East Coast Diversified Corp (fka ECDC)

[Mr B]

10K is out... Form 10-K for EAST COAST DIVERSIFIED CORP

http://sec.gov/cgi-bin/browse-edgar?company=east+coast+div&match=&CIK=&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies&action=getcompany

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15-Apr-2011

Annual Report



Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
You should read the following discussion of our results of operations and financial condition with the audited consolidated financial statements and related notes included elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs, and that involve numerous risks and uncertainties, including, but not limited to, those described in the "Risk Factors" section of this report. Actual results may differ materially from those contained in any forward-looking statements. See "Cautionary Statement Concerning Forward-Looking Statements."

East Coast Diversified Corporation, the "Company", was incorporated under the laws of the State of Florida on May 27, 1994 under the name Plantastic Corp. to engage in the business of purchasing and operating a tree farm and nursery. The Company was unsuccessful in this venture and in March 1997, the Company amended its articles of incorporation, reorganized its capital structure and changed its name to Viva Golf, USA Corp. The Company then acquired the assets of Viva Golf, USA Corp., a Delaware corporation, which consisted of a golf equipment marketing plan and other related assets. The Company unsuccessfully engaged in the business of golf club manufacturing and marketing and ceased those operations in 1998.



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The Company acquired 100% of the issued and outstanding shares of common stock of Lifekeepers International, Inc. in exchange for 1,000,000 of its newly issued shares under an Agreement and Plan of Reorganization on October 22, 1998. In connection with this acquisition, the Company changed its name to Lifekeepers International, Inc. On May 29, 2003, the Company changed its name to East Coast Diversified Corporation and changed its domicile to Nevada. During the year 2001, the Company discontinued its operations, and remained inoperative until April 26, 2006.

On April 26, 2006, the Registrant entered into a definitive Share Exchange Agreement (the "Agreement") to acquire 100% of the issued and outstanding shares of Miami Renaissance Group, Inc. ("MRG"), a privately-owned Florida corporation, in exchange for the issuance of 4,635,000 restricted shares of the Registrant's common stock and 167,650 preferred stock designated as Series A Convertible Preferred Stock ("Preferred Stock"). The Registrant's officers and directors, who did not own any shares of common stock of the Registrant prior to this Agreement, were also the majority shareholders of MRG. The Agreement was adopted by the unanimous consent of the Board of Directors of the Registrant and written consent of the majority shareholders of the Registrant; and by unanimous consent of the Board of Directors of MRG and by written consent of the majority shareholders of MRG.

Pursuant to the Agreement, the Registrant issued a total of 4,635,000 shares of common stock and 158,650 shares of Preferred stock to the shareholders of the MRG in exchange for the 20,500,000 issued and outstanding shares of MRG. Following the closing of the Agreement, the shareholders of MRG shall own 63.75% of the issued and outstanding shares of common stock of the Registrant.

The Company entered into a Stock Sale Agreement, dated as of February 20, 2008 ("Stock Sale Agreement"), pursuant to which ECDC agreed to sell and MRG Acquisition Corp. ("MRGA is a Delaware corporation and was formed for the purpose of acquiring MRG") agreed to acquire 100% of the capital stock of MRG ("MRG Shares") , representing substantially all of the assets of ECDC, in consideration for the forgiveness of liabilities in the amount of $1,051,471 owed by ECDC to certain affiliated persons.

On April 6, 2009 the Company's Board of Directors unanimously adopted and the consenting stockholders approved a resolution to effect a one-for-hundred (1:100) reverse stock split (the "Reverse Split") of the Common Stock of the Company pursuant to clearance and final approval by FINRA. The resulting share ownership interest including resulting fractional shares for each individual shareholder shall be rounded up to the third whole integer in such a manner that every shareholder shall own at least 100 shares as a result of the Reverse Split.

On June 29, 2009 the Company was notified by NASDAQ that has it had received the necessary documentation to process the Reverse Split (1 for 100) and issue a new symbol ("ECDC") and that this action would take effect at the open of business on June 30, 2009.

On December 18, 2009, the Company's principal stockholders, Frank Rovito, Aaron Goldstein and Green Energy Partners, LLC ( the "Sellers") entered into a Securities Purchase Agreement (the "Purchase Agreement") with Kayode Aladesuyi (the "Buyer") pursuant to which the Sellers, owners of record and beneficially of an aggregate of 6,997,150 shares of common stock, par value $0.001 per share of ECDC (the "Sellers' Shares"), agreed to sell and transfer the Sellers' Shares to the Buyer for total consideration of Three Hundred Thousand ($300,000) Dollars. The Purchase Agreement also provided that the Company would enter into a share exchange agreement with EarthSearch Communications International, Inc. ("EarthSearch").

