Item 1.Business
Background
Overview
East Coast Diversified Corporation (the "Company", “East Coast”, “ECDC”, “we”, “us” or “our”), 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 features 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.
EarthSearch GPS devices offer trucking fleet owners a suite of security, safety and convenience features for both consumer and commercial fleets. EarthSearch offerings such as AutoSearchGPS™, AutoSearchRFID and HALO are vehicle and supply chain management solutions. The products are designed to be easily installed into any type of vehicle, including automobiles, construction equipment, trucks, buses and other mobile machinery. Customers can use these proprietary devices to address their specific needs, such as substantially reducing the risk of assets being lost, stolen or misrouted; managing a commercial vehicle or a fleet; and precisely track the location of their goods, inventory, and/or vehicles in real-time.
Additionally, EarthSearch has developed Student Connect - the first school transportation solution and class attendance monitoring system utilizing integrated GPS/RFID technology. This unique solution is designed to provide real-time visibility and security of students traveling on scheduled school bus routes as well as provide parents with real time notification when students miss classes. This technology monitors the real-time status of students as they enter and exit school buses and class rooms. SchoolConnect can provide real-time alerts to parents and schools when a student gets on the bus or off the bus. Alerts are sent should a student exit at the wrong bus stop, or should a student fail to get on or off the bus at a scheduled location. The SchoolConnect system provides real-time notification to parents with hand-held devices, such as smart phones as well as communication between parents and teachers.
On October 23, 2011, the Company acquired Rogue Paper, Inc., a California corporation (“Rogue Paper”). Rogue Paper was founded in February 2010 and has developed a proprietary Audience Engagement Platform for media companies to interact with their television audiences via a secondary device, such as a tablet, PC or smart phone. The technology is the integration of a social media platform with entertainment technology. Rogue Paper licenses and provides private label brands to its media clients. Rogue Paper continues to improve and expand the application of its technology, including the collection of audience data behavior patterns and content interest that will become part of its service offering to media clients and other companies looking to increase interactivity and engagement around their content via a second screen or mobile device.
We have elected to suspend continued involvement in Rogue Paper so we may focus on our 3 core operations, though we continue to retain a 51% interest in the company. As of November 12, 2012 the company elected to terminate its participation in the Rogue Paper operation. In the first quarter of 2012 the Company invested $90,000 in the Rogue Paper operation and did not receive any value or stock for the investment. Management withdrew all further funding for Rogue Paper effective April 2012.
WetWinds was created on July 3, 2012, as a Georgia corporation. WetWinds is a wholly owned subsidiary of the Company focused on social media technology that provides interactive social media experiences for users across the globe through its primary product, a social media platform called Vir2o. Vir2o it gives users the opportunity to congregate and engage in interactive activities including shopping, watching movies, playing music and other entertainment activities.
Company History
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.
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 October 23, 2011, (the “Effective Date”) the Company entered into a Share Exchange Agreement (the “Rogue Paper Share Exchange Agreement”)with Rogue Paper, Inc., a California corporation (“Rogue Paper”) and certain shareholders of Rogue Paper (the “Rogue Paper Shareholders”).
Pursuant to the Rogue Paper Share Exchange, the Company acquired fifty-one percent (51%) of the issued and outstanding shares of common stock of Rogue Paper (the “Rogue Paper Shares”) in exchange for two million five hundred thousand (2,500,000) shares of the Company’s Series A Convertible preferred stock, par value $0.001 per share (the “Preferred Shares”). No sooner than twelve months from the Effective Date, the Preferred Shares shall be convertible, at the option of the holder of such shares, into an aggregate of fifty million shares (50,000,000) of the Company’s common stock, par value $0.001 per share.
Beginning six months from the Effective Date, both the Company and holders of the Preferred Shares have the option to redeem any portion of such holders for Preferred Shares, for cash, at a price of sixty cents ($0.60) per share. Commencing twenty-four (24) months from the Effective Date, the holders of the remaining, unsold shares of Rogue Paper common stock may require the Company to redeem such shares, for cash, at a price of three cents ($0.03) per share. In 2012, the Company invested $90,000 in Rogue Paper, and on November 12, 2012 the Company discontinued working with Rogue Paper to focus on its core businesses. The Company considers Rouge Paper to be a disputed subsidiary. For accounting purposes, the Company has treated its relationship with Rouge as a discontinued operation.
On July 4th 2012, the Company created WetWinds, a Georgia corporation as a wholly owned subsidiary of the Company focused on social media technology that provides interactive social media experiences for users across the globe through its primary product, a social media platform called Vir2o.WetWinds is currently developing a virtual desktop-to-mobile technology in an attempt to try and change the way users socialize and interact on the web in real-time. WetWinds launched the beta site for Vir2o on April 5, 2013.
EarthSearch Transactions
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 KayodeAladesuyi (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 was accounted for as an acquisition and recapitalization. EarthSearch was the acquirer for accounting purposes and, consequently, the assets and liabilities and the historical operations that were reflected in the consolidated financial statements were those of EarthSearch. The accumulated deficit of EarthSearch was also carried forward after the acquisition.
EarthSearch Communications International, Inc. was founded in November 2003 as a Georgia corporation. The Company subsequently re-incorporated in Delaware on July 8, 2005.
The operations of its former wholly-owned subsidiary, EarthSearch Localizacao de Veiculos, Ltda in Brazil, were discontinued during 2007.
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, based in Atlanta, Georgia, has created an 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.
Our internal research showed 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 significant rate and a combination of both technologies seemed 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 other applications such as oil pipeline monitoring.
As part of our growth strategy, we launched an aggressive sales network development program in the summer of 2010. We now 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.
Products and Services
EarthSearch
LogiBoxx is the world’s first vehicle tracking device with an embedded RF Module. LogiBoxx provides the ability to perform the dual functions of an RFID solution by communicating directly with RF Tags while also creating a wireless gateway between mobile RFID solution and a backend server to function as a fleet management solution.
GATIS (Global Asset Tracking and Identification System) is a very advanced web based asset management platform. It incorporates several applications and vertical market that integrates GPS and RFID data into their operation and business GATIS is the only web-based application that allows for the management of integrated
GPS/RFID at hardware level. It is a necessary application for the management of assets in transit. EarthSearch’s LogiBoxx solution, when used with our GATIS application, utilizes integrated RFID and GPS data, delivered in real time, under the most complex data analysis and business logic process, to achieve decisions needed by governments and businesses to accomplish critical organization objectives.
Bridging the communication between GPS/RFID and integrating with sensor technology creates solutions that challenge the imagination. We are the creator of the world’s first wireless communication between GPS and RFID interrogators and we solve complex business security, logistics and operational issues.
We engage our customers from strategic planning to implementation to make the customer’s desired solution a reality. EarthSearch provides professional services in key areas to ensure successful delivery of the desired solution to the customer. We begin with a clearly defined project objective, creating easy to understand scope of work and project design that clearly explains how we will accomplish our customer’s desired solution.
Our solutions include RFID implementation for various industries and vertical markets utilizing global standards such as EPC Gen 2 standards, 2.4ghz active RFID platforms with proprietary protocols. We utilize passive and semi-passive, as well as active, tags to create integrated solutions for our clients that will meet the desired objectives. Our expertise in the integration of GPS with RFID allows us to create hybrid solutions that can result in solutions once considered impossible, such as implementation of Active/Passive RFID applications in the same solution.
Whatever the industry, EarthSearch uses its proprietary wireless communication between GPS and RFID, integrated with sensor technology, to deliver the most advanced Auto ID solutions in the market. Our proprietary GATIS software uses integrated RFID/GPS data with intelligent business logic to deliver solutions and information for business decisions.
Student Connect
Additionally, EarthSearch has developed Student Connect - a school bus security solution with integrated GPS/RFID technology. StudentConnect offers school transportation monitoring technology which includes both software and hardware. The company utilizes its proprietary wireless communication between GPS and RFID to deliver real time notification to Parents and School transportation administrators regarding students getting on and off school buses in real time.
We install GPS and RFID interrogators on a school bus and provide RFID tags that are attached to the student’s school bags. The RFID is able to monitor and identify students getting on or off at right location and provide instant notification to both parents and schools. Parents are sent standard text messages to their phones notifying them of the student’s safe pick up and drop off.
All of our revenue related to this business shall be advertisement driven. Messages sent to school and parent are sponsored or paid for by an advertiser. All equipment and services are provided to the schools at no cost. A potential advertiser shall pay between $.07 and $0.10 per text message. The average student shall generate 4 messages per day.
We have developed a proprietary advertisement module “SCAAP” - StudentConnect Advertisement Aggregation Platform designed to automate the matching of advertisements with messages generated by the system installed on the school buses. SCAAP also provides Ad budget management tools to advertisers.
Intellectual Properties
Patents and Other Proprietary Properties
The Company has filed patent application with the USPTO for intellectual property rights related to Vir2o, a social media platform created by WetWinds. The Provisional patent application number for this filing with the USPTO is 1477372
Trademarks
The Company plans to register multiple trademarks with the USPTO. They are LogiBoxx, GATIS, TrailerSeal, RFSeal, MobileMANAGER, and has filed registration for Vir2o as well. At this time, the trademark applications are pending through the comment process with the USPTO.
Copyrights
Although the Company does not hold registered copyrights, the Company does claim copyright protection on all text and graphics, software used in conjunction with our published digital media (web site) and published printed promotional materials as stated generally in Title 17 of the United States Code, Circular 92, Chapter 1, Section 102.
Competition
We do not believe we have any substantial competitors to our wireless communication between GPS/RFID, though there maybe competitors of which we are currently unaware. We strive to deliver solutions to complex business issues that cannot be addressed by current technologies in the market.
There are numerous companies globally offering GPS and RFID products. There are also a number of other companies offering RTLS (Real-time Location Services) using software to communicate information to a back-end server for analysis of information collected from GPS/RFID hardware. The information provided by competing services is considered “almost accurate.” Our products and solutions provide real time information for event management with business intelligence decisions made by the hardware in the field.
For our standard GPS or RFID solution, some of our competitors are much larger with better resources than us. Our objective is to focus on those areas where we have the greatest competitive advantage in the market. Most of our smaller competitors globally are becoming resellers for our product. More than 70% of our current partners and distributors are former competitors to our GPS offering and now offer our integrated GPS/RFID solution to their customers.
Rogue Paper, Inc.
On November 12, 2012 the Company discontinued working with Rogue Paper to focus on its other core businesses. The Company maintains a 51% interest in Rogue Paper and considers it to be a disputed subsidiary. For accounting purposes, the Company has treated its relationship with Rouge as a discontinued operation. Below is a description of Rouge Paper and its products and services:
Based in San Francisco, California and New York City, Rogue Paper is one of the first social TV platforms in market, creating category-leading and award winning social TV experiences such as MTV WatchWith and VH1 Co-Star. For those services Rogue Paper provided an end-to-end development experience from product concept, visual and interaction design, to application development for tablets and smartphones, as well as the social TV platform that powers the application experience.
