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| ECDI > SEC Filings for ECDI > Form 10-Q on 14-May-2012 | All Recent SEC Filings |
14-May-2012
Quarterly Report
The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q for the quarter ended March 31, 2012 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by the use of forward-looking terminology, such as "may", "shall", "could", "expect", "estimate", "anticipate", "predict", "probable", "possible", "should", "continue", or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and are considered by management to be reasonable. Our future operating results, however, are difficult to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
Company Overview
We are a corporation organized under the laws of the State of Delaware. The business of the Company is the development and marketing, sales and support of casino gaming management software systems, which include the complete (or full) Tahoe Casino Management Systems as well as Tahoe TITO (ticket-in/ticket-out) system, Tahoe Table Tracking system (software packages available on a standalone basis) and other related software all under the brand name of "the Tahoe Suite of Software" to companies in the gaming industry. These systems are proprietary and developed by the Company using open-sourced software, commercial hardware and software solutions. The software is sold with appropriate licenses for use of included software belonging to others. The hardware includes data-acquisition tools that interface with the software systems which are produced to the Company's specifications by our suppliers as OEM devices. The product line provides tools for owners and managers of gaming facilities for the management of and monitoring of all aspects of the operation of a casino. The Company's software is in daily use in small and medium-sized casinos in the United States and Mexico. The Company believes that the software has proven to be reliable and technologically superior to that of its established rivals. The Company markets the Tahoe products by distinguishing the software's ability to support a wider range of game classes than do competing products and also by promoting its software as built to modern software engineering standards, which increases flexibility and reduces system management cost and complexity. The Company's products are sold directly to its customers through a variety of distribution channels. The Company markets its products and services to the gaming industry both by direct sales and sales in conjunction with VAR's and consultants who act as our distribution channel.
The Company's software systems are standards-compliant and integrate management and reporting for both Class II and Class III games and related gaming systems. The first generation of the Tahoe Software Suite was released in 2005. Over the past five years, the Company has continued to expand and grow its gaming technology to provide what the Company believes is one of the most comprehensive and cutting edge casino management systems (sometimes referred to herein generically, as "CMS") in the market. At present, our system has already been deployed on thousands of gaming devices in casinos in the US and Mexico; the Company believes its system has proven to be both reliable and technologically superior to that of its established rivals. The Company's technology is subject to protections through multiple applications for patents (patents pending) with the United States Patent and Trademark Office.
Business Strategy
We plan to continue to develop our product line to expand the number and types of gaming systems to which it can be readily adapted. Our focus has been to offer a "machine-agnostic" system; that is, a solution that is not restricted to one type of machine or brand of equipment so that operators of gaming facilities are not restricted to a particular brand of gaming equipment or a particular vendor of gaming equipment when adding, expanding or replacing their gaming equipment. By offering a solution that adapts to equipment in place and does not restrict future purchase decisions, we believe we can offer a casino management solution that is better for the developers and operators of casinos. We plan to market to newer markets where established brands of equipment are not yet dominant and thus, we believe, the flexibility of machine-agnostic systems will prove to be attractive and therefore a competitive advantage.
We are presently pursuing opportunities in niche markets that have may have been overlooked by larger competitors such as the Class II gaming facilities. Specifically the Company is pursuing the following niche markets:
Emerging International Markets
We believe that Emerging International Markets for Class II gaming facilities are showing explosive growth. There will be increased demand for the Tahoe system, which operates seamlessly between Class II and Class III environments, facilitating the customers in their growth from Class II to Class III environment. Particularly, in Southeast Asia, South America and Central America, we believe that the opportunities are growing each year.
The Company has currently deployed its Tahoe CMS in a number of gaming facilities in Mexico which we believe demonstrates our ability to localize the Tahoe CMS program in both currency and language within Spanish speaking countries.
Growing global demand for CMS systems that are agnostic to Slot Machine Manufactures but have universal integration capabilities for both Class II and Class III present exceptional opportunities for EC Development.
Boutique Gaming
The boutique gaming market consists of two primary segments: the Cruise Ship industry and Award with Prize (AWP) segment. The Tahoe CMS solution is built with state-of-the-art technologies which meet the unique requirements of these gaming sectors.
