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ECDC > SEC Filings for ECDC > Form 10-K on 16-Apr-2013All Recent SEC Filings

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Form 10-K for EAST COAST DIVERSIFIED CORP


16-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis of our financial condition and results of operations includes "forward-looking" statements that reflect our current views with respect to future events and financial performance. We use words such as "expect," "anticipate," "believe," and "intend" and similar expressions to identify forward-looking statements. You should be aware that actual results may differ materially from our expressed expectations because of risks and uncertainties inherent in future events and you should not rely unduly on these forward looking statements. We will not necessarily update the information in this discussion if any forward-looking statement later turns out to be inaccurate. This discussion and analysis of financial condition and results of operations should be read in conjunction with our Financial Statements included in this filing. Management is uncertain that it can generate sufficient cash to sustain its operations in the next twelve months, or beyond. We can give no assurances that we will be able to generate sufficient revenues to be profitable, obtain adequate capital funding or continue as a going concern.

Plan of Operation

Since April of 2010, and the acquisition by EarthSearch, ECDC has embarked on developing its technology operations and improving product offering to the market.

The 3 years since acquisition the company was in R&D phase. During this period we developed 3 distinct technology divisions. Completed the development of 2 proprietary technologies; Wireless communications between GPS &RFID (comprising of several GPS, RFID and Cargo locking devices) and, "JoinMe" for our social media division, we also developed an entire group of web assets, comprising of 5 major proprietary "Software" for the operation and management of our businesses.

Proprietary software:

Vir2o - Social media platform

StudentConnect - Student Transportation Safety technology

GATIS - Global Asset Tracking and Identifications System - Logistics business

CARAS - Customs And Revenue Authority System - Ports and revenue collection

SCAAP - StudentConnect Advertisement Aggregation Platform.

Our Businesses

EarthSearch

EarthSearch, based in Atlanta, Georgia, has created the world's first integration of RFID and GPS technology. EarthSearch is an international provider of supply chain management solutions offering real-time visibility in the supply chain with integrated RFID/GPS and other telemetry products. These solutions help businesses worldwide to increase asset management, provide safety and security, increase productivity, and deliver real-time visibility of the supply chain through automation.

Some of the solutions offered by the company include oil tanker monitoring, transit cargo solution, military logistics etc. EarthSearch has partners and distributors in over 6 countries including the US where it expects to begin generating revenue for the EarthSearch operation.

We experienced a sudden reversal of our revenue growth in the 4th quarter of 2008 as the real estate market and global economy came to a halt. A significant number of our customers declared bankruptcy or defaulted on their account. New business opportunities ceased and our sales plummeted. These events forced us to take dramatic steps and business decisions that resulted in substantial reductions of revenue for the years 2009 and 2010.

Based on our internal research, the board and management made the decision to change the business focus and product portfolio. We concluded that simply offering GPS devices, which we believed would become a commodity, exposed the company and its shareholders to potential failure. We accelerated R&D operations and began the development of wireless communication between GPS and RFID devices. We shut down most of our commercial operations due to the economic conditions and expanded R&D.

In March 2013 we reconstituted our sales team for EarthSearch. We brought on a new Director of Sales and a team of outside sales executives.

We are currently engaged in numerous pilot projects with several major organizations, including but not limited to the following partners and customers: G3 enterprises (Gallo Wines), Tanzania Revenue Authority through Utrack, Servpro in Arizona, Belfor in Canada, Utrack in Canada, and Conctena in Switzerland, Our business with each of the aforementioned organizations consists of the following:

G3 enterprises ("Gallo Wines"):

We have executed a GPS service agreement with G3 Enterprises. We have successfully completed phase one of the pilot which involved the tracing, tracking and locating of 1,200 tractor trailers carrying grapes. Phase 2 of the pilot is to complete testing of our system on wine tankers and to implement a custom application that will identify the weight of wine loaded at the winery. We have received compensation for the initial pilot and have developed software that will be deployed upon completion. We receive monthly subscription fees for the products currently deployed in the pilot.

Tanzania Revenue Authority through Utrack:

The RFP of "Request For Proposal" issued by the Tanzania revenue authority is still under evaluation. However, we have successfully delivered more than $75,000 worth of products and services to Utrack for sales to private oil distribution companies throughout Eastern Africa. We also receive ongoing subscription fees for the devices deployed under the agreement. We have executed a distributor agreement between EarthSearch and Utrack. We have completed the pilot (our pilot program consists of physical installation of our products and devices on vehicles locally and provisioning of our software for local deployment) and have begun to receive compensation for subscription services for all devices activated as well as additional purchase orders from Utrack under the distributor licensing agreement.

