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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) Forward Looking Statements 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, 2013, filed with the SEC on April 15, 2014, 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 Since acquiring EarthSearch in April of 2010, ECDC has embarked on developing its technology operations and improving its product offerings to the market. The company is currently in the research and development phase and has developed three distinct technology divisions, (i) EarthSearch Communication Inc., StudentConnect Inc. (ii) and (iii) WetWinds Inc. We completed the development of two proprietary technologies, (i) wireless communications between GPS & RFID (comprising of several GPS, RFID and cargo locking devices) and (ii) "nVite" which is a proprietary environment sharing application for our social media division. Additionally, we developed an entire group of web assets, comprised of five proprietary "Software" for the operation and management of our businesses, the following list represents proprietary software owned by the company: 1. GATIS - Global Asset Tracking & Identification Systems 2. CARAS - Customs And Revenue Authority Systems 3. StudentConnect - Student Transportation System 4. SCAAP - StudentConnect Advertisement Aggregation Platform 5. Vir2o - Online Social Media Platform On February 15, 2014, we created a prototype for a modified and less expensive version of our Halo device called Halo2, which we believe will allow us to be more competitive in 2014. We plan to deploy this product globally for small business applications. Our goal is to reenergize the EarthSearch business with Halo2 and create a mass market solution for small businesses. We believe the product will allow us to be more competitive globally where cheaper Chinese products have created significant competition for our business. We completed the integration of Halo 2 into our GATIS platform in May 2014 and have begun the marketing efforts to deploy services with the product and are continuing discussion with several local police authorities regarding the sales of Halo. Halo 2 is now deployed for commercialization. We delivered pilot units to our partner in Nigeria and potential partner in Costa Rica. We are offering HALO 2 to resellers and distributors at wholesale pricing of $64.99 and to end user customers at $129.99. In August 2014, we delivered a pilot order for oil tanker monitoring to Dangote Group in Nigeria. Additionally, in August 2014 we executed a partner agreement with Zultec Fleet Management in Saudi Arabia to represent both EarthSearch and StudentConnect solution in the Kingdom. 19 StudentConnect Our plan for the commercial deployment of StudentConnect in the first quarter was disrupted by excessive inclement weather in the South East where we had focused our resources. We completed deployment into several school districts in the second quarter and over the summer break. We have completed the deployment of hardware and software for Logan County School District in KY, Chattooga County School District in GA, Demark Olar School District in SC, Napa Valley School District in CA, and a 100 bus deployment for Auntora Private Catholic School in Beirut, Lebanon. We completed software deployment for Moore House Parish in Louisiana, and completed a pilot for Clovis School District in central California and awaiting board approval for full deployment. We engaged in joint marketing activities with the Verizon sales division in presenting StudentConnect to several School districts in GA and are anticipating several pilots to commence by September 2014 in some of Georgia's largest school districts. We launch the StudentConnect app on Android and have submitted the app to iOS as of August 15, 2014 for publishing. We executed an agreement with Mobisoko Group in Kenya and Zultec Fleet Management in Saudi Arabia to introduce StudentConnect to their respective countries. Vir2o 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 believe the initial test was highly successful with more than 300,000 users visiting our site in the first 90 days. We are currently implementing commercial content to Vir2o including a free music service named VMaestro, which is under our licensing agreement with Medianet. We are also currently implementing the retail site "Discounted College Books and Fanatic.com. We completed the integration of the Amazon shopping site API to our social media site. We plan to deliver content on mobile and cross platforms that integrates mobile and desktop. We believe Vir2o brings everything from the web to social media including online games, video, movies, shopping, and music and live broadcast. We have reached terms with CES MMA sports and CES Boxing sports to published content and broadcast live event on Vir2o. We have begun to integrate the Content Delivery Network to our platform that would allow us to host media files for delivery of content to end users. 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. The Company maintains a 51% interest in Rogue Paper and considers it to be a discontinued subsidiary. For accounting purposes, the Company has treated its relationship with Rouge Paper as a discontinued operation and has written off all net assets and contingent acquisition liabilities associated with Rogue Paper. Results of Operations For the Three Months Ended June 30, 2014 and 2013 Revenues For the three months ended June 30, 2014, our revenue was $58,300 compared to $18,885 for the same period in 2013, representing an increase of 182%. This increase is attributed to our commencing installations of our StudentConnect products. Revenues are generated from four separate but related offerings, RFID/GPS product sales, license fees, consulting services, and user fees for GATIS - our advanced web based asset management platform. We generated revenues from product sales of $45,858 and $14,909 for the three months ended June 30, 2014 and 2013, respectively. Revenues for license fees were $5,001 and $-0- for the three months ended June 30, 2014 and 2013. Revenues for consulting services were $-0- and $-0- for the three months ended June 30, 2014 and 2013. User fees were $7,441 and $3,976 for the three months ended June 30, 2014 and 2013, respectively. 