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[December 28, 2012]
EAST COAST DIVERSIFIED CORP - 10-K/A - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) 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 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.
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.
According to an article on Industryweek.com, "RFID Expecting Strong Rebound", GPS solutions will become inadequate for business needs and the market would demand or require more sophisticated solutions for asset management, workforce optimization and security. RFID technology was growing at a significant rate and a combination of both technologies was inevitable. Management seized the opportunity of the slow economy to develop the world's first solution for continuous visibility of assets and become a global leader in offering such an integrated solution. We are also continuing to utilize the technology to provide for other applications such as oil pipeline monitoring.
We completed our product development in the first quarter of 2010, and began commercial beta tests in the summer of 2010. We officially launched our new business and product portfolio in fourth quarter of 2010. We immediately saw revenue growth as 60% of our 2010 revenue came in the 4th quarter of 2010. We outperformed our entire 2010 revenue levels in the 1st quarter of 2011 and we expect to continue to see significant increases in revenue. 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, Interactive Group in UAE and Pakistan, Belfor in Canada, Utrack in Canada, Cnord in Russia 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.
22 Servpro in Arizona: We are still in the early stages of the pilot phase. We have been paid for the hardware delivered under the pilot agreement. Once the pilot program (consisting of physical installation of our products and devices on vehicles locally and provisioning of our software for local deployment) is completed we will be able to present the solution to all Servpro licensees across North America.
Interactive Group in UAE and Pakistan: We have delivered products to Interactive Group and have been paid for all devices used under the pilot program, which consisted of physical installation of our products and devices on vehicles locally and provisioning of our software for local deployment. We are not receiving any compensation during the pilot phase. We expect the pilot will be completed by the end of first fiscal quarter in 2012. We have executed a Distributor licensing agreement with Interactive Group.
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.
Cnord in Russia and Conctena in Switzerland : We are still in the pilot phases for both CNord and 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 Russian and European Union require domestic certification similar to that of the Federal Communication Commission. We have successfully completed both pilots and hope to commence further operations later in the first quarter of 2012. We have not executed any partner agreements with either of these companies.
MultiPlant LTD, Ghana: The RFP or "Request For Proposal" is still under evaluation by the Ghanaian Revenue Authority. However, we have delivered the products required for the pilot. The pilot project will involve the installation of our products on vehicles locally and deployed with our software. We have executed a distributor licensing agreement with Multiplant LTD.
We have also expanded our product offering into military logistics. Our integrated GPS/RFID technology would allow most military supply chain operations to monitor and track movement of supply in the theater of operation, (real-time) validating destination, equipment and material delivered to specific troops in the theatre of operation. We have submitted a proposal to the Military of Nigeria and the project continues to be under consideration.
Pursuant to a partner agreement the Company has been granted distribution rights to MW Marketing, a New Jersey based Department of Defense minority contractor with registration rights to bid in government contracts. We have also made an unsolicited proposal to the US department of Defense and continue to pursue these opportunities as part of our expansion into military logistics.
As part of our growth strategy, we launched an aggressive sales network development program in the summer of 2010. As of the end of the second quarter 2011 we have more than 15 distribution partners in 5 geographic regions (Southeast, Asia, 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.
Part of our strategy is to implement a merger and acquisition plan as a part of the 2011 growth strategy. We will focus on targeting those GPS firms with a concentration of clients with advanced supply chain solution needs. As aforementioned, on October 23, 2011, the Company acquired 51% of Rogue Paper pursuant to the Rogue Paper Share Exchange Agreement. The Company will also seek joint venture opportunities where its technology will have significant impact on the success of the opportunities.
23 Results of Operations Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010 Revenue For the year ended December 31, 2011, our revenue was $612,482 compared to $129,248 for the same period in 2010, representing an increase of 374%. 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, and the acquisition of Rogue Paper, Inc., which represented $94,821 of total revenues. 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 $203,776 and $76,984 for the years ended December 31, 2011 and 2010, respectively. Revenues for consulting services were $352,041 for the year ended December 31, 2011, compared to $21,757 for the year ended December 31, 2010. User fees were $56,665 and $30,507 for the years ended December 31, 2011 and 2010, respectively.
Operating Expenses For the year ended December 31, 2011, operating expenses were $2,480,768 compared to $2,508,156 for the same period in 2010, a decrease of 1.1%.
Cost of revenues increased $219,275 and is directly attributable to the increase in revenues for the year ended December 31, 2011.
For the year ended December 31, 2011, selling, general and administrative expenses were $2,179,420 compared to $2,404,804 for the same period in 2010, a decrease of 9.4%. This decrease was primarily caused by accounting fees decreased from $89,278 to $27,282, compensation for board members decreased from $170,000 to $80,000, professional fees related to public company compliance and investor relations increased from $160,350 to $475,997, research and development costs decreased from $333,971 to $75,372, and salary expenses decreased from $1,408,008 to $1,172,382.
Our salary expenses decreased significantly in 2011 over the same period in 2010 due to the streamlining of production and sales functions and the due to the conducting of beta tests for our integrated GPS/RFID solution in 2010.
Our professional fees related to public company compliance and investor relations increased significantly because we filed an S-1 registration statement in 2011 as well as increased our investor relations efforts.
