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EAST COAST DIVERSIFIED CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) 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 2013 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 to commercialize 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 1 st 2013. We opened the Amazon aStore to all users on Vir2o on July 22, 2013. EarthSearch Communications In March 2013 we reconstituted our sales team for EarthSearch. We hired a 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. 24 We are currently engaged in numerous pilot projects with several major organizations, including but not limited to the following partners and customers: Proseguer Uraguay, and Oando Oil in Nigeria. Our business with each of the aforementioned organizations consists of the following: Proseguer Uruguay: We executed a 2 year licensing agreement with Prosequer in Uruguay and delivered an initial pilot order of 50 TrailerSeals. Proseguer is currently working on a project with the Uruguay Customs Authority for the tracking of Cargo transported between Uruguay and neighboring countries. Our TrailerSeals will be installed on all containers traveling between Uruguay and neighboring countries. We have developed and localized a version of our GATIS software in Uruguay for the intended deployment of a full operation in 2014. Oando Oil in Nigeria We completed our pilot project for Oando Oil in Nigeria and delivered 400 units of oil tanker monitoring devices for the project and are implementing several pilot projects for our Regional Master Licensee for West Africa (Halogen Security), these pilot projects include Lagos State Government Waste Management and an oil pipeline monitoring project for the Nigerian National Petroleum commission through our partner Halogen Security. StudentConnect The Company has commercially launched StudentConnect, our school transportation and safety division. We executed 5-year contracts with school Districts in South Carolina, Kentucky, Louisiana, and Arkansas. We intend to have all 4 school districts fully installed and implemented for the school year beginning January 2014. In addition, we are continuing pilot testing and discussions with school districts in GA, SC, KY, AR, AL, NC and LA. We anticipate additional agreements executed by year end for further deployment in 2014. We executed 2 agreements with Verizon Wireless, The Verizon Partner Program and the Verizon Master Services Agreements (MSA). The MSA agreement gives us access to the Verizon network and grants Verizon wireless exclusive right to provide network services to all schools utilizing StudentConnect. Under the Verizon Partner Program, Verizon and StudentConnect shall engage in joint sales and marketing of the StudentConnect product to school districts across the country. Verizon's sales force shall market StudentConnect to school districts nationwide. We anticipate having access to the Verizon sales force which will allow us to reach greater audience for the continued and accelerated growth of the StudentConnect division of our business. To meet the potential demand we have expanded our technical and customer service operation and plan to increase our warehousing capabilities. 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 5, 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 January 2014. We launched the full version of Vir2o on July 1, 2013. The platform will offer an online movie service, music service "VMaestro", a ecommerce platform "MarketPlace" , Gaming platform, Web Radio, 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. On August 1, 2013, we executed an agreement with Ad Media to provide advertisement content to Vir2o. We offer commercial content and advertisement platform in 4 additional markets outside the US. We implemented advertisement capability on the platform and currently display advertisement on the platform in 40 countries. In September 2013 we hired several independent consultants in Nigeria and Brazil to help facilitate the growth of the platform in both markets with the recruitment of users and content providers, Our user recruitment strategy includes the engagement of a public relations firm to target and introduce our proprietary nVite technology to the public. We are consistently promoting the platform on social media, engaging potential users with games and contest in all markets where we are actively promoting the site, and hope to engage online bloggers and celebrities to endorse the platform. 25 On October 18, 2013, we launched the mobile app for Vir2o on iOS, Android and Blackberry platforms making it available to all users with smart phones. In addition we launched the app in html for users that do not have smartphones. On October 20, 2013, we entered into an agreement with AdMob, the mobile ad division of Google, to provide advertisement on the mobile apps. We anticipate that these advertisements will be deployed by the end of 2013. We intend to accelerate and increase our promotion and marketing efforts to grow the site as we move into 2014. Our goal is to have the site actively growing with users, content and revenue. We filed a 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 Paper management resigned on January 25, 2013. No legal action has been taken by either Rogue Paper or the Company. Results of Operations For the Three Months Ended September 30, 2013 and 2012 Revenues For the three months ended September 30, 2013, our revenue was $106,949 compared to $66,314 for the same period in 2012, representing an increase of 61%. This decrease is attributed to increase in orders of our EarthSearch products, while we continue 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 $101,563 and $52,721 for the three months ended September 30, 2013 and 2012, respectively. Revenues for consulting services were $-0- and $-0- for the three months ended September 30, 2013 and 2012. User fees were $5,386 and $13,593 for the three months ended September 30, 2013 and 2012, respectively. Operating Expenses For the three months ended September 30, 2013, operating expenses were $530,632 compared to $1,007,834 for the same period in 2012, a decrease of 47%. Cost of revenues increased $25,634 and is directly attributable to the increase in revenues for the three months ended September 30, 2013. For the three months ended September 30, 2013, selling, general and administrative expenses were $453,896 compared to $956,732 for the same period in 2012, a decrease of 53%. This decrease was primarily caused by professional fees related to public company compliance and investor relations decreased by $131,500; bad debt expenses decreased by $125,002; royalties owed on a license agreement decreased by $1,024; and salary expenses of $243,203. Net Loss We generated net losses of $384,802 for the three months ended September 30, 2013 compared to $974,993 for the same period in 2012, a decrease of 61%. Included in the net loss for the three months ended September 30, 2013 was interest expense of $125,578 (of which $101,476 represents accretion of embedded beneficial conversion features on notes payable); offset by the change in derivative liability of $160,000 and non-controlling interests' share of the net loss of EarthSearch of $4,459. Included in the net loss for the three months ended September 30, 2012 was interest expense of $134,083 (of which $138,230 represents accretion of embedded beneficial conversion features on notes payable); offset by other income of $57,003, change in derivative liability of $8,518, net loss from disputed subsidiary of $12,047 and non-controlling interests' share of the net loss of EarthSearch of $47,136. 