20 Operating Expenses For the three months ended June 30, 2014, operating expenses were $355,788 compared to $516,292 for the same period in 2013, a decrease of 31%. Cost of revenues increased $27,762 and is directly attributable to the increase in related revenues for the three months ended June 30, 2014. For the three months ended June 30, 2014, selling, general and administrative expenses were $318,072 compared to $506,338 for the same period in 2013, a decrease of 37%. This decrease was primarily caused by decreases in legal fees of $6,842, consulting expense of $39,850 and salary expenses of $102,157. Net Loss We generated net losses from continuing operations of $341,310 for the three months ended June 30, 2014 compared to $633,590 for the same period in 2013, a decrease of 45%. Included in the net loss for the three months ended June 30, 2014 was interest expense of $107,522 (of which $90,784 represents accretion of embedded beneficial conversion features on notes payable) offset by a change in derivative liability of $63,700. 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. Net loss attributable to noncontrolling interests in EarthSearch were $4,245 and $7,228 for the three months ended June 30, 2014 and 2013, respectively. For the Six Months Ended June 30, 2014 and 2013 Revenues For the six months ended June 30, 2014, our revenue was $76,407 compared to $62,219 for the same period in 2013, representing an increase of 23%. This increase is attributed to our commencing installations of our StudentConnect products. Revenues are generated from four separate but related offerings, RFID/GPS product sales, license fees, consulting services, and user fees for GATIS - our advanced web based asset management platform. We generated revenues from product sales of $54,627 and $53,822 for the six months ended June 30, 2014 and 2013, respectively. Revenues for license fees were $6,668 and $-0- for the six months ended June 30, 2014 and 2013. Revenues for consulting services were $-0- and $-0- for the six months ended June 30, 2014 and 2013. User fees were $15,112 and $8,397 for the six months ended June 30, 2014 and 2013, respectively. Operating Expenses For the six months ended June 30, 2014, operating expenses were $777,466 compared to $1,108,742 for the same period in 2013, a decrease of 30%. Cost of revenues increased $4,903 and is directly attributable to the increase in related revenues for the six months ended June 30, 2014. For the six months ended June 30, 2014, selling, general and administrative expenses were $732,731 compared to $1,068,910 for the same period in 2013, a decrease of 31%. This decrease was primarily caused by decreases in legal fees of $118,584, consulting expenses of $39,850 and salary expenses of $188,088. Net Loss We generated net losses from continuing operations of $853,679 for the six months ended June 30, 2014 compared to $1,386,963 for the same period in 2013, a decrease of 38%. Included in the net loss for the six months ended June 30, 2014 was interest expense of $216,320 (of which $188,303 represents accretion of embedded beneficial conversion features on notes payable) offset by a change in derivative liability of $63,700. 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. Net loss attributable to noncontrolling interests in EarthSearch were $8,737 and $13,249 for the six months ended June 30, 2014 and 2013, respectively. For the six months ended June 30, 2014, the Company recognized a gain from discontinued operations of $984,115 on the disposition of the net assets and liabilities associated with Rogue Paper. 21 Liquidity and Capital Resources Overview For the six months ended June 30, 2014 and 2013, we funded our operations through financing activities consisting of private placements of equity securities and loans from related and unrelated parties. Our principal use of funds during the six months ended June 30, 2014 and 2013 has been for working capital and general corporate expenses. Liquidity and Capital Resources during the Six Months ended June 30, 2014 compared to the Six Months ended June 30, 2013 As of June 30, 2014, we had cash of $3,666 and a working capital deficit of $3,853,217. The Company generated a negative cash flow from operations of $405,567 for the six months ended June 30, 2014, as compared to cash used in operations of $468,256 for the six months ended June 30, 2013. The negative cash flow from operating activities for the six months ended June 30, 2014 is primarily attributable to the Company's net income of $139,173, offset by noncash depreciation of $1,391, stock issued for services of $2,096, amortization of prepaid license fees of $25,000, accretion of beneficial conversion features on convertible notes payable of $188,303, accrued interest on loans payable of $28,018, changes in operating assets and liabilities of $267,004, and increased by a gain on disposal of discontinued operations of $984,115, change in derivative liability of $63,700 and noncontrolling interests in the loss of EarthSearch of $8,737. The negative cash flow from operating activities for the six months ended June 30, 2013 is primarily attributable to the Company's net loss 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, accretion of beneficial conversion features on convertible notes payable of $292,948, change in derivative liability of $5,723, accrued interest on loans payable of $38,522, changes in operating assets and liabilities of $462,221, and increased by noncontrolling interests in the loss of EarthSearch of $13,249. No cash was used in investing activities for the six months ended June 30, 2014 and 2013. Cash generated from our financing activities was $408,992 for the six months ended June 30, 2014, compared to $470,000 during the comparable period in 2013. The decrease was primarily attributed to the repurchase of common stock of $-0- in 2014 compared to $20,000 in 2013, the proceeds from the issuance of preferred stock of $95,000 in 2014 compared to $149,000 in 2013, proceeds from the issuance of preferred stock subscriptions of $64,000 in 2014 compared to $67,500 in 2013, proceeds from loans payable of $97,850 in 2014 compared to $217,000 in 2013, and proceeds from loans payable - related parties of $152,142 in 2013 compared to $21,500 in 2013, offset by the repurchase of common stock of $-0- in 2014 compared to $5,000 in 2013. We will require additional financing during the current fiscal year. During the period from July 1, 2014 to August 18, 2014, we received proceeds of $20,000 from the issuance of promissory notes and loans and $25,000 from the sale of preferred stock. 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, 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 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. 22 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 annual consolidated financial statements for the year ended December 31, 2013, included in our Annual Report on Form 10-K as filed on April 15, 2014, for a discussion of our critical accounting policies and estimates. |