In mid-2011, Rogue Paper’s founders and board made a decision to move from providing highly customized front-end solutions to providing the total solution out-of-the-box for media companies, and a core platform for developing in order to expand and reach more media companies and users. This shift in strategy required creating two divisions, a professional services division for the front-end development and custom engagements for media clients and a platform R&D unit. The Platform R&D unit is focused on creating a core platform for new clients and providing access to our core functionality to third-party developers who are interested in adding social TV interactions to their existing applications. These two divisions will allow Rogue Paper to reach the greatest number of users across the most media properties. Aggregating users and understanding how users interact with television provides for compelling business, new revenue opportunities, and allows Rogue Paper to continue to innovate in the social TV market.
This shift in strategy required creating two divisions, a professional services division for the front-end development and custom engagements for media clients and a platform R&D unit. The Platform R&D unit is focused on creating a core platform for new clients and providing access to our core functionality to third-party developers who are interested in adding social TV interactions to their existing applications. These two divisions will allow Rogue Paper to reach the greatest number of users across the most media properties. Aggregating users and understanding how users interact with television provides for compelling business, new revenue opportunities, and allows Rogue Paper to continue to innovate in the social TV market.
Products and Services
TV Tune-In is one of the world’s first social TV platforms that allows media companies to develop branded iPhone, iPad and Android applications for television shows and channels. TV Tune-In is Rogue Paper’s proprietary platform, designed to provide a feature-rich Audience Engagement Platform to media and entertainment companies. Whether a viewer engages with a second screen via smartphone, tablet or desktop, TV Tune-In is the ideal white-label solution. It allows broadcasters to quickly onboard television properties and content producers to engage viewers through timed content, curated social commentary and other customized interactions.
These applications aim to attract fans to interact around live viewing of their favorite show, event, or sports team. Users can actively comment, message on Twitter or Facebook and Like their favorite show, chat with friends, play trivia, watch exclusive video content, photos and more. As users interact with the application, they can earn rewards such as virtual badges. TV Tune-In also has the ability to time-shift interactions and commentary in case you aren't watching a show live.
Rogue Paper’s TV Tune-In solution aggregates social commentary from social networks and delivers real-time, individually-curated message stream utilizing services like Facebook and Twitter.
Rogue Paper engages its customers from strategic planning to implementation to make the customer's desired interactive solution a reality. Rogue Paper’s professional services team engages in an iterative, user-centered design process to design world-class user experiences.
Competition
There are numerous direct-to-consumer platforms providing experiences that compete with TV broadcasters for viewer mindshare. Several other companies, such as Into Now and Miso, can be considered direct competitors to Rogue Paper and have more access to capital.
WetWinds
Wetwinds launched Vir2o on April 5, and has commenced marketing of the platform to users. The Viro2o offers users a community newsfeed, messaging module, profile wall and private rooms to share content with friends and families. Each user will have their own private photo, music, movie, game and ecommerce rooms. Users can privately or publicly share content in these rooms with their friends and family.
Viro2o also features the interactive “NVite” technology that allows user and friends to engage in social activities online.
All of our revenue from Vir2o is expected to be advertisement driven. We offer multiple unique advertisement strategies on Vir2o:
Impression Ads - Are similar to advertisements generally referred to as a banner Ad, however based on the design of Vir2o, we have modified the way this advertisement works and allow advertisers to spend extended time on users pages and afford them the ability to embed their advertisement into a users page for periods between 5 and 10 minutes at a time.
Banner Ad - We offer regular banner Ads to advertisers in the ecommerce section of the site.
Timeline Campaigns - Advertisers will be able to run campaigns on the site and within the users newsfeed based on the users product preferences and areas of interest.
Ecommerce - We will offer a platform for retailers to sell products to social media users on the site through our marketplace in exchange for a commission on each sale. We have executed an agreement with Amazon to offer products to users on the platform for purchases on Amazon.
Employees
As of December 31, 2013, we had 12 full-time employees and 8 full-time consultants.
Available Information
All reports of the Company filed with the SEC are available free of charge through the SEC’s Web site at www.sec.gov. In addition, the public may read and copy materials filed by the Company at the SEC’s Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. The public may also obtain additional information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.
Item 1A.
Item 1A. Risk Factors
You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations.
THERE IS SUBSTANTIAL DOUBT ABOUT THE COMPANY’S ABILITY TO CONTINUE AS A GOING CONCERN.
Our auditor’s report in our 2013 consolidated financial statements expresses an opinion that substantial doubt exists as to whether we can continue as an ongoing concern. Because obtaining investment capital in not certain, or that our officers and directors may be unable or unwilling to loan or advance any additional capital to the Company, we may not have the funds necessary to continue our operations. Currently, our liabilities are greater than our assets. Our ability to meet our operating needs depends in large part on our ability to secure third party financing. We cannot provide any assurances that we will be able to obtain financing. See “December 31, 2013 Audited Consolidated Financial Statements.”
WE HAVE SUSTAINED RECURRING LOSSES SINCE INCEPTION AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE FORESEEABLE FUTURE.
Our main operating subsidiary was formed in November 2003 and has reported annual net losses since inception. For our fiscal years ended December 31, 2013 and 2012, we experienced losses of $5,749,513 and $2,280,676, respectively. As of December 31, 2013 we had an accumulated deficit of $18,812,108. In addition, we expect to incur additional losses in the foreseeable future, and there can be no assurance that we will ever achieve profitability. Our future viability, profitability and growth depend upon our ability to successfully operate, expand our operations and obtain additional capital. There can be no assurance that any of our efforts will prove successful or that we will not continue to incur operating losses in the future.
WE DO NOT HAVE SUBSTANTIAL CASH RESOURCES AND IF WE CANNOT RAISE ADDITIONAL FUNDS OR GENERATE MORE REVENUES, WE WILL NOT BE ABLE TO PAY OUR VENDORS AND WILL PROBABLY NOT BE ABLE TO CONTINUE AS A GOING CONCERN.
As of December 31, 2013 our available cash balance was $0. We will need to raise additional funds to pay outstanding vendor invoices and execute our business plan. We estimate that it will require an additional $3,500,000 to pay our outstanding vendor invoices and execute our business plan. Our future cash flows depend on our ability to enter into, and be paid under, contracts with merchants to provide our products to their customers. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to us.
We may be required to pursue sources of additional capital through various means, including joint venture projects and debt or equity financings. Future financings through equity investments will be dilutive to existing stockholders. Also, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other convertible securities, which will have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition and results of operations.
Our ability to obtain needed financing may be impaired by such factors as the weakness of capital markets and the fact that we have not been profitable, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
THE LIMITED HISTORY OF OUR BUSINESS MAKES IT DIFFICULT TO EVALUATE AN INVESTMENT IN OUR COMPANY.
Due to the early stage of our development, limited financial and other historical data is available for investors to evaluate whether we will be able to fulfill our business strategy and plans, including whether we will be able to achieve sales growth or meet our sales objectives. Further, financial and other limitations may force us to modify, alter, or significantly delay the implementation of such plans. Our anticipated investments include, but are not limited to, information systems, sales and marketing, research and development, distribution and fulfillment, customer support and administrative infrastructure. We may incur substantial losses in the future, making it extremely difficult to implement our business plans and strategies and sustain our then current level of operations. Furthermore, no assurances can be given that our strategy will result in an improvement in operating results or that our operations will become profitable.
OUR BUSINESS MODEL IS UNPROVEN AND MAY ULTIMATELY PROVE TO BE COMMERCIALLY UNVIABLE.
Because of our limited history of operations, we are unable to predict whether our business model will prove to be viable, whether the actual demand we anticipate for our products and services will materialize, whether demand for our products and services will materialize at the prices we expect to charge, or whether current or future revenue streams and/or pricing levels will be sustainable. There can be no assurances we will be able to achieve or sustain such revenue streams and/or pricing levels, the results of which could have a material, adverse effect on our business, financial condition and results of operations. Our ability to generate future revenues will depend on a number of factors, many of which are beyond our control, including, among other things, the risks described herein. Our likelihood of success must be considered in light of the problems, expenses, complications, delays, and disruptions typically encountered in forming a new management team, hiring and training new employees, expanding into new markets, application of GPS, telematics and wireless technology still in its infancy and the competitive environment in which we intend to operate.
Our ability to obtain needed financing may be impaired by such factors as the weakness of capital markets and the fact that we have not been profitable, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
THE LIMITED HISTORY OF OUR BUSINESS MAKES IT DIFFICULT TO EVALUATE AN INVESTMENT IN OUR COMPANY.
Due to the early stage of our development, limited financial and other historical data is available for investors to evaluate whether we will be able to fulfill our business strategy and plans, including whether we will be able to achieve sales growth or meet our sales objectives. Further, financial and other limitations may force us to modify, alter, or significantly delay the implementation of such plans. Our anticipated investments include, but are not limited to, information systems, sales and marketing, research and development, distribution and fulfillment, customer support and administrative infrastructure. We may incur substantial losses in the future, making it extremely difficult to implement our business plans and strategies and sustain our then current level of operations. Furthermore, no assurances can be given that our strategy will result in an improvement in operating results or that our operations will become profitable.
OUR BUSINESS MODEL IS UNPROVEN AND MAY ULTIMATELY PROVE TO BE COMMERCIALLY UNVIABLE.
Because of our limited history of operations, we are unable to predict whether our business model will prove to be viable, whether the actual demand we anticipate for our products and services will materialize, whether demand for our products and services will materialize at the prices we expect to charge, or whether current or future revenue streams and/or pricing levels will be sustainable. There can be no assurances we will be able to achieve or sustain such revenue streams and/or pricing levels, the results of which could have a material, adverse effect on our business, financial condition and results of operations. Our ability to generate future revenues will depend on a number of factors, many of which are beyond our control, including, among other things, the risks described herein. Our likelihood of success must be considered in light of the problems, expenses, complications, delays, and disruptions typically encountered in forming a new management team, hiring and training new employees, expanding into new markets, application of GPS, telematics and wireless technology still in its infancy and the competitive environment in which we intend to operate.
WE DISCONTINUED OUR PARTICIPATION IN THE OPERATION OF ROUGE PAPER.
We discontinued our participation in the operation of Rogue Paper as of November 12, 2012 to focus our resources on the operation of businesses developed internally. As of February 1, 2013, after review of the status of the Rogue Paper operation and technology and upon notification of the CEO’s intention to resign our review of the Rogue Paper operation and technology, management concluded, taking control of the operation will result in disruption to our business and significant losses to the Company. Management concluded it the best interest of the Company and its shareholders to severe all interests in the Rogue Paper operation and recognize losses for ownership interest and the investment in Rogue Paper. We have not included the Rogue Paper financial statement in our reports due to lack of financial reporting from Rogue Paper management. We invested funds in Rouge Paper and we may never see a return of these funds.