Belfor in Canada:

We have delivered integrated GPS/RFID products to Belfor pursuant to a GPS service agreement. We have successfully deployed products and services for the automation of monitoring of equipment usage by drivers in the field using RFID, while also creating a billing log using GPS data. We have been paid for the products and will begin receiving on-going subscription service fees for all products beginning January 2012.

Conctena in Switzerland:

We are still in the pilot phases for Contecna, with our pilot program consisting of, physical installation of our products and devices on vehicles locally and provisioning of our software for local deployment. We need to complete local certification in both markets before we will fully deploy in the markets. The European Union require domestic certification similar to that of the Federal Communication Commission.

As of the end of 2012 we have 6 active distribution partners in 3 geographic regions (Africa, South and North America). We launched a new web site reflecting our new business, products and solutions. We launched our first commercial ecommerce site (www.shop.earthsearch.us) in the second quarter of 2011.

StudentConnect

StudentConnect launched its school transportation technology division in April 2013 using ECDC proprietary wireless communication between GPS and RFID to monitor students getting on or off the School bus. The system provides instant notification to schools and parents about students riding on the school buses, anomaly such as student getting off the bus on or off the bus at the wrong location is instantly detected. Solution is delivered to schools and parents at no cost. The messages are funded through advertisers who sponsor each message sent to the parent about their child. The first pilot installation of StudentConnect was installed at Gordon County School District in Georgia in April 2013.

The company has expanded its sales force to introduce StudentConnect to school districts nationwide through a network of sales professional specializing on marketing and sales of services to school district nationwide.

WetWinds/Vir2o

On April 5th 2013 ECDC launched its 3rd division Vir2o an interactive social media platform. The company entered the social media space with a proprietary technology called "JoinMe" which would allow users to engage each other interactively. The Company's primary objective is to create a more engaging social media platform with relevance to commerce on the internet. Vir2o is the first social media platform with fully integrated ecommerce solution allowing multiple users to congregate in a marketplace and shop together or allow family and friends to go to the movies, play music, watch concerts or view photo together regardless of distance or location.

We executed a representative agreement with HotSauce a major digital advertising agency in Nigeria where we intend to launch our first international version Vir2o in May 2013.

We filed patent application with the US Trade and Patent Office (USPTO) for the protection of our "JoinMe" technology.

As of April 2013 all of our businesses and operation are now fully commercialized and operational. To execute our business plan we expanded our management team.

Directors of Advertising and Content Management

VP of Marketing

Director of Sales operation

Team of sales executives and consultants to promote and market StudentConnect to School Districts.

Disputed Operation

We discontinued our participation in the operation of Rogue Paper as of November 12, 2012 to focus our resources on the operation of businesses developed internally. As of February 1, 2013, after review of the status of the Rogue Paper operation and technology and upon notification of the CEO's intention to resign our review of the Rogue Paper operation and technology, management concluded, taking control of the operation will result in disruption to our business and significant losses to the Company. Management concluded it the best interest of the Company to severe all interests in the Rogue Paper operation and recognize losses for ownership interest and the investment in Rogue Paper. We have not included the Rogue Paper financial statement in our reports due to lack of financial reporting from Rogue Paper management.

Results of Operations

Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Revenue

For the year ended December 31, 2012, our revenue was $715,986 compared to $517,661 for the same period in 2011, representing an increase of 38%. This increase in revenue was directly attributable to the Company's decision to change its business focus and product portfolio in 2010, from simply marketing GPS devices to developing full-fledged supply chain solutions which include RFID technologies, other supply chain and warehouse solutions, the expansion of marketing activities to develop a global distribution network for its new product portfolios. Management believes these changes will result in greater stability and long term growth for the Company.

Revenues are generated from three separate but related offerings, RFID/GPS product sales, consulting services, and user fees for GATIS - our advanced web based asset management platform. We generated revenues from product sales of $528,397 and $203,776 for the years ended December 31, 2012 and 2011, respectively. Revenues for consulting services were $151,920 for the year ended December 31, 2012, compared to $257,220 for the year ended December 31, 2011. User fees were $35,669 and $56,665 for the years ended December 31, 2012 and 2011, respectively.

