note 9-Income Taxes
The federal statutory tax rate reconciled to the effective tax rate during 2005
is as follows:
2005
--------
Tax at U.S Statutory Rate: 35.0%
State tax rate, net of federal benefits 4.6
--------
Effective tax rate 39.6%
========
The provision for income taxes consists of the following :
Current:
Federal $ 259,038
State 34,045
----------
$293,083
Deferred:
Federal $ 36,277
State 4,768
-----------
41,045
Total : $ 334,128
========
F-25
CHINA DIRECT INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
There are no differences between the provision for income taxes and income taxes
computed using the U.S. federal statutory rate.
There are no deferred tax assets at December 31, 2005. The gross deferred tax
liabilities consist primarily on differences in the valuation of investment held
for sale for book and tax purposes.
The Company paid no income taxes in 2005.
Note 10-Marketable Securities
Marketable securities, as shown in the accompanying balance sheet, consist of
securities held for sale. Their value at date received and estimated fair market
value at December 31, 2005 are as follows:
Date received Unrealized gain December 31, 2005
--------------------- --------------------- ----------------------------
Investment in trading $
securities-common stock
$ 124,150 $ 28,650 152,800
Investment in marketable
securities held for sale
$ 735,000 $ 75,000 $ 810,000
--------------------- --------------------- ----------------------------
Note 11- Related Party Transactions
The Company subleases its office space from a related party owned by an officer
and director. The Company incurred approximately $24,000 in rental expense
pursuant to this subleasing arrangement during fiscal 2005.
The Company assigned shares received by one of its clients to a related party
partially owned by an officer and director in consideration for services
rendered. The value of the shares assigned amounted to $117,000 during fiscal
2006 and was recognized as selling, general and administrative expenses.
One of the Company's clients is a related party company which chairman of the
board is the brother of an officer and director of the Company. The Company
recognized $849,000 in revenues during 2005 for services provided by this
Company, of which $735,000 was received in shares of common stock of the related
party. The fair value of such shares amounted to $810,000 at December 31, 2005.
F-26
Evolve One, Inc.
Proforma Consolidated Balance Sheets
June 30, 2006
(Unaudited)
China Direct
Evolve One, Inc. Investments, Inc. Combined
------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 66,148 $ 66,148
Prepaid executive compensation - 256,267 256,267
Investment in trading securities - 616,000 616,000
Investment in marketable securities held for sale for related party - 3,120,000 3,120,000
------------------ --------------- --------------
Total current assets $ - 4,058,415 4,058,415
Property and equipment, net of accumulated depreciation of $3,125 - 17,890 17,890
Prepaid expenses - 384,400 384,400
Other assets - 26,975 26,975
------------------ --------------- --------------
Total assets $ - $ 4,487,680 $ 4,487,680
================== =============== ==============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 17,889 $ 26,618 $ 44,507
Accrued compensation - 11,967 11,967
Deferred revenues-short term - 366,300 366,300
Income tax payable - 100,503 100,503
Due to executive officers - 143,430 143,430
Deferred income tax payable - 975,196 975,196
------------------ --------------- --------------
Total current liabilities 17,889 1,624,014 1,641,903
Deferred revenues-long term - 549,450 549,450
Stockholders' (Deficit) Equity:
Preferred stock, 10,000,000 shares authorized, none issued - - -
Common stock, 1,000,000,000 authorized, 526,120 issued and outstanding 53 - 53
Common stock, 200,000,000 shares authorized, 10,000,000 issued and outstanding - 10,000 10,000
Additional paid-in capital 8,183,398 583,111 8,766,509
Accumulated comprehensive income - 1,457,845 1,457,845
Accumulated deficit (8,201,340) 263,260 (7,938,080)
------------------ --------------- --------------
Total stockholders' (deficit) equity (17,889) 2,314,216 2,296,327
------------------ --------------- --------------
Total liabilities and stockholders' (deficit) equity $ - $ 4,487,680 $ 4,487,680
================== =============== ==============
See Notes to Unaudited Proforma Financial Statements.
F-27/A
Evolve One, Inc.