Further, we had various fees associated with the acquisition of Rogue Paper, including but not limited to, legal fees, transfer agent fees and other related costs causing us to incur significant expenses.
The lack of immediate success in the marketing and promotion of our Integrated GPS/RFID product in 2010 coupled with our inability to raise significant capital, caused us to terminate all of the employees hired in 2010 to the develop our marketing program.
Net Loss We generated net losses of $2,280,676 for the year ended December 31, 2011 compared to $2,496,892 for the same period in 2010, a decrease of 8.7%. Included in the net loss for the year ended December 31, 2011 was a loss on the conversion of debt of $432,270, interest expense of $177,308, reduced by a gain on the recovery of accounts payable of $146,859 and non-controlling interests' share of the net loss of EarthSearch and Rogue Paper of $51,832. Included in the net loss for the year ended December 31, 2011 was a loss on the conversion of debt of $66,157, loss on the purchase of non-controlling interest of $55,849 and interest expense of $108,550, reduced by non-controlling interests' share of the net loss of EarthSearch of $112,507.
24 Liquidity and Capital Resources Overview For the years ended December 31, 2011 and 2010, 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, 2011 and 2010 has been for working capital and general corporate expenses.
Liquidity and Capital Resources during the year ended December 31, 2011 compared to the year ended December 31, 2010 As of December 31, 2011, we had cash of $53,519 and a working capital deficit of $3,384,298. The Company generated a negative cash flow from operations of $533,325 for the year ended December 31, 2011, as compared to cash used in operations of $1,060,618 for the year ended December 31, 2010. The negative cash flow from operating activities for the year ended December 31, 2011 is primarily attributable to the Company's net loss from operations of $2,280,676, offset by noncash depreciation and amortization of $110,390, stock issued for services of $945,430, loss on the conversion of debt of $432,270, accrued interest on loans payable of $111,347, accretion of beneficial conversion feature on notes payable of $42,358, amortization of payment redemption premium of $16,899, amortization of prepaid license fee of $12,500 and net cash from changes in operating assets and liabilities of $272,845, offset by a gain on the recovery of accounts payable of $146,859 and noncontrolling interests in the loss of EarthSearch and Rogue Paper of $49,829.
The negative cash flow from operating activities for the year ended December 31, 2010 is primarily attributable to the Company's net loss from operations of $2,496,892, offset by depreciation and amortization expense of $197,112, stock issued in lieu of cash compensation of $183,159, in-kind contribution of services of $347,846, loss on conversion of debt of $66.157, loss on disposal of assets of $21,779, loss on acquisition of non-controlling interest in EarthSearch of $55,849, interest accrued on notes payable of $91.755, and decreased investment in operating working capital elements of $555,124, offset by noncontrolling interests in the loss of EarthSearch of $112,507.
The decrease in investing activities is attributable to the purchase of equipment of $6,760 during the year ended December 31, 2010, compared to $4,391 in 2011, $62,698 of cash received in the acquisition of Rogue Paper during the year ended December 31, 2011 2011, and the proceeds received and payments of escrow deposits in the year ended December 31, 2010.
Cash generated from our financing activities was $527,259 for the year ended December 31, 2011, compared to $992,884 during the comparable period in 2010.
This decrease was primarily attributed to the proceeds from the issuance of common stock, a decrease from $656,125 to $186,200, proceeds for the sale of preferred stock in 2011 of $5,000, proceeds from loans payable to related parties, a decrease from $264,823 to $205,919, proceeds from loans payable to unrelated parties, a decrease from $376,931 to $244,755, offset by the repayments of loans payable to related parties, a decrease from $281,995 to $112,115 and repayments of loans payable to unrelated parties in 2011 of $2,500.
We will require additional financing during the current fiscal year according to our planned growth activities; however, there is no assurance that we will be able to raise such additional financing. During the period from January 1, 2012 to April 13, 2012, we received proceeds from the sale of 250,000 shares of our common stock of $1,000 and $60,000 from the issuance of convertible promissory notes.
On July 1, 2011, we entered into an Equity Purchase Agreement (the "Equity Purchase Agreement") with Southridge Partners II, LP ("Southridge"). Pursuant to the Equity Purchase Agreement, Southridge shall commit to purchase up to Ten Million Dollars ($10,000,000) of our common stock over the course of twenty four (24) months commencing the effective date of the initial Registration Statement (as defined below) covering the Registrable Securities pursuant to the Equity Purchase Agreement. For each share of our common stock purchased under the Agreement, Southridge will pay ninety-two percent (92%) of the average of the lowest closing bid price of our common stock in any two trading days, consecutive or inconsecutive, of the five consecutive trading day period (the "Valuation Period") commencing the date a put notice (the "Put Notice") is delivered to Southridge in a manner provided by the Equity Purchase Agreement.
Subject to certain limitations and floor price reductions, the Company may, at its sole discretion, issue a Put Notice to Southridge and Southridge will then be irrevocably bound to acquire such shares. To date, the Company has not completed the registration process and therefore is unable to put shares under the Equity Purchase Agreement.
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, 2011, 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.
25 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.
26 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, 2011.
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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