On January 15, 2010, ECDC and EarthSearch executed a Share Exchange Agreement (the "Share Exchange Agreement") pursuant to which the Company agreed to issue 35,000,000 restricted shares to the shareholders of EarthSearch. On April 2, 2010 EarthSearch consummated all obligations under the Purchase Agreement and the Share Exchange Agreement. In accordance with the terms and provisions of the Purchase Agreement, the Company acquired 93.49% of the issued and outstanding common stock of EarthSearch. As a result of the execution and closing of the Purchase Agreement and Share Exchange Agreement, our principal business became the business of EarthSearch. The board of directors of ECDC passed a resolution electing the board and management of the Company and effectively resigned from the board of ECDC.

The Stock Exchange is being accounted for as an acquisition and recapitalization. EarthSearch is the acquirer for accounting purposes and, consequently, the assets and liabilities and the historical operations that are reflected in the consolidated financial statements herein are those of EarthSearch. The accumulated deficit of EarthSearch was also carried forward after the acquisition.

On December 31, 2010, the Company acquired 1,800,000 additional shares of EarthSearch from a non-controlling shareholder in exchange for 439,024 of the Company's common stock. The Company owns 94.66% of the issued and outstanding stock of EarthSearch at December 31, 2010.

EarthSearch Communications International, Inc. was founded in November 2003 as a Georgia corporation. The Company subsequently re-incorporated in Delaware on July 8, 2005.

Overview

East Coast Diversified Corporation, through its majority owned Subsidiary, EarthSearch Communications International, Inc. ("EarthSearch") offers a portfolio of GPS devices, RFID interrogators, integrated GPS/RFID technologies and Tag designs. 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. EarthSearch is an international provider of Global Positioning Systems (GPS) and telemetric devices, applications and solutions for both consumer and commercial markets. EarthSearch developed and created devices which feature the world's first wireless communication between RFID and GPS technologies. These devices provide real-time visibility of assets and goods in transit as well providing specialized security applications for sea ports, shipyards, and power and energy plants.



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The following Management Discussion and Analysis should be read in conjunction with the consolidated financial statements and accompanying notes included in this Form 10-K.

Results of Operations

Year ended December 31, 2010 compared to the Year ended December 31, 2009

Revenue

For the year ended December 31, 2010, our revenue was $129,248, compared to $147,193 for the same period in 2009, representing a decrease of 12.2%. This decrease in revenue was primarily attributable to the effects of the economy, the deficiency in working capital to provide for marketing the Company's products, and the Company's decision to change its business focus and product portfolio from simply marketing GPS devices to developing full-fledged supply chain solutions which include RFID technologies, other supply chain and warehouse solutions, as well as the expansion of marketing activities to develop a global distribution network for its new product portfolios. Management believes these changes, while resulting in significant short term increases in invested resources and cost of operations, will result in greater stability and long term growth for the Company.

Gross Profit

For the year ended December 31, 2010, our gross profit was $47,675, compared to $87,871 for the same period in 2009, representing a decrease of 45.7%. This decrease in our gross profit resulted primarily from increases in our cost of revenue related to various pilot projects started in the 4th quarter of 2010 and the decrease in revenue of $17,945.

Selling, General and Administrative Expenses

For the year ended December 31, 2010, selling, general and administrative expenses were $2,404,804 compared to $1,498,889 for the same period in 2009, an increase of 60.4%. This increase was primarily caused by accounting fees increased from $0 to $89,278, compensation for board members increased from $110,000 to $170,000, professional fees related to public company compliance and investor relations increased from $0 to $182,285, sales and marketing expenses increased from $22,311 to $107,630, and salary expenses increased from $775,290 to $1,408,008.

Net Loss

We generated net losses of $2,496,892 for the year ended December 31, 2010 compared to $1,473,225 for the same period in 2009, an increase of 69.5%. Included in the net loss for the year ended December 31, 2010 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.