26 For the Nine Months ended September 30, 2013 and 2012 Revenues For the nine months ended September 30, 2013, our revenue was $169,168 compared to $710,718 for the same period in 2012, representing a decrease of 76%. 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 $155,385 and $514,397 for the nine months ended September 30, 2013 and 2012, respectively. Revenues for consulting services were $-0- for the nine months ended September 30, 2013, compared to $151,920 for the nine months ended September 30, 2012. User fees were $13,783 and $44,401 for the nine months ended September 30, 2013 and 2012, respectively. Operating Expenses For the nine months ended September 30, 2013, operating expenses were $1,639,374 compared to $2,911,471 for the same period in 2012, a decrease of 44%. Cost of revenues decreased $264,905 and is directly attributable to the decrease in revenues for the nine months ended September 30, 2013. For the nine months ended September 30, 2013, selling, general and administrative expenses were $1,522,806 compared to $2,529,998 for the same period in 2012, a decrease of 40%. This decrease was primarily caused by professional fees related to public company compliance and investor relations decreased by $529,538; bad debt expenses decreased by $309,517, royalties owed on a license agreement decreased by $39,563; travel expense decreased by $8,413; and amortization of intangible assets and prepaid license fees decreased by $9,273; offset by an increase in salary expenses of $37,000 and consulting expenses of $51,470. Net Loss We generated net losses of $1,758,516 for the nine months ended September 30, 2013 compared to $3,221,480 for the same period in 2012, a decrease of 45%. Included in the net loss for the nine months ended September 30, 2013 was interest expense of $460,295 (of which $400,424 represents accretion of embedded beneficial conversion features on notes payable); offset by change in derivative liability of $154,277and non-controlling interests' share of the net loss of EarthSearch of $17,708. Included in the net loss for the nine months ended September 30, 2012 was interest expense of $635,280 (of which $604,841 represents accretion of embedded beneficial conversion features on notes payable), a loss on conversion of debt of $575,263, change in derivative liability of $2,291; offset by other income of $58,387, gain on settlement of debt of $141,141, net loss from disputed subsidiary of $41,167 and non-controlling interests' share of the net loss of EarthSearch of $33,746. Liquidity and Capital Resources Overview For the nine months ended September 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 nine months ended September 30, 2013 and 2012 has been for working capital and general corporate expenses. Liquidity and Capital Resources during the nine months ended September 30, 2013 compared to the nine months ended March 30, 2012 As of September 30, 2013, we had cash of $368 and a working capital deficit of $3,573,986. The Company generated a negative cash flow from operations of $669,789 for the nine months ended September 30, 2013, as compared to cash used in operations of $1,242,037 for the nine months ended September 30, 2012. The negative cash flow from operating activities for the nine months ended September 30, 2013 is primarily attributable to the Company's net loss from operations of $1,758,516, offset by noncash depreciation and amortization of $3,166, issuance of loan payable for consulting services of $78,922, stock issued for services of $12,900, amortization of prepaid license fees of $37,500, accretion of beneficial conversion features on convertible notes payable of $400,424, accrued interest on loans payable of $56,626, changes in operating assets and liabilities of $671,174, and increased by change in derivative liability of $154,277 and noncontrolling interests in the loss of EarthSearch of $17,708. 27 The negative cash flow from operating activities for the nine months ended September 30, 2012 is primarily attributable to the Company's net loss from operations of $3,221,480, offset by noncash depreciation and amortization of $24,046, provision for doubtful accounts of $311,671, amortization of intangible assets of disputed subsidiary of $114,750, issuance of loan payable for consulting services of $60,000, stock issued for services and compensation of $425,205, amortization of prepaid license fees of $37,500, amortization of payment redemption premiums of $12,076, loss on conversion of debt of $575,263, change in derivative liability of $2,291, accretion of beneficial conversion features on convertible notes payable of $604,841, accretion of stock discounts on convertible notes payable of $2,160, accrued interest on loans payable of $47,224, liabilities of disputed subsidiary of $11,116, changes in operating assets and liabilities of $101,986 and increased by gain on recovery of redemption premiums of $28,975, gain on settlement of loans payable of $38,646, gain on settlement of accounts payable of $102,495, assets of disputed subsidiary of $ 107,271 and noncontrolling interests in the losses of EarthSearch of $73,299. No cash was used in investing activities for the nine months ended September 30, 2013 while $700 was used for capital expenditures for the nine months ended September 30, 2012. Cash generated from our financing activities was $670,157 for the nine months ended September 30, 2013, compared to $1,192,878 during the comparable period in 2012. This decrease was primarily attributed to the proceeds from the issuance of preferred stock subscriptions of $91,500 in 2013 compared to $325,002 in 2012, proceeds from the issuance of common stock subscriptions of $14,000 in 2013, proceeds from loans payable of $302,500 in 2013 compared to $676,076 in 2012, proceeds from loans payable - related parties of $65,157 in 2013 compared to $56,500 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 $184,000 in 2013 compared to $151,900 in 2012, the repayment of loans payable of $2,000 in 2013 compared to $12,600 in 2012, and the repayment of loans payable - related party of $5,000 in 2012. We will require additional financing during the current fiscal year. During the period from October 1, 2013 to October 31, 2013, we received proceeds of $23,500 from the issuance of convertible promissory notes and loans and $12,500 from the sale of preferred stock. 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 nine months ended September 30, 2013, the Company received $42,500 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 September 30, 2013, the Company has issued an additional 102,910,400 shares of the Company's common stock pursuant to the Stipulation. 28 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. |