Operating Expenses

For the year ended December 31, 2012, operating expenses were $3,687,389 compared to $2,395,846 for the same period in 2011, an increase of 53.9%.

Cost of revenues decreased $132,437 and is directly the increase in revenues for the year ended December 31, 2012.

For the year ended December 31, 2012, selling, general and administrative expenses were $3,290,204 compared to $2,131,098 for the same period in 2011, an increase of 54.4%. This increase was primarily caused by accounting fees decreased from $44,782 to $14,190, compensation for board members increased from $80,000 to $160,000, professional fees related to public company compliance and investor relations increased from $436,366 to $629,357, research and development costs increased from $75,372 to $378,383, bad debt expense increased from $22,234 to $604,735, and salary expenses increased from $554,224 to $716,283.

Our salary expenses increased significantly in 2012 over the same period in 2011 due to the streamlining of production and sales functions and the due to the development of our social media business requiring a significant increase in development costs related to software engineers as well as conducting of beta tests for our integrated StudentConnect solution in 2012.

Our professional fees related to public company compliance and investor relations increased significantly due increased our investor relations efforts.

Net Loss

We generated net losses of $5,749,513 for the year ended December 31, 2012 compared to $2,280,676 for the same period in 2011, an increase of 145%. Included in the net loss for the year ended December 31, 2012 was a loss on the conversion of debt of $575,263, interest expense of $903,737, change in derivative liability of $12,099, net loss from disputed subsidiary of $1,565,577, reduced by a gain on the settlement of debt of $141,141, other income of $37,616, and non-controlling interests' share of the net loss of EarthSearch and Rogue Paper of $99,809. The net loss from disputed subsidiary includes amortization of intangible assets of $114,750 and impairment of intangible assets and goodwill of $1,366,857.

Included in the net loss for the year ended December 31, 2012 was a loss on the conversion of debt of $432,270, and interest expense of $177,308], reduced by non-controlling interests' share of the net loss of EarthSearch and Rogue Paper of $49,829 and net income from disputed subsidiary of $10,407.

Liquidity and Capital Resources

Overview

For the years ended December 31, 2012 and 2011, we funded our operations through financing activities consisting of private placements of equity securities with outside investors and loans from related and unrelated parties. Our principal use of funds during the years ended December 31, 2012 and 2011 has been for working capital and general corporate expenses.

Liquidity and Capital Resources during the year ended December 31, 2012 compared to the year ended December 31, 2011

As of December 31, 2012, we had no cash and a working capital deficit of $2,841,800. The Company generated a negative cash flow from operations of $1,478,810 for the year ended December 31, 2012, as compared to cash used in operations of $539,877 for the year ended December 31, 2011. The negative cash flow from operating activities for the year ended December 31, 2012 is primarily attributable to the Company's net loss from operations of $5,749,513, offset by noncash depreciation and amortization of $130,727, change in the allowance for doubtful accounts of $604,735, the issuance of loan payable for consulting services of $105,000, stock issued for services of $252,205, loss on the conversion of debt of $575,263, change in derivative liability of $12,099, impairment of intangible assets and goodwill of $1,366,857, accrued interest on loans payable of $126,284, accretion of beneficial conversion feature on notes payable of $794,135, accretion of stock discounts on notes payable of $2,160, amortization of payment redemption premium of $12,076, amortization of prepaid license fee of $50,000 and net cash from changes in operating assets and liabilities of $525,498, offset by a gain on the settlement of debt of $141,141, gain on the recovery of redemption premiums of $28,975, net change in assets and liabilities of disputed subsidiary of $16,411 and non controlling interests in the loss of EarthSearch and Rogue Paper of $99,809.

The negative cash flow from operating activities for the year ended December 31, 2012 is primarily attributable to the Company's net loss from operations of $2,280,676, offset by depreciation and amortization expense of $110,044, stock issued for services of $945,430, amortization of prepaid license fees of $12,500, amortization of payment redemption premium of $16,899, loss on conversion of debt of $432,270, accretion of beneficial conversion feature on notes payable of $42.358, interest accrued on notes payable of $111,347, change in the nest assets and liabilities of disputed subsidiary of $10,469 and decreased investment in operating working capital elements of $256,170, offset by noncontrolling interests in the loss of EarthSearch and Rogue Paper of $49,829 and gain on the recovery of accounts payable of $146,859.