WE RECENTLY LAUNCHED STUDENTCONNECT WHICH MONITORS STUDENTS DURING TRANSPORTATION TO AND FROM SCHOOL
StudentConnect launched its school transportation technology division in April 2013 using ECDC proprietary wireless communication between GPS and RFID to monitor students getting on or off the School bus. The system provides instant notification to schools and parents about students riding on the school buses, anomalies such as students getting off the bus at the wrong location is instantly detected. Several of the States which are trying StudentConnect may withdraw from using the product which could hurt our ability to successfully test the product. If the StudentConnect technology fails to function properly while in operation it could have a material adverse effect on our business operations. Expanding the use of StudentConnect may lower the working capital we have available for our business.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH THE ONGOING FINANCIAL CRISIS AND WEAKENING GLOBAL ECONOMY, WHICH INCREASE THE UNCERTAINTY OF CONSUMERS PURCHASING PRODUCTS AND/OR SERVICES.
The effects of the global financial crisis and resulting economic downturn include, among other things, significant reductions in available capital and liquidity from banks and other providers of credit, substantial reductions and/or fluctuations in equity and currency values worldwide, and concerns that the worldwide economy has entered into or may enter into a further prolonged recessionary period.
This financial crisis has adversely affected and may continue to materially adversely affect our customers’ access to capital and/or willingness to spend capital on our products, and/or their levels of cash liquidity and/or their ability and/or willingness to pay for products that they will order or have already ordered from us, or result in their ceasing operations. Further, we have experienced an increasing number of our customers, principally in emerging markets, requesting longer payment terms, lease or vendor financing arrangements, longer terms for the letters of credit securing purchases of our products, which could potentially negatively impact our orders, revenue conversion cycle, and cash flows.
In seeking to reduce their expenses, we have also seen significant pressure from our customers to lower prices for our products as they try to improve their operating performance within their reduced budget levels. To the extent that we lower prices on our products and services, our orders, revenues, and gross margins may be negatively impacted. Additionally, certain emerging markets are particularly sensitive to pricing as a key differentiator. Where price is a primary decision driver, we may not be able to affectively compete or we may chose not to compete due to unacceptable margins.
The potential effects of these economic factors are difficult to forecast and mitigate. As a consequence, our operating results for a particular period are difficult to predict, and, therefore, prior results are not necessarily indicative of results to be expected in future periods. Any of the foregoing effects could have a material adverse effect on our business, results of operations, and financial condition and could adversely affect our stock price.
IF WE ARE NOT SUCCESSFUL IN THE CONTINUED DEVELOPMENT, INTRODUCTION, OR TIMELY MANUFACTURE OF NEW PRODUCTS, DEMAND FOR OUR PRODUCTS AND SERVICES COULD DECREASE SUBSTANTIALLY.
We expect that a significant portion of our future revenue will be derived from sales of newly introduced products and services. The market for our products and services is characterized by rapidly changing technology, evolving industry standards, and changes in customer needs. Specifically, the GPS, telematics, and wireless industries are experiencing significant technological change and advancement, and the industry in which we operate may coalesce in support of one or more particular advanced technologies that our company does not possess. If we fail to modify or improve our products and services in response to changes in technology, industry standards or customer needs, our products and services could rapidly become less competitive or obsolete. We must continue to make significant investments in research and development in order to continue to develop new products, enhance existing products and achieve market acceptance for such products. However, there can be no assurance that development stage products will be successfully completed or, if developed, will achieve significant customer acceptance.
If we are unable to successfully develop and introduce competitive new products and services, and enhance our existing products and services, our future results of operations would be adversely affected. Our pursuit of necessary technology may require substantial time and expense, and we may need to license new technologies to respond to technological change. These licenses may not be available, desirable or contain acceptable terms. Development and manufacturing schedules for technology products are difficult to predict, and there can be no assurance that we will achieve timely initial customer shipments of new products. The timely availability of these products in volume and their acceptance by customers are important to our future success. We may experience delays in shipping certain of our products and, whether due to manufacturing delays, lack of market acceptance, delays in regulatory approval, or otherwise, they could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business (Earth Search, School Connect and WetWinds)
COMPETITION MAY INCREASE IN THE GPS DEVICE MARKET.
We may in the future compete for potential customers with companies not yet offering GPS devices. Competition in the GPS related industry may increase in the future, partly due to the potentially rebounding economic situation in the United States and internationally. Increased competition could result in price reductions, reduced margins or loss of market share and greater competition for major merchants.
OUR SIGNIFICANT INTERNATIONAL SALES MAKE US SUSCEPTIBLE TO A VARIETY OF CURRENCY, GOVERNMENTAL AND BUSINESS CUSTOM RISKS.
Sales to customers outside the United States in Kenya, Nigeria and Tanzania represented 79% of our revenue for the twelve months ended December 31, 2012. We expect that our international business will continue to account for a significant portion of our future revenue. An increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and therefore less competitive in foreign markets. Additional risks inherent in our international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, longer accounts receivable payment cycles, potentially adverse tax consequences, and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have an adverse effect on our future revenue and our results of operations.
WE ARE DEPENDENT ON KAYODE ALADESUYI. OUR FAILURE TO RETAIN MR. ALADESUYI AND/OR ATTRACT NEW HIGHLY QUALIFIED MEMBERS TO OUR COMPANY’S MANAGEMENT TEAM WOULD ADVERSELY AFFECT OUR ABILITY TO GROW OR REMAIN IN OPERATION.
Our success to date has largely been attributable to the skills and efforts of Kayode Aladesuyi, our Chief Executive Officer, President and Treasurer. Our growth and profitability will depend on our ability to strengthen our leadership infrastructure by recruiting and retaining qualified, experienced executive personnel. Competition in our industry for executive-level personnel is fierce, and there can be no assurance that we will be able to hire and retain other highly skilled executive employees, or that we can do so on economically feasible or desirable terms. The loss of Mr. Aladesuyi or our inability to hire and retain other such executives would have a material adverse effect on our business, financial condition and results of operations. In addition, the other members of our management team do not have substantial, if any, experience in the telematics industry.
IF WE ARE UNABLE TO ATTRACT, TRAIN AND RETAIN HIGHLY QUALIFIED PERSONNEL, THE QUALITY OF OUR SERVICES MAY DECLINE AND WE MAY NOT SUCCESSFULLY EXECUTE OUR INTERNAL GROWTH STRATEGIES.
Our success depends in large part upon our ability to continue to attract, train, motivate and retain highly skilled and experienced employees, including technical personnel. Qualified technical employees periodically are in great demand and may be unavailable in the time frame required to satisfy our customers’ requirements. While we currently have available technical expertise sufficient for the requirements of our business, expansion of our business could require us to employ additional highly skilled technical personnel.
There can be no assurance that we will be able to attract and retain sufficient numbers of highly skilled technical employees in the future. The loss of personnel or our inability to hire or retain sufficient personnel at competitive rates of compensation could impair our ability to secure and complete customer engagements and could harm our business.
WE WILL DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM SALES OUTSIDE THE UNITED STATES, AND NUMEROUS FACTORS RELATED TO INTERNATIONAL BUSINESS ACTIVITIES WILL SUBJECT US TO RISKS THAT COULD, AMONG OTHER THINGS, AFFECT THE DEMAND FOR OUR PRODUCTS, NEGATIVELY AFFECTING OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
Part of our strategy will involve the pursuit of growth opportunities in a number of foreign markets. If we are not able to maintain or increase international market demand for our products, services and technologies, then we may not be able to achieve our financial goals.
In many foreign markets, barriers to entry are created by long-standing relationships between potential customers and their local providers and protective regulations, including local content and service requirements. In addition, the pursuit of international growth opportunities requires significant efforts for an extended period before substantial revenues from these markets are realized. Our business could be adversely affected by a variety of uncontrollable and changing factors, including:
l Unexpected changes in legal or regulatory requirements;
l Difficulty in protecting our intellectual property rights in a particular foreign jurisdiction;
l Cultural differences in the conduct of business;
l Difficulty in attracting qualified personnel and managing foreign activities;
l Recessions in foreign economies;
l Longer payment cycles for and greater difficulties collecting accounts receivable;
l Export controls, tariffs, and other trade protection measures;
l Fluctuations in currency exchange rates;
l Nationalization, expropriation, and limitations on repatriation of cash;
l Social, economic, and political instability;
l Natural disasters, acts of terrorism, and war;
l Taxation; and
l Changes in laws and policies affecting trade, foreign investment, and loans.
During the last fiscal year, more than 79% of our revenue was from international partners who were purchasing initial products as part of their partnership program. Our partnership program is a white label program that allow us to brand our technology and software for our partners. We customize the technology (hardware and software) under their corporate brand, makes software modifications and changes to meet the individual local culture. Currently, 21% of our revenue now comes from the domestic market and the other 79% from foreign markets. We generate approximately 60% of our revenue from emerging markets in Africa and Middle East and SE. Asia. Some of the countries where we have generated significant portion of our revenue include Kenya, Tanzania, Nigeria, UAE, Indonesia, Turkey and Vietnam. Approximately 30% of our first fiscal quarter revenue came from Nigeria while approximately 50% of our revenue in the second fiscal quarter came from Kenya and Tanzania.
WE RELY ON THIRD-PARTY RFID DEVICES WE INTEGRATED WITH OUR PRODUCT. THE LOSS OR INABILITY TO MAINTAIN LICENSES WITH SUCH THIRD-PARTIES COULD MATERIALLY, NEGATIVELY IMPACT OUR BUSINESS.
We currently rely upon certain software licensed from third-parties, including software that is integrated with our internally developed software and used to perform key functions. Certain of these licenses, including our license with Google, are for limited terms and can be renewed only by mutual consent. In addition, these licenses may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. There can be no assurance that such licenses will be available to us on commercially reasonable terms, if at all. The loss of or inability to maintain or obtain licenses on such third-party software could result in the discontinuation of, or delays or reductions in, product shipments unless and until equivalent technology is identified, licensed, and integrated with our software. Any such discontinuation, delay, or reduction would harm our business, results of operations, and financial condition.
In addition, the third-party licenses that we may need to acquire in the future may not be exclusive, and there can be no assurance that our competitors will not obtain similar licenses and utilize such technology in competition with us. There can be no assurance that the vendors of certain technology that we may need to utilize in our products, will be able to provide such technology in the form we require, nor can there be any assurance that we will be able to modify our own products to adapt to changes in such technology. In addition, there can be no assurance that financial or other difficulties that may be experienced by such third-party vendors will not have a material adverse effect upon the technologies that may be incorporated into our products, or that, if such technologies become unavailable, we will be able to find suitable alternatives if we in fact need them. The loss of, or inability to maintain or obtain, any such software licenses could potentially result in shipment delays or reductions until equivalent software can be developed, identified, licensed and integrated, and could harm our business, operating results, and financial condition if we ultimately need to rely on such software.
IF WE DO NOT CORRECTLY ANTICIPATE DEMAND FOR OUR PRODUCTS, WE MAY NOT BE ABLE TO SECURE SUFFICIENT QUANTITIES OR COST-EFFECTIVE PRODUCTION OF OUR PRODUCTS, OR WE COULD HAVE COSTLY EXCESS PRODUCTION OR INVENTORIES.
