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ECDC > SEC Filings for ECDC > Form 10-K on 15-Apr-2014All Recent SEC Filings

Show all filings for EAST COAST DIVERSIFIED CORP

Form 10-K for EAST COAST DIVERSIFIED CORP


15-Apr-2014

Annual Report


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

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 four years since acquisition the company was in R&D phase. During this period we developed three distinct technology divisions. Completed the development of two proprietary technologies; Wireless communications between GPS &RFID (comprising of several GPS, RFID and Cargo locking devices) and, "nVite" a proprietary environment sharing application for our social media division, we also developed an entire group of web assets, comprising of five proprietary "Software" for the operation and management of our businesses.

On Febraury 15, 2014, we created a prototype for a modified less expensive version of our Halo device called Halo2 which we believe will allow us be more competitive in 2014. We plan to deploy the product globally for small business applications. Our goal is to reenergize the EarthSearch business with this product and create a mass market solution for small business. We believe the product will allow us to be more competitive globally where cheaper Chinese products have created significant competition for our business.

Once the product is deployed we plan to reorganize the sales operation for EarthSearch to push this product both from direct sales and increase efforts to establishing new distribution networks for the Halo2.

We plan on the Halo 2 costing approximately $70.00 per unit.

StudentConnect began commercial deployment in the first quarter of 2014. In February 2014, we deployed StudentConnect on school buses in school districts in Georgia, Arkansas, Kentucky, California, and South Carolina. In addition, Texas, Florida and North Carolina engaged us to implement systems on their school buses. Our objective is to secure as many schools as we can through the end of the current school year and the summer break. We plan to expend a significant amount of resource over the same period to train and deploy products for these schools. Our objective is to have enough school districts in place to generate revenue for the 2015 school year. We plan for our advertising team to continue to strengthen relationships with local chambers of commerce to enhance revenue in all of the districts we plan to offer services. We plan to launch our StudentConnect mobile application this quarter and plan to implement a mobile advertising platform that we believe will also help enhance revenue for StudentConnect. We launched a licensing program for exclusive distributorship that would allow for rapid deployment of StudentConnect in key US markets. In May 2014, we plan to deploy our product on carrier networks which we believe will allow the carriers commercial sales team to commence the marketing of StudentConnect.

Vir2o, our social media division, has launched is first marketing campaign in the US and North America. We executed a promotional agreement with CBS local Atlanta Radio Station WVEE as the first beta test for our marketing strategy for North America. We expect the Radio campaign to commence on April 15, 2014. If successful we will introduce a similar strategy to key markets in North America to allow us to compete even more effectively in the social media space.

We plan to introduce commercial content and ecommerce into social media space. We have entered into agreement with Amazon, College books.com and fanatics.com an online retailer of sporting goods.

We believe strongly, that the ability to deliver movies, music, shopping, in a live, engaging and interactive way, for users, their friends and family is the future of social media. Our goal is to join the next wave of innovation to transform social media. We plan to deliver content on mobile and cross platform that integrates mobile and desktop. We believe Vir2o brings everything web to social media including online games, video, movies, shopping, and music and live broadcast. It is imperative that we form strategic alliances with content providers for our strategy to be successful.

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.

LogiBoxx- Wireless Communication between GPS & RFID

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 organizations, including but not limited to the following partners and customers: Kenya Revenue Authority, Tanzania Revenue Authority (both still in bidding process), we are going through certification of our container tracking supplication with the Uruguay customs authority and Conctena in Switzerland, Our business with each of the aforementioned organizations consists of the following:

Tanzania Revenue Authority through Utrack:

The RFP of "Request For Proposal" issued by the Tanzania revenue authority is now in the bidding status. We await update with our local partner Utrack

Conctena in Switzerland :

The pilot testing with Conctena is still ongoing.

Kenya Revenue Authority

We are in the certification phase for our product with the Kenya Revenue Authority and await updates from our local partner

Uruguay Custom and Revenue

We began certification process with Uruguay Custom authority on April 8 2014 and awaits updates from our local partner.

Other EarthSearch Development

In other to reenergize our GPS business and to remain competitive locally and internationally with cheaper Chinese products we created a modified cheaper version of our basic GPS product in 2013 called Hallo2 the product will sell for under $70.00 and allow us to enter the GPS small business mass market

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.

We entered 5 year agreements with several school districts in 2013 and 2014.including schools districts in California, Texas, South Carolina, Louisiana, Arkansas and Kentucky. We are continuing pilot test and contract negotiation with additional schools in GA, California, Louisiana and Arkansas.

We have successfully secured the support of several local chambers of commerce is getting local businesses commitments and participation is advertising sponsorship for StudentConnect.

We executed a marketing agreement with Verizon wireless that would allow its Schools Sales division to market StudentConnect as part of their portfolio. We are still in the process of converting our LogiBoxx devices to work on the CDMA network which would allow our devices to run on the Verizon Platform, upon completion of this step Verizon will commence marketing StudentConnect.

We have deployed devices on school buses on all schools currently under contract and are in the training phase for school transportation administrators. We expect the full and complete use of our system will commence with the new school year of 2014.

We executed a 5 year licensing agreement with Neuva Tech LLC granting exclusive territorial rights for the State of California.

We executed a 5 year licensing agreement with Smart1st in Lebanon granting it exclusive territorial rights to market StudentConnect in Lebanon

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.