Liquidity and Capital Resources

As of December 31, 2010, the Company had cash of $1,278 and a deficit in working capital of $3,863,250 compared to cash of $766 and working capital deficit of $3,025,646 at December 31, 2009. We have historically met our cash needs through a combination of cash flows from operating activities and proceeds from private placements of our securities. Our cash requirements are generally for selling, general and administrative activities and the purchase of inventories.

We do not believe that our cash balance as of December 31, 2010 and expected cash flows from operations will be sufficient to finance our cash requirements for expected operational activities, capital improvements, and partial repayment of debt through the next six months. Accordingly, we will need to rely on additional loans and private placements of our securities.

There is substantial doubt about our ability to continue as a going concern as the continuation of our business is dependent upon the continued financial support from our shareholders, our ability to obtain necessary equity financing to continue operations, and achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.



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Cash flow information for the years ended December 31, 2010 and 2009 are summarized as follows:


Year Ended December 31,
2010 2009
Cash used in operating activities $ (1,060,618 ) $ (784,005 )
Cash from (used in) investing activities 68,246 (158,434 )
Cash from financing activities 992,884 943,177
Net changes to cash $ 512 $ 738




Our operating activities generated a deficit cash flow of approximately $1,060,618 for the year ended December 31, 2010, compared to $784,005 during 2009. The principal elements of cash flow from operations for the year ended December 31, 2010 included a net loss 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, and decreased investment in operating working capital elements of $585,124.

Cash provided by our investing activities was $68,246 for the year ended December 31, 2010, compared to $158,434 used in investing activities for the same period in 2009. This increase of $226,680 was primarily due the receipt of funds for reimbursement of escrow deposits of $220,000.

Cash generated from our financing activities was $992,884 for the year ended December 31, 2010, compared to $943,177 during the comparable period in 2009. This increase was primarily attributed to the proceeds from the issuance of common stock, an increase from $524,977 to $656,125, proceeds from loans payable to related parties, a decrease from $435,197 to $264,823, proceeds from loans payable to unrelated parties, an increase from $125,000 to $376,931, offset by the repayments of loans payable to related parties, an increase from $141,997 to $281,995.

Going Concern

Our independent auditors included an explanatory paragraph in their report on the accompanying consolidated financial statements 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 disclosure by our independent auditors.

Our consolidated financial statements have been prepared on a going concern basis, which assumes the realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and / or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. The outcome of these matters cannot be predicted with any certainty at this time and raise substantial doubt that we will be able to continue as a going concern. Our 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

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in the accompanying consolidated financial statements include the amortization period for intangible assets, impairment valuation of intangible assets, depreciable lives of the website and property and equipment, valuation of share-based payments and the valuation allowance on deferred tax assets. Actual results could differ from those estimates and would impact future results of operations and cash flows.

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.



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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.

Research and Development Costs

The Company accounts for research and development costs in accordance with ASC
730 "Research and Development". ASC 730 requires that research and development costs be charged to expense when incurred.

Prior to the adoption of ASC 730, costs incurred internally in researching and developing computer software products were charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached after all high-risk development issues have been resolved through coding and testing Generally, this occurs shortly before products which will utilize the software are released to manufacturing which occurred in January 2007. The amortization of these costs is included in general and administrative expense over the estimated life of the software, which is estimated to be 3 years.

Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 states that a fair value measurement should be determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the types of valuation information ("inputs") are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The three broad levels defined by FASB ASC 820 hierarchy are as follows:

Level 1 - quoted prices for identical assets or liabilities in active markets. Level 2 - pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. Level 3 - valuations derived from methods in which one or more significant inputs or significant value drivers are unobservable in the markets.

These financial instruments are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment to estimation. Valuations based on unobservable inputs are highly subjective and require significant judgments. Changes in such judgments could have a material impact on fair value estimates. In addition, since estimates are as of a specific point in time, they are susceptible to material near-term changes. Changes in economic conditions may also dramatically affect the estimated fair values.

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2010. The respective carrying value of certain financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include accounts receivable, inventory, accounts payable and accrued expenses and accrued compensation. The fair value of the Company's loans payable is estimated based on current rates that would be available for debt of similar terms which is not significantly different from its stated value.

Revenue Recognition

The Company recognized revenue on arrangements in accordance with FASB Codification Topic 605, "Revenue Recognition" ("ASC Topic 605"). Under ASC Topic 605, revenue is recognized only when the price is fixed and determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. Revenue is recognized when products are received and accepted by the customer.



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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, 2010.

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.