Proforma Consolidated Balance Sheets Continued
June 30, 2006
(Unaudited)
Proforma Proforma
Adjustments Consolidated
--------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ - $ 66,148
Prepaid executive compensation - 256,267
Investment in trading securities - 616,000
Investment in marketable securities held for sale for related party - 3,120,000
------------- -------------
Total current assets - 4,058,415
Property and equipment, net of accumulated depreciation of $3,125 - 17,890
Prepaid expenses - 384,400
Other assets - 26,975
------------- -------------
Total assets $ - $ 4,487,680
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ - $ 44,507
Accrued compensation - 11,967
Deferred revenues-short term - 366,300
Income tax payable - 100,503
Due to executive officers - 143,430
Deferred income tax payable - 975,196
------------- -------------
Total current liabilities - 1,641,903
Deferred revenues-long term - 549,450
Stockholders' (Deficit) Equity:
Preferred stock, 10,000,000 shares authorized, none issued - -
Common stock, 1,000,000,000 authorized, 526,120 issued and outstanding 10,000 (a) 10,053
Common stock, 200,000,000 shares authorized, 10,000,000 issued and outstanding (10,000) (a) -
Additional paid-in capital (8,201,340) (b) 565,169
Accumulated comprehensive income - 1,457,845
Accumulated deficit 8,201,340 (b) 263,260
------------- -------------
Total stockholders' (deficit) equity - 2,296,327
------------- -------------
Total liabilities and stockholders' (deficit) equity $ - $ 4,487,680
============= =============
See Notes to Unaudited Proforma Financial Statements.
F-27/B
Evolve One, Inc.
Proforma Statements of Operations
For the Six-Month Period Ended June 30, 2006
(Unaudited)
China Direct
Evolve One, Inc. Investment, Inc. Combined
----------------- ----------------- --------------
Revenues - 386,832 386,832
Cost of revenues - 148,794 148,794
--------------- -------------- -------------
Gross profit - 238,038 238,038
Operating expenses:
Selling, general, and administrative-related parties - 11,252 11,252
Selling, general and administrative 35,556 842,088 877,644
--------------- -------------- -------------
Total operating expenses 35,556 853,340 888,896
Operating loss (35,556) (615,302) (650,858)
Other income:
Unrealized gain (loss) on trading securities - 273,500 273,500
Realized gain on sale of trading securities - 43,345 43,345
--------------- -------------- -------------
- 316,845 316,845
Net loss before income tax (35,556) (298,457) (334,013)
Income tax benefit - 118,189 118,189
--------------- -------------- -------------
Net loss (35,556) (180,268) (215,824)
Unrealized gain on marketable securities held
for sale, net of income tax - 1,395,240 1,395,240
--------------- -------------- -------------
Comprehensive income $ (35,556) $ 1,214,972 $ 1,179,416
=============== ============== =============
See Notes to Unaudited Proforma Financial Statements.
F-28/A
Evolve One, Inc.
Proforma Statements of Operations
For the Six-Month Period Ended June 30, 2006
(Unaudited)
Proforma Proforma
Adjustments Consolidated
----------------------------
Revenues - 386,832
Cost of revenues - 148,794
----------- ------------
Gross profit - 238,038
Operating expenses:
Selling, general, and administrative-related parties 11,252
Selling, general and administrative (35,556) (c) 842,088
----------- ------------
Total operating expenses (35,556) 853,340
Operating loss 35,556 (c) (615,302)
Other income:
Unrealized gain (loss) on trading securities - 273,500
Realized gain on sale of trading securities - 43,345
----------- ------------
- 316,845
Net loss before income tax 35,556 (c) (298,457)
Income tax benefit - 118,189
----------- ------------
Net loss 35,556 (c) (180,268)
Unrealized gain on marketable securities held
for sale, net of income tax - 1,395,240
----------- ------------
Comprehensive income $ 35,556 (c) $1,214,972
=========== ============
See Notes to Unaudited Proforma Financial Statements.
F-28/B
Evolve One, Inc.
Proforma Statements of Operations
For the Year Ended December 31, 2005
(Unaudited)
China Direct
Evolve One, Inc. Investment, Inc. Combined
------------------------------------------------
Revenues $ - $1,538,428 $1,538,428
Cost of revenues - 109,522 109,522
--------------- -------------- -------------
Gross profit - 1,428,906 1,428,906
Operating expenses:
Sales, general, and administrative-related parties - 141,188 141,188
Sales, general and administrative 686,775 557,283 1,244,058
--------------- -------------- -------------
Total operating expenses 686,775 698,471 1,385,246
Operating loss (686,775) 730,435 43,660
Other income:
Unrealized gain on trading securities - 28,650 28,650
Realized gain on sale of trading securities - 6,176 6,176
--------------- -------------- -------------
- 34,826 34,826
Net income (loss) before discontinued operations and income tax (686,775) 765,261 78,486
Net loss from discontinued operations (605,876) - (605,876)
--------------- -------------- -------------
Net income (loss) before income tax (1,292,651) 765,261 (527,390)
Income tax expense - (304,428) (304,428)
--------------- -------------- -------------
Net loss (1,292,651) 460,833 (831,818)
Unrealized gain on marketable securities held
for sale, net of income tax - 45,300 45,300
--------------- -------------- -------------
Comprehensive income $ (1,292,651) $ 506,133 $ (786,518)
=============== ============== =============
See Notes to Unaudited Proforma Financial Statements.