The decrease in investing activities is attributable to the purchase of equipment of $0 during the year ended December 31, 2012, compared to $4,391 in 2011.

Cash generated from our financing activities was $1,477,866 for the year ended December 31, 2012, compared to $543,934 during the comparable period in 2011. This increase was primarily attributed to proceeds received from the sale of preferred stock of $197,900 in 2012 compared to $5,000 in 2011, proceeds from preferred stock subscriptions of $344,002 in 2012, proceeds from loans payable from $244,755 in 2011 to $851,711 in 2012 and a reduction on payments on loans payable to related parties of $112,115 in 2011 compared to $5,000 in 2012, offset by a reduction in the proceeds from the issuance of common stock of $186,200 to $56,000, , change in bank over draft of $10,647 in 2012 compared to $16,675 in 2011, proceeds from loans payable to related parties, a decrease from $205,919 to $56,500, and repayments of loans payable to unrelated parties in 2012 of $12,600 compared to $2,500 in 2011.

The Company will need additional financing in 2013 to carry out its business plan. There can be no assurance that financing will be available or if available, that it will be on terms acceptable to the Company.

Going Concern

Due to the uncertainty of our ability to meet our current operating and capital expenses, our independent auditors included an explanatory paragraph in their report on the accompanying consolidated financial statements for the year ended December 31, 2012, regarding concerns about our ability to continue as a going concern. Our consolidated financial statements contain additional note disclosures describing the circumstances that lead to this conclusion by our independent auditors.

Our consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. Our unaudited consolidated financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.

There is no assurance that our operations will be profitable. Our continued existence and plans for future growth depend on our ability to obtain the additional capital necessary to operate either through the generation of revenue or the issuance of additional debt or equity.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of 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. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experiences and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions and conditions. We continue to monitor significant estimates made during the preparation of our financial statements. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

Our significant accounting policies are can also be found in Note 2 of our financial statements. While all of these significant accounting policies impact the Company's consolidated financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company and require management to use a greater degree of judgment and estimates. We believe that the estimates and assumptions that are most important to the portrayal of our consolidated financial condition and results of operations, in that they require subjective or complex judgments, form the basis for the accounting for the valuation accounts receivable, inventory, revenue recognition, impairment of long-lived assets, and stock-based compensation. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future consolidated financial conditions or results of operations. We suggest that our significant accounting policies be read in conjunction with this Management's Discussion and Analysis of Financial Condition.

Accounts Receivable

The Company grants unsecured credit to commercial and governmental customers in the United States and abroad. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience, customer specific facts and economic conditions.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure to its customers.

Inventories

Inventories are stated at the lower of cost or market ("LCM"). The Company uses the first-in-first-out ("FIFO") method of valuing inventory. Inventory consists primarily of finished goods and accessories for resale.

Revenue Recognition

The Company generates revenue through three processes: (1) Sale of its RFID/GPS products, (2) Fees for consulting services provided to its customers, and (3) Service Fees for the use of its advanced web based asset management platform.

Revenue for RFID/GPS products is recognized when shipments are made to customers. The Company recognizes a sale when the product has been shipped and risk of loss has passed to the customer.
Revenue for consulting services is recognized when the services have been performed.
Revenue for service fees is recognized ratably over the term of the use agreement.

Impairment or Disposal of Long-Lived Assets

The Company accounts for the impairment or disposal of long-lived assets according to ASC 360 "Property, Plant and Equipment". ASC 360 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. Long-lived assets are reviewed when facts and circumstances indicate that the carrying value of the asset may not be recoverable. When necessary, impaired assets are written down to estimate fair value based on the best information available. Estimated fair value is generally based on either appraised value or measured by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates.

Stock-Based Compensation

The Company accounts for Employee Stock-Based Compensation under ASC 718 "Compensation - Stock Compensation", which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 is a revision to SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. ASC 718-10 requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized.

The Company accounts for stock-based compensation awards to non-employees in accordance with ASC 505-50 "Equity-Based Payments to Non-Employees"("ASC 505-50"). Under ASC 505-50, the Company determines the fair value of the warrants or stock-based compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Any stock options issued to non-employees are recorded in expense and additional paid-in capital in shareholders' equity/(deficit) over the applicable service periods using variable accounting through the vesting dates based on the fair value of the options at the end of each period.

The Company has not granted any stock options as of December 31, 2012.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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