We will launch the StudentConnect Mobile app on April 25 2014. The application will be available on iOS and Android platforms. Our goals is to secure several additional school district agreements over the summer break for deployment in the 2014 school year.

WetWinds/Vir2o

On April 5, 2013, ECDC launched its third division, Vir2o an interactive social media platform. The company entered the social media space with a proprietary technology called "nVite" 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 photos 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.

In 2014 we executed agreement with Smat1st to launch Vir2o in Lebanon.

We filed patent non-provisional application with the US Trade and Patent Office (USPTO) for the protection of our "NVite" technology. We plan to file non provisional license in April 2014.

We deployed mobile apps for Vir2o on iOS, Android and Blackberry in October 2013. We believe we aggressively introduced the platform to Nigeria, India, Brazil.

We plan to launch our first US campaign to promote vir2o in April 2014. To accomplish our goals we executed 6 months promotional agreement with CBS Atlanta Radio WVEE and secured exclusive endorsement by WVEE Radio personality Greg Street to introduce the platform to audiences in Atlanta. WVEE has over 1.2 million listeners in the local market.

We are in final stages of negotiations with Fuga Inc. a music licensing organization to license music for VMaestro our music service program which would offer advertisement sponsored free music channels to users on the platform.

We are in final stages of negotiation with CESMMA sports and CESBoxing to bring both live events and video on demand programing to Vir2o movie and video rooms.

We executed retailer publishing agreements with Fanatics.com a sporting gear retailer which will feature sporting gears on Vir2o market place

We executed agreement with Campus Books Rental a college online books store to offer discounted books on Vir2o.

We have executed a retailer agreement with Amazon.com to resell product offered by Amazon on Vir2o.com. This agreement was a one sided reseller agreements. We had to apply to be approved as a retailer and we had to accept the terms if suitable for our business.

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, 2013 Compared to the Year Ended December 31, 2012

Revenue

For the year ended December 31, 2013, our revenue was $180,271 compared to $715,986 for the same period in 2012, representing a decrease of 70%. This decrease is attributed to our focus on completing development of the StudentConnect and WetWinds divisions. 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 $157,370 and $528,397 for the years ended December 31, 2013 and 2012, respectively. Revenues for consulting services were $-0- for the year ended December 31, 2013, compared to $151,920 for the year ended December 31, 2012. User fees were $22,901 and $35,669 for the years ended December 31, 2013 and 2012, respectively.

Operating Expenses

For the year ended December 31, 2013, operating expenses were $2,067,187 compared to $3,687,389 for the same period in 2012, a decrease of 44%.

Cost of revenues decreased $269,760 and is due to the decrease in revenues for the year ended December 31, 2013.

For the year ended December 31, 2013, selling, general and administrative expenses were $1,939,762 compared to $3,290,204 for the same period in 2012, a decrease of 41%. This decrease was primarily caused by professional fees related to public company compliance and investor relations decreased from $629,357 to $172,697, bad debt expense decreased from $604,735 to $3,297, offset by research and development costs increased from $378,383 to $580,119, and salary expenses increased from $716,283 to $848,871.

Our salary expenses increased in 2013 over the same period in 2012 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.

Net Loss

We generated net losses of $2,284,354 for the year ended December 31, 2013 compared to $5,749,513 for the same period in 2012, a decrease of 60%. Included in the net loss for the year ended December 31, 2013 was interest expense of $571,150 and loss on disposal of fixed assets of $4,729, reduced by a change in derivative liability of $154,277.

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.

Liquidity and Capital Resources

Overview

For the years ended December 31, 2013 and 2012, we funded our operations through financing activities consisting of private placements of equity securities with outside investors and related parties and loans from related and unrelated parties. Our principal use of funds during the years ended December 31, 2013 and 2012 has been for working capital and general corporate expenses.

Liquidity and Capital Resources during the year ended December 31, 2013 compared to the year ended December 31, 2012

As of December 31, 2013, we had cash of $241 and a working capital deficit of $3,732,820. The Company generated a negative cash flow from operations of $904,919 for the year ended December 31, 2013, as compared to cash used in operations of $1,489,457 for the year ended December 31, 2012. The negative cash flow from operating activities for the year ended December 31, 2013 is primarily attributable to the Company's net loss of $2,284,354, offset by noncash depreciation and amortization of $3,861, the issuance of loan payable for consulting services of $78,922, stock issued for services of $12,900, accrued interest on loans payable of $81,208, accretion of beneficial conversion feature on notes payable of $486,696, amortization of prepaid license fee of $50,000 and net cash from changes in operating assets and liabilities of $844,289, offset by a change in derivative liability of $154,277 and noncontrolling interests in the loss of EarthSearch of $24,164.

The negative cash flow from operating activities for the year ended December 31, 2012 is primarily attributable to the Company's net loss 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 noncontrolling interests in the loss of EarthSearch and Rogue Paper of $99,809.

Cash generated from our financing activities was $905,160 for the year ended December 31, 2013, compared to $1,488,513 during the comparable period in 2012. This decrease was primarily attributed to proceeds received from the sale of preferred stock of $184,000 in 2013 compared to $197,900 in 2012, proceeds from preferred stock subscriptions of $161,500 in 2013 compared to $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 overdraft 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, 2013, 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.

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

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