F-29/A
Evolve One, Inc.
Proforma Statements of Operations
For the Year Ended December 31, 2005 Continued
(Unaudited)
Proforma Proforma
Adjustments Consolidated
------------------------------
Revenues $ - $1,538,428
Cost of revenues - 109,522
------------ -------------
Gross profit - 1,428,906
Operating expenses:
Sales, general, and administrative-related parties - 141,188
Sales, general and administrative (686,775) (c) 557,283
------------ -------------
Total operating expenses (686,775) 698,471
Operating loss 686,775 (c) 730,435
Other income:
Unrealized gain on trading securities - 28,650
Realized gain on sale of trading securities - 6,176
------------ -------------
- 34,826
Net income (loss) before discontinued operations and income tax 686,775 (c) 765,261
Net loss from discontinued operations 605,876 (c) -
------------ -------------
Net income (loss) before income tax 1,292,651 (c) 765,261
Income tax expense - (304,428)
------------ -------------
Net loss 1,292,651 (c) 460,833
Unrealized gain on marketable securities held
for sale, net of income tax - 45,300
------------ -------------
Comprehensive income $ 1,292,651 (c) $ 506,133
============ =============
See Notes to Unaudited Proforma Financial Statements.
F-29/B
Evolve One, Inc.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
June 30, 2006 and December 31, 2005
NOTE 1. DESCRIPTION OF TRANSACTION AND BASIS OF PRESENTATION
Effective August 16,2006, Evolve One, Inc. ("Evolve") acquired all the
outstanding common stock of China Direct Investments, Inc. ("China Direct")
through an exchange of shares of Evolve for all the outstanding common stock of
China Direct (the Acquisition). Evolve issued 10,000,000 shares of restricted
common stock, $.0001 par value, to the former stockholders of China Direct in
exchange for their 10,000,000 shares of China Direct common stock. Pursuant to
a Stock Exchange Agreement dated [] among China Direct, Evolve and China Direct
stockholders (the Agreement), the officers and directors of Evolve resigned upon
consummation of the Acquisition. The persons serving as directors and officers
of China Direct immediately prior to the Acquisition were elected to the same
offices at Evolve and retained their positions as directors and officers of
China Direct. Upon consummation of the Acquisition, Evolve had 526,120 shares of
its common stock issued and outstanding. The China Direct stockholders
beneficially own 95% of the Evolve voting securities. As a result of the
Acquisition, China Direct is a wholly-owned subsidiary of Evolve. Evolve intends
to operate China Direct in the same manner and to continue in the business that
China Direct engaged in prior to the Acquisition. Prior to the Acquisition, no
material relationship existed between China Direct and its affiliates and Evolve
and its affiliates. The Acquisition will be accounted for as a reverse
acquisition application of the purchase method of accounting by Evolve with
China Direct treated as the accounting acquirer. Under the reverse acquisition
method of accounting, the assets and liabilities of Evolve will be recorded as
of the acquisition date, at their respective historical cost, which is
considered to be the equivalent of fair values, and added to those of China
Direct with no increment in combined stockholders' Equity (deficiency). The
reported results of operations of Evolve after completion of the acquisition
will reflect the historical results of operations of China Direct.
F-30
Evolve One, Inc.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
June 30, 2006 and December 31, 2005
NOTE 2. UNAUDITED PRO FORMA ADJUSTMENTS
Adjustments included in the column under the heading "Pro Forma Adjustments"
include the following: (a) To reflect the deemed issuance of 10,000,000 shares
of Evolve common stock to the China Direct stockholders and the cancellation of
China Direct issued and outstanding shares of common stock as of June 30, 2006.
(b) To eliminate the accumulated deficit of Evolve as the accounting acquiree
under the reverse acquisition application of the purchase method of accounting.
(c) To eliminate one time charges from the results of operations of Evolve.
F-31