We expect that it will become more difficult to forecast demand as we introduce and support multiple products and as competition in the market for our products intensifies. Significant unanticipated fluctuations in demand could cause the following problems in our operations:
l If demand increases beyond what we forecast, we would have to rapidly increase production. We would depend on suppliers to provide additional volumes of components, and those suppliers might not be able to increase production rapidly enough to meet unexpected demand.
l Rapid increases in production levels to meet unanticipated demand could result in higher costs for manufacturing and supply of components and other expenses. These higher costs could lower our profit margins. Further, if production is increased rapidly, manufacturing quality could decline, which may also lower our profit margins.
l If forecasted demand does not develop, we could have excess production resulting in higher inventories of finished products and components, which would use cash and could lead to write-offs of some or all of the excess inventories. Lower than forecasted demand could also result in excess manufacturing capacity at our facilities, which could result in lower margins.
OUR SALES AND GROSS MARGINS FOR OUR PRODUCTS MAY FLUCTUATE OR ERODE.
Our sales and gross margins for our products may fluctuate from quarter to quarter due to a number of factors, including product mix, competition, and unit volumes. In particular, the average selling prices of a specific product tend to decrease over that product’s life. To offset such decreases, we intend to rely primarily on obtaining yield improvements and corresponding cost reductions in the manufacture of existing products and on introducing new products that incorporate advanced features and, therefore, can be sold at higher average selling prices. However, there can be no assurance that we will be able to obtain any such yield improvements, or cost reductions, or introduce any such new products in the future. To the extent that such cost reductions and new product introductions do not occur in a timely manner or our products do not achieve market acceptance, our business, financial condition, and results of operations could be materially, adversely affected.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AGAINST PIRACY OR THE INFRINGEMENT OF THE PATENTS THAT WE USE BY THIRD-PARTIES DUE TO THE DECLINING LEGAL PROTECTION GIVEN TO INTELLECTUAL PROPERTY.
Preventing unauthorized use or infringement of intellectual property rights that we use is difficult. Piracy of our software represents a potential loss of significant revenue. While this would adversely affect our revenue from the United States market, the impact on revenue from abroad is more significant, particularly in countries where laws are less protective of intellectual property rights. Similarly, the absence of harmonized patent laws makes it more difficult to ensure consistent respect for patent rights. Moreover, future legal changes could make defending our intellectual property rights even more challenging. Continued enforcement efforts of our intellectual property rights may not affect revenue positively, and revenue could be adversely affected by reductions in the legal protection for intellectual property rights for software developers or by compliance with additional legal obligations impacting the intellectual property rights of software developers.
VIR2O CURRENTLY RELIES ON SOME THIRD PARTY CODING TO RUN ITS APPLICATIONS
We rely on some standard software for parts of the Vir2o platform that is using certain generic social media applications for which we acquired perpetual licensing rights such as newsfeed, profile wall, friends’ module, and parts of the profile settings including the framework. We utilized these 3rd party software applications in the short term to help expedite the launching of the platform. The custom sections of the platform such as marketplace, movie room, music room and Photo room also rely on user data supplied by generic modules in the application. While we intend to replace these 3rd party codes with our own, if the current owners of such software fail to or choose to no longer support Vir2o, the platform could cease to be functional.
WE RELY ON LIMITED INTELLECTUAL PROPERTY PROTECTION AS AN IMPORTANT ELEMENT OF COMPETITION.
We currently have no trademark registration for any of our products. We rely on common law trademark rights to protect our unregistered trademarks. Common law trademark rights generally are limited to the geographic area in which the trademark is actually used, while a United States federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third party anywhere in the United States. We intend to register our trademarks in certain jurisdictions where our products are sold. The Company plans to register multiple trademarks with the USPTO. The trademarks being requested are being completed in connection with the LogiBoxx, GATIS, TrailerSeal, RFSeal, and MobileMANAGER products. The Company currently has licenses for several patents, however, to the extent we do not have patents on our products, another company may be able to replicate one or more of our products. Although we seek to ensure that we do not infringe the intellectual property rights of others, there can be no assurance that third parties will not assert intellectual property infringement claims against us.
WE MAY NOT BE SUCCESSFUL IN OUR EFFORTS TO GROW AND MONETIZE WETWINDS VIRO2o PLATFORM.
We have made and are continuing to make investments to enable developers to build applications (apps) and websites that integrate with the VirO2o Platform. Existing and prospective Platform developers may not be successful in building apps or websites that create and maintain user engagement. Additionally, developers may choose to build on other platforms, including mobile platforms controlled by third parties, rather than building on our Platform. We are continuously seeking to balance the distribution objectives of our Platform developers with our desire to provide an optimal user experience, and we may not be successful in achieving a balance that continues to attract and retain Platform developers. If we are not successful in our efforts to grow our Platform or if we are unable to build and maintain good relations with Platform developers, our user growth and user engagement and our financial results related to this Platform may be adversely affected.
Additionally, we may not be successful in monetizing the Viro20 Platform. We are currently trying to monetize the VirO2o Platform in several ways, including ads on pages generated by apps, direct advertising on VirO2o purchased by Platform developers to drive traffic to their apps and websites, and fees from commissions from ecommerce generated on our Platform. If we unable to attract users and advertisers to our site our financial performance and ability monetize the VirO2o Platform will be adversely affected and we may need to cease operations.
OUR NEW PRODUCTS AND CHANGES TO EXISTING PRODUCTS COULD FAIL TO ATTRACT OR RETAIN USERS OR GENERATE REVENUE.
Our ability to retain, increase, and engage our user base and to create revenue for Vir02o will depend heavily on our ability to create successful new products for user engagement. We may introduce significant changes to our existing products or develop and introduce new and unproven products, including using technologies with which we have little or no prior development or operating experience. If new or enhanced products fail to engage users, developers, or advertisers, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments in Viro2o, and our business will be adversely affected. In the future, we may invest in new products and initiatives to generate revenue, but there is no guarantee these approaches will be successful. If we are not successful with new approaches to monetization, we may not be able to grow our revenue as anticipated or recover any associated development costs, and our financial results could be adversely affected.
IMPROPER ACCESS TO OR DISCLOSURE OF USERS’ INFORMATION ON WETWINDS VIRO2o, OR VIOLATION OF OUR TERMS OF SERVICE OR POLICIES, COULD HARM OUR REPUTATION AND ADVERSELY AFFECT OUR BUSINESS.
Our efforts to protect the information that our users have chosen to share using VirO2o may be unsuccessful due to the actions of third parties, software bugs or other technical malfunctions, employee error or malfeasance, or other factors. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users’ data. If any of these events occur, our users’ information could be accessed or disclosed improperly. Any incidents involving unauthorized access to or improper use of the information of our users or incidents involving violation of our terms of service or policies could damage our reputation and our brand. In addition, the affected users or government authorities could initiate legal or regulatory action against us in connection with such incidents, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Any of these events could have a material and adverse effect on our business, reputation, or financial results.
Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
WETWINDS AND VIRO2o ARE SUBJECT TO A VARIETY OF LAWS AND REGULATIONS IN THE UNITED STATES AND ABROAD THAT INVOLVE MATTERS CENTRAL TO OUR BUSINESS, INCLUDING USER PRIVACY, RIGHTS OF PUBLICITY, DATA PROTECTION, CONTENT, INTELLECTUAL PROPERTY, DISTRIBUTION, ELECTRONIC CONTRACTS AND OTHER COMMUNICATIONS, COMPETITION, PROTECTION OF MINORS, CONSUMER PROTECTION, TAXATION, AND ONLINE PAYMENT SERVICES.
Foreign data protection, privacy, and other laws and regulations are often more restrictive than those in the United States. These U.S. federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which WetWinds (VirO2o) will operate. For example, the interpretation of some laws and regulations that govern the use of names and likenesses in connection with advertising and marketing activities is unsettled and developments in this area could affect the manner in which we design our products, as well as our terms of use. A number of proposals are pending before federal, state, and foreign legislative and regulatory bodies that could significantly affect our business. For example, a revision to the 1995 European Union Data Protection Directive is currently being considered by European legislative bodies that may include more stringent operational requirements for data processors and significant penalties for non-compliance. Similarly, there have been a number of recent legislative proposals in the United States, at both the federal and state level, that would impose new obligations in areas such as privacy and liability for copyright infringement by third parties. These existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices.
THE COMPANY MAY BE UNABLE TO OBTAIN, GENERATE, INCREASE OR MAINTAIN ADVERTISING REVENUES, WHICH COULD REDUCE THE COMPANY’S PROFITS.
While there is no assurance, the Company intends to pursue advertising revenues from the sale of display advertisements though School Connect and Viro2o. The ability of the Company to attract or maintain advertising revenue from each of these potential sources is largely dependent upon the number of members actively using the services of the Company and the traffic generated. The Company has to increase user engagement with its services in order to create advertising revenues. In addition, advertising revenue may fluctuate, and may fluctuate in the future, due to changes in the online advertising market, including extreme fluctuations in online advertising spending patterns and advertising rates.
LIMITED LIABILITY OF DIRECTORS AND OFFICERS.
The Company has adopted provisions to its Articles of Incorporation and Bylaws which limit the liability of its Officers and Directors, and provide for indemnification by the Company of its Officers and Directors to the full extent permitted by Nevada corporate law, which generally provides that its officers and directors shall have no personal liability to the Company or its stockholders for monetary damages for breaches of their fiduciary duties as directors, except for breaches of their duties of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, acts involving unlawful payment of dividends or unlawful stock purchases or redemptions, or any transaction from which a director derives an improper personal benefit. Such provisions substantially limit the shareholder's ability to hold officers and directors liable for breaches of fiduciary duty, and may require the Company to indemnify its officers and directors.
IF WE FAIL TO ESTABLISH AND MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL, WE MAY NOT BE ABLE TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR TO PREVENT FRAUD. ANY INABILITY TO REPORT AND FILE OUR FINANCIAL RESULTS ACCURATELY AND TIMELY COULD HARM OUR REPUTATION AND ADVERSELY IMPACT THE TRADING PRICE OF OUR COMMON STOCK.
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures. Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. In addition, if we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, then we may not be able to obtain the independent accountant certifications required by such act, which may preclude us from keeping our filings with the SEC current and may adversely affect any market for, and the liquidity of, our common stock.
PUBLIC COMPANY COMPLIANCE MAY MAKE IT MORE DIFFICULT FOR US TO ATTRACT AND RETAIN OFFICERS AND DIRECTORS.
The Sarbanes-Oxley Act and new rules subsequently implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, we expect these new rules and regulations to increase our compliance costs and to make certain activities more time consuming and costly. As a public company, we also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.
IF WE FAIL TO ESTABLISH AND MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROL, WE MAY NOT BE ABLE TO REPORT OUR FINANCIAL RESULTS ACCURATELY OR TO PREVENT FRAUD. ANY INABILITY TO REPORT AND FILE OUR FINANCIAL RESULTS ACCURATELY AND TIMELY COULD HARM OUR REPUTATION AND ADVERSELY IMPACT THE TRADING PRICE OF OUR COMMON STOCK.
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures. Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. In addition, if we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, then we may not be able to obtain the independent accountant certifications required by such act, which may preclude us from keeping our filings with the SEC current and may adversely affect any market for, and the liquidity of, our common stock.
