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ECDC > SEC Filings for ECDC > Form 10-Q on 19-Aug-2013All Recent SEC Filings

Show all filings for EAST COAST DIVERSIFIED CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for EAST COAST DIVERSIFIED CORP


19-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This quarterly report on Form 10-Q and other reports (collectively, the "Filings") filed by East Coast Diversified Corporation (the "Company") from time to time with the U.S. Securities and Exchange Commission (the "SEC") contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company's management as well as estimates and assumptions made by Company's management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words "anticipate," "believe," "estimate," "expect," "future," "intend," "plan," or the negative of these terms and similar expressions as they relate to the Company or the Company's management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on April 16, 2013, relating to the Company's industry, the Company's operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.

Plan of Operation

First and second quarter operations represented a significant shift in focus and business restructuring for the Company. We completed the development of 2 new divisions, "StudentConnect and WetWinds," and began expansion of commercial operation to include both divisions. The company is continuing to focus its resources on completing the development of its two newest divisions StudentConnect and WetWinds Vir2o.

To accomplish our commercial objectives we hired key executives to manage development activities for all divisions of the company.

Marketing and Business Development

We completed the development of Vir2o and launched the site as planned in Brazil, India, US, Nigeria, Canada and UK representing markets where we will offer commercial content.

We hired SocialRadius to engage in public and media relations campaign for Vir2o

We began the development of the mobile application for Vir2o and will launch the mobile application on September 1st 2013.

We opened the Amazon aStore to all users on Vir2o on July 22nd 2013

EarthSearch Communications

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. Due to the rebound in the US economy we have refocused our resources on the expansion of commercial activities in the US and North America.

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, 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 or "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 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.

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.

In addition we are implementing several pilot projects for our Regional Master Licensee for West Africa (Halogen Securities),

Oil, Lagos State Government Waste Management, pilot of first International StudentConnect deployment and an oil pipeline monitoring project for the Nigerian National Petroleum Commission.

On July 20th we sold 400 oil tanker monitoring order from Oanda oil through our regional licensee Halogen Security

StudentConnect

The Company has commercially launched StudentConnect, our school transportation and safety division. We executed a pilot agreement with Gordon County School district in Georgia and began pilot testing in May 2013. We have also executed agreements with several other school districts. We are currently in pilot discussion with school districts in Georgia, Chicago, South Carolina and Indiana.

Our plans to expand the commercial opportunity for StudentConnect include participation in School Districts trade and industry events throughout the summer break in an effort to expand the scope of opportunity available to for the deployment StudentConnect and introduce the technology to more transportation directors.

We plan to expand the use of StudentConnect in other countries, specifically Nigeria, Guatemala and Dubai and will look to develop support operations for international deployment over the next 6 months.

We have begun piloting of StudentConnect for several school districts including in California and Georgia. The StudentConnect technology was approved by a the School Transportation Board in the Southeast and can be implemented on all 5000 plus buses owned by the state and supplied o several school districts. We will implement on district by district basis.

WetWinds dba "Vir2o"

WetWinds is a technology company that provides interactive social media experiences for users across the globe through its online platform Vir2o. We launched the beta version of Vir2o on April 5th 2013. We filed provisional patent application with the US Trade Mark office in April of 2013 and expect to complete a full non provisional application by November 2013.

We launched the full version of Vir2o on July 1, 2013. We completed the development of an online movie service, an ecommerce platform "MarketPlace" , Gaming platform, Live event broadcast, a World Headline news feature and our proprietary "nVite" technology. The social media product was designed to improve social engagement on the internet.

We launched Vir2o and offer commercial content and advertisement platform in 4 additional markets outside the US. We will implement advertisement spot from Ad Media to generate revenue beginning September 2013

In April 2013 we executed a MOU with HotSauce in Nigeria.

On August we executed agreement with Ad Media to provide advertisement content to Vir2o.

We plan to launch a South American office for Vir2o in Sao Paulo Brazil during fall quarter 2013. We are in final negotiation with ITS Global as our local representative in Brazil.