Tribal Gaming
The company is uniquely qualified to expand and grow in this market. The founders of EC Development, LLC (the predecessor company) are Native American and have actively worked with a number of tribes. The Company has demonstrated its ability to deploy the Tahoe CMS solution in gaming facilities owned by several tribes meeting the challenges of both Class II and Class III gaming environments and has earned a solid reputation.
We are also planning to continue the development of our user-monitoring and reporting systems which we believe will be more attractive to operators and management of gaming facilities who strive to build customer loyalty through frequency rewards and similar programs.
We believe our best opportunity for growth will be through development and expansion and refinement of our current product line, which, we believe, offers sufficient flexibility and opportunities for growth in the near-term future. There are no material development expenditures expected in the pursuit of our current business strategy as the technology systems are fully developed and deployed in multiple languages and currencies. Rather, we will continue to add refinements, through ongoing programming upgrades, that allow flexibility and ease deployment to additional markets.
Impact of Regulatory Aspects of Gaming
Our product lines are used in gaming facilities which are themselves subject to extensive governmental oversight. In some cases, governmental agencies rely on gaming equipment management tools to determine compliance with their regulations or insure accurate reporting for collection of taxes and other regulatory purposes. Our product lines have been certified for use in many jurisdictions and we continue to seek additional approvals and certifications so that our product lines can be sold or installed in newer markets (with the understanding that we presently have approvals or certifications to sell in our present markets). Certifications are an important part of our business model because our customers and potential customers may be required to acquire certified gaming management software to provide accurate reporting for their regulatory obligations. We believe we have obtained the certifications which we need to transact business in each jurisdiction where we are actively marketing our product lines. We recognize that regulatory aspects of owning gaming facilities can sometimes delay installation of our CMS systems where a facility has not received necessary approvals during the construction or installation phases and, as a result, we do not recognize revenue for contracts, even though such contracts would otherwise represent binding obligations on the part of the gaming facility owners and managers, until we are permitted to commence installation and the gaming facility has reached a point in the regulatory process where commencing operation has been authorized by governmental agencies.
Plan of Operation
The Company is presently focused on product development to refine and expand its product line to meet both current customer needs and the perceived needs in markets into which we plan to expand. The Company produces its product line through development (generally writing software code) of its software and design and integration of data acquisition hardware which provides the link from the various types of gaming equipment to our management solutions. Our product line is comprised of software and hardware which are sold directly to gaming facilities or bundled for sale for installation by VAR's and consultants in the industry. Hardware is sourced from a number of vendors who manufacture to our specifications. We plan to continue this method of production.
Current operations consist of continued development of existing products including refinements and new ancillary products as well as upgraded versions of our product line; marketing through our own direct sales and through the strategic relationships with VAR's and other consultants, sellers of complementary products such as gaming equipment and other vendors, all of whom comprise our distribution chain; selling our products, installation and support for installed products. While we are expanding the geographical markets in which we operate, we are also trying to expand our market presence into certain niche markets that we believe are not adequately served by other competitors. While we believe that we offer a competitive advantage in our product line, we believe that the Company can be most successful by selling in the niche markets.
Management's Discussion and Analysis of Financial Condition and Results of Operations
As a result of the merger, the Company is actively executing on its business model which consists of design, development, marketing, production sales and distribution of CMS solutions and related systems for the gaming industry. The nature of our model involves engaging employees and consultants to provide programing services to development and implement our products and services. The Company utilizes few major capital items except its intangible assets in the delivery of its products and services and requires no significant plant expenses beyond ordinary commercial office space for both use by the employees and very limited storage of component devices for delivery along with its software. Our financial statements reflect primarily income from sales of our products and services and expenses incurred to pay employees and consultants in sales, development and implementation as well as general administration expenses to manage the Company.