Risks Related to Our Common Stock
THERE IS A VOLATILE AND LIMITED MARKET FOR OUR COMMON STOCK.
Recent history relating to the market prices of public companies indicates that, from time to time, there may be periods of extreme volatility in the market price of the Company’s securities due to factors unrelated to the operating performance of the Company, or announcements concerning the condition of the Company, especially for stock quoted on the OTCQB. In the last 52 week period, the common stock was quoted on the OTCQB from a high closing price of $0.48 to a low closing price of $0.0001 per share. See “Market for Common Equity, Related Stockholder Matter and Issuer Purchases of Equity Securities.” General market price declines, market volatility, especially for low priced securities, or factors related to the general economy or specifically to the Company in the future could adversely affect the price of the common stock. With the low price of the common stock, securities placement by the Company could be very dilutive to existing stockholders, thereby limiting the nature of future equity placements.
WE HAVE NEVER PAID DIVIDENDS AND WE DO NOT ANTICIPATE PAYING DIVIDENDS IN THE FUTURE.
We do not believe that we will pay any cash dividends on our common stock in the future. We have never declared any cash dividends on our common stock, and if we were to become profitable, it would be expected that all of such earnings would be retained to support our business. Since we have no plan to pay cash dividends, an investor would only realize income from his investment in our shares if there is a rise in the market price of our common stock, which is uncertain and unpredictable.
WE ARE SUBJECT TO PENNY STOCK REGULATIONS AND RESTRICTIONS.
The SEC has adopted regulations that generally define penny stocks to be an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. As a penny stock, our common stock may become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (“Exchange Act”), or the “Penny Stock Rule.” This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.
For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure is required to be made regarding sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be provided disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
Our common stock might not qualify for exemption from the penny stock restrictions. In any event, even if our common stock were exempt from the penny stock restrictions, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock, if the SEC finds that such a restriction would be in the public interest.
AS AN ISSUER OF “PENNY STOCK,” THE PROTECTION PROVIDED BY THE FEDERAL SECURITIES LAWS RELATING TO FORWARD LOOKING STATEMENTS DOES NOT APPLY TO US.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
ADDITIONAL SHARES OF OUR AUTHORIZED CAPITAL STOCK WHICH ARE ISSUED IN THE FUTURE WILL DECREASE EQUITY OWNERSHIP PERCENTAGES OF EXISTING SHAREHOLDERS, COULD ALSO BE DILUTIVE TO EXISTING SHAREHOLDERS, AND COULD DELAY OR PREVENT A CHANGE OF CONTROL OF OUR COMPANY.
We are authorized to issue up to 13 billion shares of common stock, and our board of directors has the sole authority to issue unissued authorized stock without further shareholder approval. To the extent that additional common shares are issued in the future, they will decrease existing shareholders’ percentage equity ownership and, depending upon the prices at which they are issued, could be dilutive to existing shareholders.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Our principal executive office is located at 810 Franklin Court, Suite H, Marietta, Ga. 30067. We currently lease approximately 3708 square feet of generic office space on 6 year term for $2,163, $2,227, $2,295, $2,363, $2,434, and $2,509 from each month for the 1st through the sixth year respectively. This lease expires 2018. This space is utilized for office purposes and it is our belief that the space is adequate for our immediate needs. Additional space may be required as we expand our business activities. We do not foresee any significant difficulties in obtaining additional facilities if deemed necessary.
Item. 3. Legal Proceedings
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item. 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
(a) Market Information
Our Class A common stock, $0.001 par value, is quoted on the OTC Bulletin Board under the symbol “ECDC.”
(b) Holders of Common Equity.
As of April 15, 2014, there were approximately 500 holders of record of our common stock. This figure does not take into account those shareholders whose certificates are held in the name of broker-dealers or other nominees.
(c) Dividend Information.
We have never paid any cash dividends on our common shares, and we do not anticipate that we will pay any dividends with respect to those securities in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion and development of our business.
Recent Sales of Unregistered Securities
The Company issued the following securities pursuant to exemptions from registration provided by Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated thereunder.
On October 29, 2013, pursuant to a stock purchase agreement, the Company issued 20,000,000 shares of the Company’s common stock to an investor for a purchase price of $2,000.
On November 1, 2013, pursuant to a debt conversion notice, the Company issued 107,010,674 shares of the Company’s common stock to satisfy a debt obligation of $5,351.
On November 21, 2013, pursuant to a debt conversion notice, the Company issued 189,320,000 shares of the Company’s common stock to satisfy a debt obligation of $9,466.
On December 4, 2013, pursuant to a stock purchase agreement, the Company issued 100,000,000 shares of the Company’s common stock to an investor for a purchase price of $10,000.
On January 6, 2014, pursuant to a debt conversion notice, the Company issued 189,739,800 shares of its common stock to satisfy a debt obligation of $9,487.
On January 8, 2014, pursuant to a debt conversion notice, the Company issued 200,000,000 shares of its common stock to satisfy a debt obligation of $10,000.
On January 27, 2014, pursuant to a debt conversion notice, the Company issued 220,844,765 shares of its common stock to satisfy a debt obligation of $11,042.
On February 10, 2014, pursuant to a debt conversion notice, the Company issued 110,385,400 shares of its common stock to satisfy a debt obligation of $4,967.
On February 11, 2014, pursuant to three debt conversion notices, the Company issued 462,812,001 shares of its common stock to satisfy debt obligations of $23,141.
On February 13, 2014, pursuant to a debt conversion notice, the Company issued 294,000,000 shares of its common stock to satisfy a debt obligation of $14,700.
On February 14, 2014, pursuant to two debt conversion notices, the Company issued 231,904,000 shares of its common stock to satisfy debt obligations of $11,595.
On February 21, 2014, pursuant to a debt conversion notice, the Company issued 155,000,000 shares of its common stock to satisfy a debt obligation of $6,975.
On February 24, 2014, pursuant to a debt conversion notice, the Company issued 280,000,000 shares of its common stock to satisfy a debt obligation of $14,000.
On February 25, 2014, pursuant to a debt conversion notice, the Company issued 100,548,000 shares of its common stock to satisfy a debt obligation of $5,027.
On February 28, 2014, pursuant to a debt conversion notice, the Company issued 293,519,800 shares of its common stock to satisfy a debt obligation of $14,676.
On March 3, 2014, pursuant to a debt conversion notice, the Company issued 36,000,000 shares of its common stock to satisfy a debt obligation of $1,800.
On March 5, 2014, pursuant to a debt conversion notice, the Company issued 169,000,000 shares of its common stock to satisfy a debt obligation of $9,000.
On March 6, 2014, pursuant to a debt conversion notice, the Company issued 177,400,000 shares of its common stock to satisfy a debt obligation of $5,000.
On March 11, 2014, pursuant to a debt conversion notice, the Company issued 294,000,000 shares of its common stock to satisfy a debt obligation of $14,700.
On March 21, 2014, pursuant to a debt conversion notice, the Company issued 194,000,000 shares of its common stock to satisfy a debt obligation of $9,700.
On March 24, 2014, pursuant to a debt conversion notice, the Company issued 100,000,000 shares of its common stock to satisfy a debt obligation of $7,000.
On March 25, 2014, pursuant to three debt conversion notices, the Company issued 572,190,277 shares of its common stock to satisfy debt obligations of $33,796.
On March 26, 2014, pursuant to two debt conversion notices, the Company issued 314,285,714 shares of its common stock to satisfy debt obligations of $16,400.
On March 28, 2014, pursuant to a debt conversion notice, the Company issued 369,872,800 shares of its common stock to satisfy a debt obligation of $18,494.
On March 31, 2014, pursuant to a debt conversion notice, the Company issued 200,000,000 shares of its common stock to satisfy a debt obligation of $5,904.
On April 1, 2014, pursuant to a stock purchase agreement, the Company issued 15,000,000 shares of the Company’s common stock to a related party for a purchase price of $4,500 received in 2013.
On April 1, 2014, pursuant to a debt conversion notice, the Company issued 250,000,000 shares of its common stock to satisfy a debt obligation of $12,500.
On April 7, 2014, pursuant to three debt conversion notices, the Company issued 821,007,589 shares of its common stock to satisfy debt obligations of $39,541.
The securities mentioned above were not registered under the Securities Act of 1933, as amended (the “Securities Act”), and qualified for exemption under Section 4(2) of the Securities Act because the issuance of the securities did not involve a public offering. The offering was not a “public offering” as defined in Section 4(2) due to the insubstantial number of persons involved in the transaction, size of the offering, manner of the offering and number of securities offered.
(d) Securities Authorized For Issuance Under Equity Compensation Plans
In September 2010, the Company’s Board of Directors approved and adopted the East Coast Diversified Corporation 2010 Incentive Stock Plan (the “Plan”) and reserved 25,000,000 shares of the Company’s common stock for issuance under the Plan. The Plan allows for two types of grants: 1) options and 2) stock awards and restricted stock purchase offers. On March 16, 2012 the Board of Directors amended the Plan to increase the authorized shares under the plan to 50,000,000 shares. As of April 15, 2014, total stock awards of zero shares were granted to certain individuals as compensation for legal services.
Transfer Agent
Our transfer agent is ClearTrust, LLC with an address at 16540 Pointe Village Dr. Suite 206 Lutz, FL 33558.
Purchase of Equity Securities
None.
Item 6.
Item 6. Selected Financial Data.
Not applicable.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
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
Since April of 2010, and the acquisition by EarthSearch, ECDC has embarked on developing its technology operations and improving product offering to the market.
The four years since acquisition the company was in R&D phase. During this period we developed three distinct technology divisions. Completed the development of two proprietary technologies; Wireless communications between GPS &RFID (comprising of several GPS, RFID and Cargo locking devices) and, “nVite” a proprietary environment sharing application for our social media division, we also developed an entire group of web assets, comprising of five proprietary “Software” for the operation and management of our businesses.
On Febraury 15, 2014, we created a prototype for a modified less expensive version of our Halo device called Halo2 which we believe will allow us be more competitive in 2014. We plan to deploy the product globally for small business applications. Our goal is to reenergize the EarthSearch business with this product and create a mass market solution for small business. We believe the product will allow us to be more competitive globally where cheaper Chinese products have created significant competition for our business.
Once the product is deployed we plan to reorganize the sales operation for EarthSearch to push this product both from direct sales and increase efforts to establishing new distribution networks for the Halo2.
We plan on the Halo 2 costing approximately $70.00 per unit.
StudentConnect began commercial deployment in the first quarter of 2014. In February 2014, we deployed StudentConnect on school buses in school districts in Georgia, Arkansas, Kentucky, California, and South Carolina. In addition, Texas, Florida and North Carolina engaged us to implement systems on their school buses. Our objective is to secure as many schools as we can through the end of the current school year and the summer break. We plan to expend a significant amount of resource over the same period to train and deploy products for these schools. Our objective is to have enough school districts in place to generate revenue for the 2015 school year. We plan for our advertising team to continue to strengthen relationships with local chambers of commerce to enhance revenue in all of the districts we plan to offer services. We plan to launch our StudentConnect mobile application this quarter and plan to implement a mobile advertising platform that we believe will also help enhance revenue for StudentConnect. We launched a licensing program for exclusive distributorship that would allow for rapid deployment of StudentConnect in key US markets. In May 2014, we plan to deploy our product on carrier networks which we believe will allow the carriers commercial sales team to commence the marketing of StudentConnect.
