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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.
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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.
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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.
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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
$4,391in 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. 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-five 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.
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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.
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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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