Our user recruitment strategy include the engagement of a public relations firm to target and introduce our proprietary nVite to technology media, recruit college students across the US for a paid user recruitment campaign as well as brand ambassadors, online bloggers and celebrities we can retain to endorse the platform.

We filed Trademark application with the USPTO for our brand and logo Vir2o and the "V" brand as a social plug in and widget.

Rogue Paper

We do not have a management role in Rogue Paper or its operation. During the fourth quarter of 2012, the management of Rogue Paper effectively shut-down operations, denied the Company access to financial records, refused to participate in shareholder or management meetings and all members of Rogue management resigned January 25, 2013. No legal action has been taken by either Rogue Paper or the Company.

Results of Operations

For the Three months Ended June 30, 2013 and 2012

Revenues

For the three months ended June 30, 2013, our revenue was $18,885 compared to $332,090 for the same period in 2012, representing a decrease of 94%. This decrease is attributed to our focus on completing development of the StudentConnect and WetWinds divisions.

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 $14,909 and $313,744 for the three months ended June 30, 2013 and 2012, respectively. Revenues for consulting services were $-0- and $-0- for the three months ended June 30, 2013 and 2012. User fees were $3,976 and $18,346 for the three months ended June 30, 2013 and 2012, respectively.

Operating Expenses

For the three months ended June 30, 2013, operating expenses were $516,292 compared to $1,164,170 for the same period in 2012, a decrease of 56%.

Cost of revenues decreased $223,156 and is directly attributable to the decrease in revenues for the three months ended June 30, 2013.

For the three months ended June 30, 2013, selling, general and administrative expenses were $506,338 compared to $931,060 for the same period in 2012, a decrease of 46%. This decrease was primarily caused by professional fees related to public company compliance and investor relations decreased by $369,262; bad debt expenses decreased by $184,515; royalties owed on a license agreement decreased by $23,554; offset by an increase in salary expenses of $139,325.

Net Loss

We generated net losses of $626,362 for the three months ended June 30, 2013 compared to $1,470,919 for the same period in 2012, a decrease of 57%. Included in the net loss for the three months ended June 30, 2013 was interest expense of $130,460 (of which $107,175 represents accretion of embedded beneficial conversion features on notes payable) and change in derivative liability of $5,723; offset by non-controlling interests' share of the net loss of EarthSearch of $7,228. Included in the net loss for the three months ended June 30, 2012 was interest expense of $193,064 (of which $174,082 represents accretion of embedded beneficial conversion features on notes payable) and loss on conversion of debt of $575,263; offset by other income of $1, gain on settlement of debt of $141,141, change in derivative liability of $10,809, net loss from disputed subsidiary of $18,575 and non-controlling interests' share of the net loss of EarthSearch of $17,733.

For the Six months Ended June 30, 2013 and 2012

Revenues

For the six months ended June 30, 2013, our revenue was $62,219 compared to $644,404 for the same period in 2012, representing a decrease of 88%. This decrease is attributed to our focus on completing development of the StudentConnect and WetWinds divisions.

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 $53,822 and $461,676 for the six months ended June 30, 2013 and 2012, respectively. Revenues for consulting services were $-0- for the six months ended June 30, 2013, compared to $151,920 for the six months ended June 30, 2012. User fees were $8,397 and $30,808 for the six months ended June 30, 2013 and 2012, respectively.

Operating Expenses

For the six months ended June 30, 2013, operating expenses were $1,108,742 compared to $1,903,637 for the same period in 2012, a decrease of 42%.

Cost of revenues decreased $290,539 and is directly attributable to the decrease in revenues for the six months ended June 30, 2013.

For the six months ended June 30, 2013, selling, general and administrative expenses were $1,068,910 compared to $1,573,266 for the same period in 2012, a decrease of 42%. This decrease was primarily caused by professional fees related to public company compliance and investor relations decreased by $398,038; bad debt expenses decreased by $184,515, royalties owed on a license agreement decreased by $38,539; travel expense decreased by $5,566; and amortization of intangible assets and prepaid license fees decreased by $9,273; offset by an increase in salary expenses of $206,203 and consulting expenses of $40,550.