Results of Operations
REVENUES
Revenues for the first quarter ending March 31, 2012 were $164,985 compared to revenue for the first quarter ended March 31, 2011 of $56,591. In 2010, the Company completed its merger and began executing a new marketing and sales strategy during the fourth quarter of 2010 which new strategy impacted the sales in the first quarter of 2011. This increase in revenues of $108,394 or approximately 192% was due in part to the Company's having closed a significant number of transactions in the first quarter 2012 and not a corresponding number of transactions during the prior period while the new marketing and sales strategy was being initiated. Due to the relatively long sales cycle associated with our products, new marketing efforts did not result in any immediate increase in sales during the first quarter of 2011. Additionally, the nature of larger transactions (with slower installation cycles and therefore more time before revenue recognition) is reflected in the amount of revenue recognized during the first quarter of 2012 compared to contracts signed for which installations have not yet commenced (and therefore no revenue has been recognized). Revenues are comprised of sales of our CMS solutions and include service and maintenance contracts for ongoing support and service-related sales of software programming, consulting and development services.
OPERATING AND OTHER EXPENSES
Cost of revenues for the first quarter ended March 31, 2012 were $40,693 compared to cost of sales for the first quarter ended March 31, 2011 of $0. The increase in cost of revenues of $40,693 was due to the fact that sales for the first quarter ended March 31, 2011 required no allocation of cost of sales. Cost of revenues is comprised primarily of the direct costs of certain hardware components for our CMS solutions and installation related expenses.
General & administrative expenses for the first quarter ended March 31, 2012 were $123,192 compared to general & administrative expenses for the first quarter ended March 31, 2011 of $55,677. The increase in general & administrative expenses of $67,515 or approximately 121%, was due to the fact that general & administrative expenses were increased to meet the needs of support for contemplated sales and associated with the development and roll-out of certain of its products and increased staffing to manage the process. General & administrative expenses are comprised primarily of expenses related to administrative operations and therefore reflects changes in staffing (including staffing of administrative positions and positions not directly tied to sales or programming; those costs are included in compensation costs discussed below) as well as legal services and accounting fees associated with operations.
Compensation expense for the first quarter ended March 31, 2012 was $106,367 compared to compensation expense for the first quarter ended March 31, 2011 of $183,345. This decrease of $76,978 or approximately 42% was related to a reduction of staffing from programming after the roll-out of the software revisions and improvements during 2011.
Interest expense for the first quarter ended March 31, 2012 was $10,785 compared to interest expense for the first quarter ended March 31, 2011 of $8,829. The increase in interest expense is a result of increased borrowing.
Net loss was $250,104 or $(.01) per share, for the first quarter ended March 31, 2012 as compared to net loss of $445,312 or $(0.02) per share, for the comparable period in 2011. The decrease in net loss of $195,208 reflects the increase in customer contracts (recognized sales) as well as a decrease in compensation expense offset by a forgiveness of debt or $120,000 in the first quarter of 2012.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2012, the Company had negative working capital of $532,377 as compared to $1,028,900 for the comparable 2011 period, an increase of $496,523, resulting primarily from a decrease in debt. Current assets consisted of cash and cash equivalents of $286,609 and accounts receivable of $128,825 as well as prepaid expenses of $2,908. The Company continues to enter into contracts for future work for which no revenue is recognized as installation has not commenced. These contracts reflect the expectation and desire of gaming facility managers and owners for future sales once the gaming facilities have met certain approvals of governing agencies and are farther along in their construction. Because they are subject to approvals and construction, we do not recognize the revenues until installation is completed. Nevertheless, these contracts represent binding obligations of companies which we believe have both the intention and the wherewithal to fulfill their obligations and we anticipate realizing revenues which we believe will be adequate to meet the Company's operating requirements for the next twelve months. While extraordinary circumstances can occur such as a bankruptcy filing by a gaming facility manager or owner or a reversal or delay of a pending approval for a gaming facility, and therefore, such contracts are not absolute, we believe the projected revenues represent the foreseeable amounts that the Company will recognize and ultimately receive and we have based our discussion on this.
The pending contracts are material to the growth of our company. The Company is expecting to realize approximately $3 million during CY 2012 (or next 12 months). Each contract may be considered pending because of delays in construction before we begin installation, pending decisions of gaming facility managers and owners to purchase or install gaming machine equipment with which we will integrate our Tahoe System or delays in the approval process relating to routine processing by approval agencies. The backlog of pending business consists of larger transactions which, because installations have not commenced, represent unrecognized revenues. Smaller contracts signed previously accounted for the $164,985 revenue for the quarter.