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 expect the Radio campaign to commence on April 15, 2014. If successful we will introduce a similar strategy to key markets in North America to allow us to compete even more effectively in the social media space.
We plan to introduce commercial content and ecommerce into social media space. We have entered into agreement with Amazon, College books.com and fanatics.com an online retailer of sporting goods.
We believe strongly, that the ability to deliver movies, music, shopping, in a live, engaging and interactive way, for users, their friends and family is the future of social media. Our goal is to join the next wave of innovation to transform social media. We plan to deliver content on mobile and cross platform that integrates mobile and desktop. We believe Vir2o brings everything web to social media including online games, video, movies, shopping, and music and live broadcast. It is imperative that we form strategic alliances with content providers for our strategy to be successful.
Proprietary software:
Vir2o - Social media platform
StudentConnect - Student Transportation Safety technology
GATIS - Global Asset Tracking and Identifications System - Logistics business
CARAS - Customs And Revenue Authority System - Ports and revenue collection
SCAAP - StudentConnect Advertisement Aggregation Platform.
LogiBoxx- Wireless Communication between GPS & RFID
Our Businesses
EarthSearch
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.
Some of the solutions offered by the company include oil tanker monitoring, transit cargo solution, military logistics etc. EarthSearch has partners and distributors in over 6 countries including the US where it expects to begin generating revenue for the EarthSearch operation.
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.
In March 2013 we reconstituted our sales team for EarthSearch. We brought on a new Director of Sales and a team of outside sales executives.
We are currently engaged in numerous pilot projects with several organizations, including but not limited to the following partners and customers: Kenya Revenue Authority, Tanzania Revenue Authority (both still in bidding process), we are going through certification of our container tracking supplication with the Uruguay customs authority and Conctena in Switzerland, Our business with each of the aforementioned organizations consists of the following:
Tanzania Revenue Authority through Utrack :
The RFP of “Request For Proposal” issued by the Tanzania revenue authority is now in the bidding status. We await update with our local partner Utrack
Conctena in Switzerland :
The pilot testing with Conctena is still ongoing.
Kenya Revenue Authority
We are in the certification phase for our product with the Kenya Revenue Authority and await updates from our local partner
Uruguay Custom and Revenue
We began certification process with Uruguay Custom authority on April 8 2014 and awaits updates from our local partner.
Other EarthSearch Development
In other to reenergize our GPS business and to remain competitive locally and internationally with cheaper Chinese products we created a modified cheaper version of our basic GPS product in 2013 called Hallo2 the product will sell for under $70.00 and allow us to enter the GPS small business mass market
StudentConnect
StudentConnect launched its school transportation technology division in April 2013 using ECDC proprietary wireless communication between GPS and RFID to monitor students getting on or off the School bus. The system provides instant notification to schools and parents about students riding on the school buses, anomaly such as student getting off the bus on or off the bus at the wrong location is instantly detected. Solution is delivered to schools and parents at no cost. The messages are funded through advertisers who sponsor each message sent to the parent about their child. The first pilot installation of StudentConnect was installed at Gordon County School District in Georgia in April 2013.
We entered 5 year agreements with several school districts in 2013 and 2014.including schools districts in California, Texas, South Carolina, Louisiana, Arkansas and Kentucky. We are continuing pilot test and contract negotiation with additional schools in GA, California, Louisiana and Arkansas.
We have successfully secured the support of several local chambers of commerce is getting local businesses commitments and participation is advertising sponsorship for StudentConnect.
We executed a marketing agreement with Verizon wireless that would allow its Schools Sales division to market StudentConnect as part of their portfolio. We are still in the process of converting our LogiBoxx devices to work on the CDMA network which would allow our devices to run on the Verizon Platform, upon completion of this step Verizon will commence marketing StudentConnect.
We have deployed devices on school buses on all schools currently under contract and are in the training phase for school transportation administrators. We expect the full and complete use of our system will commence with the new school year of 2014.
We executed a 5 year licensing agreement with Neuva Tech LLC granting exclusive territorial rights for the State of California.
We executed a 5 year licensing agreement with Smart1st in Lebanon granting it exclusive territorial rights to market StudentConnect in Lebanon
The company has expanded its sales force to introduce StudentConnect to school districts nationwide through a network of sales professional specializing on marketing and sales of services to school district nationwide.
We will launch the StudentConnect Mobile app on April 25 2014. The application will be available on iOS and Android platforms. Our goals is to secure several additional school district agreements over the summer break for deployment in the 2014 school year.
WetWinds/Vir2o
On April 5, 2013, ECDC launched its third division, Vir2o an interactive social media platform. The company entered the social media space with a proprietary technology called “nVite” which would allow users to engage each other interactively. The Company’s primary objective is to create a more engaging social media platform with relevance to commerce on the internet. Vir2o is the first social media platform with fully integrated ecommerce solution allowing multiple users to congregate in a marketplace and shop together or allow family and friends to go to the movies, play music, watch concerts or view photos together regardless of distance or location.
We executed a representative agreement with HotSauce a major digital advertising agency in Nigeria where we intend to launch our first international version Vir2o in May 2013.
In 2014 we executed agreement with Smat1st to launch Vir2o in Lebanon.
We filed patent non-provisional application with the US Trade and Patent Office (USPTO) for the protection of our “NVite” technology. We plan to file non provisional license in April 2014.
We deployed mobile apps for Vir2o on iOS, Android and Blackberry in October 2013. We believe we aggressively introduced the platform to Nigeria, India, Brazil.
We plan to launch our first US campaign to promote vir2o in April 2014. To accomplish our goals we executed 6 months promotional agreement with CBS Atlanta Radio WVEE and secured exclusive endorsement by WVEE Radio personality Greg Street to introduce the platform to audiences in Atlanta. WVEE has over 1.2 million listeners in the local market.
We are in final stages of negotiations with Fuga Inc. a music licensing organization to license music for VMaestro our music service program which would offer advertisement sponsored free music channels to users on the platform.
We are in final stages of negotiation with CESMMA sports and CESBoxing to bring both live events and video on demand programing to Vir2o movie and video rooms.
We executed retailer publishing agreements with Fanatics.com a sporting gear retailer which will feature sporting gears on Vir2o market place
We executed agreement with Campus Books Rental a college online books store to offer discounted books on Vir2o.
We have executed a retailer agreement with Amazon.com to resell product offered by Amazon on Vir2o.com. This agreement was a one sided reseller agreements. We had to apply to be approved as a retailer and we had to accept the terms if suitable for our business.
Disputed Operation
We discontinued our participation in the operation of Rogue Paper as of November 12, 2012 to focus our resources on the operation of businesses developed internally. As of February 1, 2013, after review of the status of the Rogue Paper operation and technology and upon notification of the CEO’s intention to resign our review of the Rogue Paper operation and technology, management concluded, taking control of the operation will result in disruption to our business and significant losses to the Company. Management concluded it the best interest of the Company to severe all interests in the Rogue Paper operation and recognize losses for ownership interest and the investment in Rogue Paper. We have not included the Rogue Paper financial statement in our reports due to lack of financial reporting from Rogue Paper management.
Results of Operations
Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012
Revenue
For the year ended December 31, 2013, our revenue was $180,271 compared to $715,986 for the same period in 2012, representing a decrease of 70%. This decrease is attributed to our focus on completing development of the StudentConnect and WetWinds divisions. 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 $157,370 and $528,397 for the years ended December 31, 2013 and 2012, respectively. Revenues for consulting services were $-0- for the year ended December 31, 2013, compared to $151,920 for the year ended December 31, 2012. User fees were $22,901 and $35,669 for the years ended December 31, 2013 and 2012, respectively.
Operating Expenses
For the year ended December 31, 2013, operating expenses were $2,067,187 compared to $3,687,389 for the same period in 2012, a decrease of 44%.
Cost of revenues decreased $269,760 and is due to the decrease in revenues for the year ended December 31, 2013.
For the year ended December 31, 2013, selling, general and administrative expenses were $1,939,762 compared to $3,290,204 for the same period in 2012, a decrease of 41%. This decrease was primarily caused by professional fees related to public company compliance and investor relations decreased from $629,357 to $172,697, bad debt expense decreased from $604,735 to $3,297, offset by research and development costs increased from $378,383 to $580,119, and salary expenses increased from $716,283 to $848,871.
Our salary expenses increased in 2013 over the same period in 2012 due to the development of our social media business requiring a significant increase in development costs related to software engineers as well as conducting of beta tests for our integrated StudentConnect solution in 2012.
Net Loss
We generated net losses of $2,284,354 for the year ended December 31, 2013 compared to $5,749,513 for the same period in 2012, a decrease of 60%. Included in the net loss for the year ended December 31, 2013 was interest expense of $571,150 and loss on disposal of fixed assets of $4,729, reduced by a change in derivative liability of $154,277.
Included in the net loss for the year ended December 31, 2012 was a loss on the conversion of debt of $575,263, interest expense of $903,737, change in derivative liability of $12,099, net loss from disputed subsidiary of $1,565,577, reduced by a gain on the settlement of debt of $141,141, other income of $37,616, and non-controlling interests’ share of the net loss of EarthSearch and Rogue Paper of $99,809. The net loss from disputed subsidiary includes amortization of intangible assets of $114,750 and impairment of intangible assets and goodwill of $1,366,857.
Liquidity and Capital Resources
Overview
For the years ended December 31, 2013 and 2012, we funded our operations through financing activities consisting of private placements of equity securities with outside investors and related parties and loans from related and unrelated parties. Our principal use of funds during the years ended December 31, 2013 and 2012 has been for working capital and general corporate expenses.
Liquidity and Capital Resources during the year ended December 31, 2013 compared to the year ended December 31, 2012
As of December 31, 2013, we had cash of $241 and a working capital deficit of $3,732,820. The Company generated a negative cash flow from operations of $904,919 for the year ended December 31, 2013, as compared to cash used in operations of $1,489,457 for the year ended December 31, 2012. The negative cash flow from operating activities for the year ended December 31, 2013 is primarily attributable to the Company's net loss of $2,284,354, offset by noncash depreciation and amortization of $3,861, the issuance of loan payable for consulting services of $78,922, stock issued for services of $12,900, accrued interest on loans payable of $81,208, accretion of beneficial conversion feature on notes payable of $486,696, amortization of prepaid license fee of $50,000 and net cash from changes in operating assets and liabilities of $844,289, offset by a change in derivative liability of $154,277 and noncontrolling interests in the loss of EarthSearch of $24,164.