Net Loss

We generated net losses of $1,373,714 for the six months ended June 30, 2013 compared to $2,210,904 for the same period in 2012, a decrease of 38%. Included in the net loss for the six months ended June 30, 2013 was interest expense of $334,717 (of which $292,948 represents accretion of embedded beneficial conversion features on notes payable) and change in derivative liability of $5,723; offset by non-controlling interests' share of the net loss of EarthSearch of $13,249. Included in the net loss for the six months ended June 30, 2012 was interest expense of $501,197 (of which $466,611 represents accretion of embedded beneficial conversion features on notes payable) and loss on conversion of debt of $575,263; offset by other income of $1,384, gain on settlement of debt of $141,141, change in derivative liability of $10,809, net loss from disputed subsidiary of $29,120 and non-controlling interests' share of the net loss of EarthSearch of $22,193.

Liquidity and Capital Resources

Overview

For the six months ended June 30, 2013 and 2012, 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 six months ended June 30, 2013 and 2012 has been for working capital and general corporate expenses.

Liquidity and Capital Resources during the six months ended June 30, 2013 compared to the six months ended March 30, 2012

As of June 30, 2013, we had cash of $1,744 and a working capital deficit of $3,496,525. The Company generated a negative cash flow from operations of $515,632 for the six months ended June 30, 2013, as compared to cash used in operations of $766,303 for the six months ended June 30, 2012. The negative cash flow from operating activities for the six months ended June 30, 2013 is primarily attributable to the Company's net loss from operations of $1,373,714, offset by noncash depreciation and amortization of $2,471, issuance of loan payable for consulting services of $78,922, stock issued for services of $12,900, amortization of prepaid license fees of $25,000, change in derivative liability of $5,723, accretion of beneficial conversion features on convertible notes payable of $292,948, accrued interest on loans payable of $38,522, changes in operating assets and liabilities of $414,845, and increased by noncontrolling interests in the loss of EarthSearch of $13,249.

The negative cash flow from operating activities for the six months ended June 30, 2012 is primarily attributable to the Company's net loss from operations of $2,210,904, offset by noncash depreciation and amortization of $13,632, provision for doubtful accounts of $186,669, amortization of intangible assets of disputed subsidiary of $76,500, issuance of loan payable for consulting services of $60,000, stock issued for services and compensation of $125,205, amortization of prepaid license fees of $25,000, amortization of payment redemption premiums of $12,076, loss on conversion of debt of $575,263, change in derivative liability of $10,809, accretion of beneficial conversion features on convertible notes payable of $466,611, accretion of stock discounts on convertible notes payable of $2,160, accrued interest on loans payable of $40,280, and increased by changes in operating assets and liabilities of $59,334, gain on recovery of redemption premiums of $17,625, gain on settlement of loans payable of $38,646, gain on settlement of accounts payable of $102,495, and noncontrolling interests in the losses of EarthSearch of $50,172.

No cash was used in investing activities for the six months ended June 30, 2013 while $700 was used for capital expenditures for the six months ended June 30, 2012.

Cash generated from our financing activities was $517,376 for the six months ended June 30, 2013, compared to $750,847 during the comparable period in 2012. This decrease was primarily attributed to the proceeds from the issuance of preferred stock subscriptions of $67,500 in 2013 compared to $115,002 in 2012, proceeds from loans payable of $217,000 in 2013 compared to $486,926 in 2012, proceeds from loans payable - related parties of $21,500 in 2013 compared to $56,500 in 2012, proceeds related to bank overdraft of $47,376 in 2013 compared to payment on bank overdraft of $11,881 in 2012, repurchase of common stock of $5,000 in 2013, proceeds from the issuance of common stock of $20,000 in 2013 compared to $1,000 in 2012, proceeds from the issuance of preferred stock of $149,000 in 2013 compared to $113,400 in 2012, and the repayment of loans payable of $10,100 in 2012.