The bookings from newly-executed contracts for the fiscal year ended December 31, 2011 reflect retooling of the marketing and sales processes along with innovation to the technology. While the revenues declined towards the end of 2011, these resulting contracts allow us to project sufficient cash-flow to meet the Company's operating requirements during 2012.
Cash Flows from Operating Activities. Cash provided by operating activities increased by approximately $64,636 for the first quarter ended March 31, 2012 as compared to the comparable 2011 period, resulting primarily from a decrease in net loss and an increase in deferred revenue offset by a decrease in accounts payable and accrued expenses.
Cash Flows from Financing Activities. Net cash provided by financing activities increased by $220,143, resulting primarily from a sale of common stock offset by the purchase and cancellation of common stock and a decrease in notes payable - related party.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company had incurred operating losses, negative working capital and no operating cash flow and future losses are anticipated.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The Company's plan of operations is to generate operating cash
flows from revenues on existing, but not yet recognized, contracts
requiring scheduled installation which, is expected to adequately meet the
Company's current operating requirements. The Company is continuing to promote
its systems internationally and even if successful in the implementation of
current contracts may not result in cash flow sufficient to fully develop its
international business plan. The Company if required will seek additional equity
to meets its cash flow need in its international development. Realization of
assets is dependent upon future operations of the Company, which in turn is
dependent upon management's plans to meet its financing requirements and the
success of its future operations. The Company anticipates that its current
operating results, based on its forecasted revenues and expenses, raise an issue
about its ability to continue as a going concern, however, the Company
anticipates cash flow based only upon its existing business and signed contracts
(subject to routine delays or extraordinary events such bankruptcy of a customer
- discussed above), which, if received in the ordinary course of business, would
be sufficient to meet current expenses. Therefore, assuming only performance
under signed contracts, the ability of the Company to meet its future
obligations may be greater than would be suggested by the results of previous
periods, the factors on which such a caveat (the "going concern" caveat) is
based.
These financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
Capital Resources
The Company expects to need additional office space, computer systems, furniture and equipment as it expands operations. This amount is not expected to exceed $50,000 in the next twelve months and is expected to be funded either through existing banking relationships, additional sales of equity or lease financing.
Impact of Inflation.
The services provided by the Company are generally comprised of consulting provided by our employees and consultants for which we incur payroll and other expenses. These expenses can increase with overall inflation which will generally impact all segments of the economy and result in increased revenue from an increase in the rate at which the services of our employees and consultants are billed. This minimizes the impact of inflation. The Company does not acquire or maintain inventories that present a risk due to inflation.
Off Balance Sheet Arrangements
There are no off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates and Policies
General
The Financial Statements of the Company are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Board of Directors who serve as our audit committee.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Financial Statements.
A summary of significant accounting policies is included in Note 2 to the financial statements included elsewhere in this Report. We believe that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition. The following are a summary of the significant accounting estimates and policies.
Estimates. The preparation of financial statements in conformity 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 the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.
Fair Value of Financial Instruments. The Company considers the carrying amounts of financial instruments, including cash, accounts receivable, accounts payable and accrued expenses and notes payable to approximate their fair values because of their relatively short maturities.
Accounts Receivables. Accounts receivables consist of amounts due from customers. The Company records a provision for doubtful receivables, if necessary, to allow for any amounts which may be unrecoverable, which is based upon an analysis of the Company's prior collection experience, customer creditworthiness and current economic trends.
Intangible Assets. Intangible assets are recorded at fair value and amortized on the straight-line method over the estimated useful lives of the related assets. The carrying value of intangible assets are reviewed for impairment by management at least annually or upon the occurrence of an event which may indicate that the carrying amount may be greater than its fair value. If impaired, the Company will write-down such impairment. In addition, the useful life of the intangible assets will be evaluated by management at least annually or upon the occurrence of an event which may indicate that the useful life may have changed.
Revenue Recognition. Revenue is recognized when it has persuasive evidence of an arrangement, the fee is fixed and determinable, performance of service has occurred and collection is reasonably assured. Revenue is recognized in the period the services are provided.
Recent Accounting Pronouncements.
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
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