The negative cash flow from operating activities for the year ended December 31, 2012 is primarily attributable to the Company's net loss of $5,749,513, offset by noncash depreciation and amortization of $130,727, change in the allowance for doubtful accounts of $604,735, the issuance of loan payable for consulting services of $105,000, stock issued for services of $252,205, loss on the conversion of debt of $575,263, change in derivative liability of $12,099, impairment of intangible assets and goodwill of $1,366,857, accrued interest on loans payable of $126,284, accretion of beneficial conversion feature on notes payable of $794,135, accretion of stock discounts on notes payable of $2,160, amortization of payment redemption premium of $12,076, amortization of prepaid license fee of $50,000 and net cash from changes in operating assets and liabilities of $525,498, offset by a gain on the settlement of debt of $141,141, gain on the recovery of redemption premiums of $28,975, net change in assets and liabilities of disputed subsidiary of $16,411 and noncontrolling interests in the loss of EarthSearch and Rogue Paper of $99,809.
Cash generated from our financing activities was $905,160 for the year ended December 31, 2013, compared to $1,488,513 during the comparable period in 2012. This decrease was primarily attributed to proceeds received from the sale of preferred stock of $184,000 in 2013 compared to $197,900 in 2012, proceeds from preferred stock subscriptions of $161,500 in 2013 compared to $344,002 in 2012, proceeds from loans payable from $244,755 in 2011 to $851,711 in 2012 and a reduction on payments on loans payable to related parties of $112,115 in 2011 compared to $5,000 in 2012, offset by a reduction in the proceeds from the issuance of common stock of $186,200 to $56,000,, change in bank overdraft of $10,647 in 2012 compared to $16,675 in 2011, proceeds from loans payable to related parties, a decrease from $205,919 to $56,500, and repayments of loans payable to unrelated parties in 2012 of $12,600 compared to $2,500 in 2011.
The Company will need additional financing in 2013 to carry out its business plan. There can be no assurance that financing will be available or if available, that it will be on terms acceptable to the Company.
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, 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 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.
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.
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, 2013.
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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As the Company is a “smaller reporting company,” this item is not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Our financial statements are contained in pages through which appear at the end of this Annual Report.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None
Item 9A.
Item 9A. Controls and Procedures.
(a) Evaluation of Disclosure and Control Procedures
The Company’s disclosure controls and procedures are designed to ensure (i) that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (ii) that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our principal executive officer and principal financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2012, and concluded that the disclosure controls and procedures were not effective as a whole.
(b) Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with Generally Accepted Accounting Principles (“GAAP”).
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance of such reliability and may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has conducted, with the participation of our Chief Executive Officer and our Principal Accounting Officer, an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013. Management’s assessment of internal control over financial reporting used the criteria set forth in SEC Release 33-8810 based on the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control over Financial Reporting - Guidance for Smaller Public Companies. Based on this evaluation, Management concluded that our system of internal control over financial reporting was not effective as of December 31, 2012, based on these criteria.
(c) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information.
None
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following table sets forth information with respect to persons who are serving as directors and officers of the Company. Each director holds office until the next annual meeting of shareholders or until his successor has been elected and qualified.
(a) Mr. Russo resigned as a director of the Company on August 27, 2013.
Biography of Directors and Officers
Kayode A. Aladesuyi
Kayode A. Aladesuyi is a founder of EarthSearch, and was appointed as Chairman of the Board of Directors, Chief Executive Officer, President and Interim Chief Financial Officer of the Company on April 2, 2010. Mr. Aladesuyi held similar positions with EarthSearch since January 2004. Prior to EarthSearch, Mr. Aladesuyi was the founder (in 1999), chief executive officer, and president of PlanetLink Communications, Inc. which engaged in the development of satellite-enabled products based on GPS technology and provision of monitoring services in the United States. Mr. Aladesuyi resigned from PlanetLink Communications to establish EarthSearch. He has a B.S. degree in accounting from Alabama State University.
Frank Russo
Frank Russo was appointed Executive Vice President and a Director on April 2, 2010 and served as Executive Vice President of EarthSearch from January 2010 through October 1, 2010. Mr. Russo’s position as Executive Vice President was terminated in October 2010 and he resigned as a Director of the Company on August 27, 2013. Currently, Mr. Russo is representing various manufacturers, including FIFA, Kappa and Kanga ROOS, consulting with their sales and marketing departments throughout Metro NY/NJ and the Mid-Atlantic regions. He was formerly the president of Gladiator Sales, a regional marketing and sales company that represented Puma North America ($500+ million in sales) throughout New England, Mid-Atlantic and the Metro NY/NJ regions. Prior to Gladiator Sales, he managed a sales division for Diadora, an Italian sporting goods manufacturer. Mr. Russo has a B.S. degree in business administration from Saint Michael’s College.
Edward H. Eppel
Edward H Eppel was appointed as a Director on April 2, 2010 and had served as a Director of EarthSearch since October 2009. Mr. Eppel currently is the vice president of LPS Ind., a leading manufacturer of special printed flexible films for the Medical/Food/Beverage manufacturing industries, with sales in both North America and Europe. He was the founder and president of RAE Container Inc., a manufacturer of corrugated products, molded form, cushioning and protective materials for Air/Sea/Ground shipments. Mr. Eppel and RAE Container Inc., merged with LPS in 1997. He is a "Lifetime" member of the IOPP (Institute of Packaging Professionals) and past President of the Meadowlands chapter. Mr. Eppel also served as president of the Society of Packaging and Handling Engineers, along with serving as chairman of Morris County Municipality Utilities Authority (NJ) for the past 25 years. This public utility serves more than 500,000 residents with water and a complete recycling program reducing landfill waste by over 50%. Mr. Eppel has a B.S. degree in industrial management from Rutgers University.
Anis D. Sherali
Anis Sherali was appointed as a Director on April 2, 2010 and had served as a Director of EarthSearch since June 2009. Mr. Sherali is currently the president/CEO of Energy Consulting Group and has assisted numerous electric utility clients analyze and solve optimization problems related to electric utility operations and economic dispatch. His responsibilities include the preparation of engineering feasibility analyses of alternative power supply sources, long-range planning studies for generation and transmission systems, software development related to power supply planning and utility rate analysis. Mr. Sherali has more than 25 years of experience in power supply planning and pooling evaluations, wheeling and coordination analysis, electric utility rates, finance and accounting, contract negotiations, generation analysis, utility operations and dispatch, economic and regulatory support and power supply consulting with numerous clients in more than 15 states. Mr. Sherali has a Master’s degree in industrial management from Georgia Tech.
Our directors are elected at the annual meeting of the shareholders, with vacancies filled by the Board of Directors, and serve until their successors are elected and qualified, or their earlier resignation or removal. Officers are appointed by the board of directors and serve at the discretion of the board of directors or until their earlier resignation or removal. Any action required can be taken at any annual or special meeting of stockholders of the corporation which may be taken without a meeting, without prior notice and without a vote, if consent of consents in writing setting forth the action so taken, shall be signed by the holders of the outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office, its principle place of business, or an officer or agent of the corporation having custody of the book in which the proceedings of meetings are recorded.
Board of Directors
Directors are elected at our annual meeting of shareholders and serve for one year until the next annual meeting of shareholders or until their successors are elected and qualified.
Nominating Committee
The Company does not have a standing nominating committee or a committee performing similar functions.
There are no agreements or understandings for the officer or director to resign at the request of another person and the above-named officers are not acting on behalf of nor will act at the direction of any other person.
For the year ended December 31, 2013, the Board held 6 meetings and acted by Unanimous Written Consent 5 times.
Audit Committee
The Company does not have an Audit committee or a committee performing similar functions.
Family Relationships
There are no family relationships among our directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers.
Subsequent Executive Relationships
No director or executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past five years. No director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past five years. No director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past five years. No director or officer has been found by a court to have violated a federal or state securities or commodities law during the past five years.
None of our directors or executive officers or their respective immediate family members or affiliates are indebted to us.
Legal Proceedings
None of the members of the board of directors or other executives has been involved in any bankruptcy proceedings, criminal proceedings, any proceeding involving any possibility of enjoining or suspending members of our board of directors or other executives from engaging in any business, securities or banking activities, and have not been found to have violated, nor been accused of having violated, any Federal or State securities or commodities laws.
Compliance with Section 16(A) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a).
Based solely on our review of certain reports filed with the Securities and Exchange Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, the reports required to be filed with respect to transactions in our common stock during the fiscal year ended December 31, 2013, were timely.
Code of Ethics.
We do not currently have a Code of Ethics. We intend to adopt a code of ethics that would be appropriate for our business as soon as practicable.
Item 11.
Item 11. Executive Compensation.
The following table sets forth compensation information for services rendered by certain of our executive officers in all capacities during the last two completed fiscal years. The following information includes the dollar value of base salaries and certain other compensation, if any, whether paid or deferred. The executive officers of the company did not receive any stock award, option award, non-equity incentive plan compensation, or nonqualified deferred compensation earnings during the last two completed fiscal years.
(1) Mr. Kayode Aladesuyi was appointed Chief Executive Officer, President, Chief Financial Officer and Chairman of the Board of Directors on April 2, 2010.
(2) All other compensation includes car allowance each year and health insurance premiums.
(3) Fair value of stock and option awards on date of grant computed in accordance with FASB ASC Topic 718.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The Company had no outstanding equity awards at the end of the most recent completed fiscal year.
Compensation of Directors
The general policy of the Board is that Directors earn $10,000 per quarter for each quarter served. The Board of Directors has the primary responsibility for considering and determining the amount of Director compensation.
The following table shows amounts earned by each Director in the fiscal years ended December 31, 2013 and 2012.
(1) Reflects the amount of fees earned during each year ended on December 31.
(2) Fair value of stock and option awards on date of grant computed in accordance with FASB ASC Topic 718.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table summarizes certain information regarding the beneficial ownership (as such term is defined in Rule 13d-3 under the Securities Exchange Act of 1934) of outstanding Common Stock as of April 15, 2014, by (i) each person known by us to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each of our directors, (iii) each of our named executive officers (as defined in Item 403(a) of Regulation S-K under the Securities Act), and (iv) all executive officers and directors as a group. Except as indicated in the footnotes below, the security and stockholders listed below possess sole voting and investment power with respect to their shares.
(1) “Beneficial Owner” means having or sharing, directly or indirectly (i) voting power, which includes the power to vote or to direct the voting, or (ii) investment power, which includes the power to dispose or to direct the disposition, of shares of the common stock of an issuer. The definition of beneficial ownership includes shares, underlying options or warrants to purchase common stock, or other securities convertible into common stock, that currently are exercisable or convertible or that will become exercisable or convertible within 60 days. Unless otherwise indicated, the beneficial owner has sole voting and investment power. The mailing address for all officers and directors is 120 Interstate North Parkway SE, Suite 445, Atlanta, GA 20853.
(2) For each shareholder, the calculation of percentage of beneficial ownership is based upon 6,724,421,296 total shares comprised of our common stock (6,415,059,205) and Series A preferred stock (309,362,091) outstanding as of April 15, 2014. As of April 15, 2014, due to the super voting rights of the Series A preferred stock (100:1), the total number of votes is 37,351,268,305. Shares of our Common Stock subject to options, warrants and/or conversion rights held by the shareholder that are currently exercisable or exercisable within 60 days, which are deemed to be outstanding and to be beneficially owned by the shareholder holding such options, warrants, or conversion rights. The percentage ownership of any shareholder is determined by assuming that the shareholder has exercised all options, warrants and conversion rights to obtain additional securities and that no other shareholder has exercised such rights.