We will require additional financing during the current fiscal year. During the period from July 1, 2013 to August 2, 2012, we received proceeds of $57,000 from the issuance of convertible promissory notes.

On April 20, 2012, the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with Ironridge Technology Co., a division of Ironridge Global IV, Ltd. ("Ironridge"), providing for the issuance and sale by the Company to the Ironridge of an aggregate of 1,500 shares of the Company's Series B Preferred Stock (the "Preferred Shares") in fifteen (15) equal tranches of 100 Preferred Shares each, at a price of $1,000 per Preferred Share. Pursuant to the Certificate of Designation to create the Series B Preferred Shares, each Preferred Share may be converted at any time at the option of Ironridge into shares of the Company's common stock, par value $0.001 at a conversion price of $.01 per share, subject to certain adjustments. During the year ended December 31, 2012, the Company received $100,000 for the first tranche of 100 shares and $229,000 of the subscription receivable. During the six months ended June 30, 2013, the Company received $20,000 of the subscription receivable.

In connection with the Closing, on April 20, 2012 the Company entered into a Registration Rights Agreement with Ironridge, pursuant to which the Company will file a registration statement related to the Stock Purchase Agreement with the Securities and Exchange Commission covering the resale of the Common Stock that will be issued to Ironridge upon conversion of the Preferred Shares.

On April 20, 2012, the Company issued 99,400 shares of the Company's common stock to Ironridge in reliance on the private placement exemption from the registration requirements of the Securities Act of 1933, as amended, provided by
Section 3(a)(10) thereof. The shares issued to Ironridge were issued pursuant to a Stipulation for Settlement of Claims (the "Stipulation") filed by the Company and Ironridge in the Superior Court for the State of California, County of Los Angeles (Case No. BC481395) on April 20, 2012 in settlement of claims purchased by Ironridge from certain creditors of the Company in the aggregate amount equal to $1,079,991 (the "Claim Amount"), plus attorney's fees and costs. Pursuant to the Stipulation, the Company was required to issue and deliver 99,400 shares of Common Stock (the "Initial Issuance"). Ironridge will ultimately be entitled to retain a number of shares of Common Stock (the "Final Amount") that is equal to:
(a) the sum of $1,068,344.86 plus a transaction fee of $40,000 and reasonable attorney's fees, (b) divided by sixty-five percent (65%) of the volume weighted average price ("VWAP") of the Common Stock as reported by Bloomberg Professional service of Bloomberg LP over a period of time beginning on the date on which Ironridge receives the Initial Issuance and ending on the date on which the aggregate trading volume of the Company's Common Stock exceeds $5,000,000 (such period being the "Calculation Period"), not to exceed the arithmetic average of the individual daily VWAPs of any five trading days during the Calculation Period. For every 20 million shares that trade during the Calculation Period, or if any time during the Calculation Period a daily VWAP is below 80% of the closing price of the Company's Common Stock on the day before the date of the Initial Issuance, Ironridge has the right to cause the Company to immediately issue to Ironridge additional shares of Common Stock (each, an "Additional Issuance") (provided, however, that at no time may Ironridge and its affiliates collectively own more than 9.99% of the total number of shares of Common Stock outstanding). At the end of the Calculation Period, (a) if the sum of the Initial Issuance and any Additional Issuance is less than the Final Amount, the Company shall immediately issue additional shares to Ironridge so that the total issuance is equal to the Final Amount and (b) if the sum of the Initial Issuance and any Additional Issuance is greater than the Final Amount, Ironridge will return any remaining shares to the Company for cancellation. Subsequent to April 24, 2012 and through May 14, 2013, the Company has issued an additional 2,910,400 shares of the Company's common stock pursuant to the Stipulation.

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 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 unaudited 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.

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.

Critical Accounting Policies

The preparation of 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.

See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2, "Summary of Significant Accounting Policies" in our audited consolidated financial statements for the year ended December 31, 2012, included in our Annual Report on Form 10-K as filed on April 16, 2013, for a discussion of our critical accounting policies and estimates.

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