(3) This total includes 67,301,363 of Series A preferred shares held by BBGN&K LLC, of which Mr. Aladesuyi’s is the managing member and has voting and dispositive power.
(4) Includes 500 common shares held by Mr. Sherali’s wife, Farah Sherali, of which he has shared voting and dispositive power.
(5) This total includes 304 common shares held by Mr. Russo’s three dependent children, of which he has voting and dispositive power.
(6) The address for Tangiers Investment Group LLC is 7200 Wisconsin Ave., Suite 206, Bethesda, MD 20816.
(7) Indicates Officer.
(8) Indicates Director.
Description of Securities
The following summary includes a description of material provisions of the Company’s capital stock.
Authorized and Outstanding Securities
The Company is authorized to issue 13,000,000,000 shares of common stock, par value $0.001 per share, and 500,000,000 shares of our preferred stock par value $0.001 per share. As of April 15, 2014, there were issued and outstanding 4,003,572,480 shares of our common stock, 309,362,091 shares of our Series A preferred stock and 5 shares of our Series B preferred stock.
Common Stock
The holders of our common stock are entitled to one vote for each share on all matters to be voted on by the shareholders. Holders of common stock do not have cumulative voting rights. Holders of common stock are entitled to share ratably in dividends, if any, as may be declared from time to time by the board of directors in its discretion from funds legally available therefore. In the event of a liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share pro rata all assets remaining after payment in full of all liabilities. All of the outstanding shares of common stock are fully paid and non-assessable. Holders of common stock have no preemptive rights to purchase the Company’s common stock. There are no conversion or redemption rights or sinking fund provisions with respect to the common stock.
Dividends
Dividends, if any, will be contingent upon our revenues and earnings, if any, capital requirements and financial conditions. The payment of dividends, if any, will be within the discretion of our board of directors. We intend to retain earnings, if any, for use in its business operations and accordingly, the board of directors does not anticipate declaring any dividends prior to a business combination transaction.
Undesignated Preferred Stock
Our Articles of Incorporation authorize the issuance of 500,000,000 shares of preferred stock, par value $0.001, and vest in the Company’s board of directors the authority to establish series of unissued preferred shares by the designations, preferences, limitations and relative rights, including voting rights, of the preferred shares of any series so established to the same extent that such designations, preferences, limitations, and relative rights could have been fully stated in the Articles of Incorporation, and in order to establish a series, the board of directors shall adopt a resolution setting forth the designation of the series and fixing and determining the designations, preferences, limitations and relative rights, including voting rights, thereof or so much thereof as shall not be fixed and determined by the Articles of Incorporation. The board of directors is authorized, without further action by our shareholders, to provide for the issuance of preferred shares and any preferred shares so issued would have priority over the common stock with respect to dividend or liquidation rights. Any issuance of preferred shares may have the effect of delaying, deferring or preventing a change in control of the Company and may adversely affect the voting and other rights of the holders of common stock.
Series A Preferred Stock
The Company is authorized to issue 499,998,000 shares of the Company’s Series A Preferred Stock. As of April 15, 2014, 309,362,091 shares of the Company’s Series A Preferred Stock are issued and outstanding. One share of Series A Preferred Stock entitles holders to 100 votes for all matters submitted to a vote of the Company’s common stockholders.
Item 13.
Item 13. Certain Relationships and Related Transactions.
Frank Russo, a shareholder and former Director of the Company, is a holder of an unsecured non-interest bearing note of the Company. At December 31, 2011, $409,979 was due to Mr. Russo. The Company repaid $5,000 to Mr. Russo during the year ended December 31, 2012. During the year ended December 31, 2013, the Company borrowed $6,450 from Mr. Russo. During the year ended December 31, 2012, the Company converted $50,000 of the note to 13,750,000 shares of Series A preferred stock and $10,000 of accrued board compensation due to Mr. Russo into 102,041 shares of Series A preferred stock. During the year ended December 31, 2013, the Company converted $60,000 of the note into 9,166,667 shares of Series A preferred stock. Additionally, during the year ended December 31, 2012, Mr. Russo converted 6,922,685 shares of common stock owned by him into 346,134 shares of Series A preferred stock.
Edward Eppel, a shareholder and Director of the Company, is a holder of a note of the Company which bears interest at 10% per annum. At December 31, 2011, $189,319 was due to Mr. Eppel. The Company borrowed $71,377 from Mr. Eppel during the year ended December 31, 2013. $13,643 and $15,611 of interest was accrued and included in the loan balance for the years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2012, the Company converted $20,000 of the note to 2,500,000 shares of Series A preferred stock and $10,000 of accrued board compensation due to Mr. Eppel into 102,041 shares of series A preferred stock. During the year ended December 31, 2013, the Company converted $80,000 of the note to 19,166,166 shares of Series A preferred stock.
Robert Saidel, a shareholder of the Company, is a holder of notes of the Company which bear interest at 10% per annum. The Company borrowed $179,333 from Mr. Saidel during the year ended December 31, 2013. $2,985 of interest was accrued and included in the loan balance for the year ended December 31, 2013. During the year ended December 31, 2013, Mr. Saidel purchased 7,000,000 shares of the Company’s Series A preferred stock for $45,000.
At December 31, 2011, $31,000 was owed to Mr. Anis Sherali, a shareholder and Director of the Company. During the year ended December 31, 2012, the Company borrowed an additional $56,500 from Mr. Sherali and converted the $87,500 balance of the note and issued 2,592,898 shares of Series A preferred stock to Mr. Sherali. During the year ended December 31, 2012, Mr. Sherali purchased 19,905,075 shares of the Company’s Series A preferred stock for $150,500 and the Company converted $10,000 of accrued board compensation due to Mr. Sherali into 102,041 shares of Series A Preferred stock. Additionally, during the year ended December 31, 2012, Mr. Sherali purchased 533,333 shares of common stock for $40,000 and converted 64,842 shares of common stock owned by him into 1,621,047 shares of Series A preferred stock. During the year ended December 31, 2013, Mr. Sherali purchased 10,000,000 shares of the Company’s common stock for $20,000 and 14,862,035 shares of the Company’s Series A preferred stock for $55,500. Additionally, during the year ended December 30, 2013 Mr. Sherali agreed to purchase 15,000,000 shares of common stock for $4,500 and 51,250,000 shares of Series A preferred stock for $117,500. These amounts are included in common stock issuable and preferred stock issuable, respectively, at December 31, 2013.
During the year ended December 31, 2012, the Company converted $10,000 of accrued board compensation due to Mr. Kayode Aladesuyi, the Company’s Chief executive Officer and a Director, into 102,041 shares of Series A preferred stock, issued 14,583,333 shares of Series A preferred stock as a bonus award to Mr. Aladesuyi and issued 32,500,000 shares of Series A preferred stock in conversion of $110,000 of accrued compensation. During the year ended December 31, 2013, the Company converted $260,000 of accrued salaries due to Mr. Kayode Aladesuyi, the Chief Executive Officer and Director of the Company, into 98,333,333 shares of the Company’s Series A preferred stock.
On October 5, 2011, the Company entered into a license with BBGN&K LLC (“BBGN&K”) for the rights to use certain patented technologies of which BBGN&K owns the patents. Mr. Aladesuyi is the managing member of BBGN&K. The license agreement calls for royalty payments beginning in 2012 of 8% of EarthSearch’s revenues to be paid quarterly. Also on October 5, 2011, the Company's Board of Directors approved the issuance of 1,428,572 shares of Series A preferred stock to Mr. Aladesuyi as payment of $200,000 initial license fee. Royalty fees were $4,013 and $44,441 for the years ended December 31, 2013 and 2012, respectively.
On August 5, 2012, the Company entered into a license agreement with Web Asset, LLC (“Web Asset”) for the rights to use certain social media concept and idea created by Mr. Kayode Aladesuyi. Mr. Aladesuyi is the managing member of Web Asset. The license agreement calls for royalty payments of 49% of the revenues earned by the Company in its use of the social media concept after the Company has earned its first $2,000,000 of revenue, payable quarterly. In addition, the Company was required to pay to Web Asset a one-time fee of $150,000. $85,327 of the one-time fee has been paid during the year ended December 31, 2012 and the remaining $64,673 was paid during the year ended December 31, 2013.
Item 14.
Item 14. Principal Accounting Fees and Services.
Audit Fees consist of assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. This category includes fees related to the performance of audits and attest services not required by statute or regulations, and accounts consultations regarding the application of GAAP to proposed transactions. The aggregate Audit Fees billed for the fiscal years ended December 31, 2013 and 2012 were $24,500 and $46,290, respectively.
Audit Related Fees
There were no fees billed for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements, other than those previously reported in this Item 14, for the fiscal years ended December 31, 2013 and 2012.
Tax Fees
Tax Fees consist of the aggregate fees billed for professional services rendered by our principal accounts for tax compliance, tax advice, and tax planning. These services include preparation for federal and state income tax returns. The aggregate Tax Fees billed for the fiscal years ended December 31, 2013 and 2012 were $14,500 and $14,500, respectively.
Audit Committee Pre-Approval Policies and Procedures
Effective May 6, 2003, the SEC adopted rules that require that before our auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:
• approved by our audit committee; or
• entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.
We do not have an audit committee. Our entire board of directors pre-approves all services provided by our independent auditors.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
Exhibits
(1) Incorporated by reference from Company’s Form 8-K filed with the Securities and Exchange Commission on April 12, 2010.
(2) Incorporated by reference from Company’s Form 10-SB/12g filed with the Securities and Exchange Commission on August 6, 2003
(3) Incorporated by reference from Company’s Form S-8 filed with the Securities and Exchange Commission on September 27, 2010.
(4) Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
/s/ Kayode Aladesuyi
April 15, 2014
Kayode Aladesuyi, Chief Executive Officer, President and Interim Chief Financial Officer
(Principal Executive and Principal Financial Officer)
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Kayode Aladesuyi
April 15, 2014
KayodeAladesuyi, Director
Date
/s/ Anis D. Sherali
April 15, 2014
Anis D. Sherali, Director
Date
/s/ Edward Eppel
April 15, 2014
Edward Eppel, Director
Date
AUDITED FINANCIAL STATEMENTS
N. McMullen Booth Road
Suite.308
Clearwater, FL 33759
Toll fee: 855.334.0934
Fax: 800.581.1908
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
East Coast Diversified Corporation
We have audited the accompanying balance sheets of East Coast Diversified Corporation as of December 31, 2013 and 2012, and the related statements of operations, stockholders’ deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of East Coast Diversified Corporation as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has significant net losses and cash flow deficiencies. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ DKM Certified Public Accountants
DKM Certified Public Accountants
Clearwater, Florida
April 15, 2014
PCAOB Registered
AICPA Member
East Coast Diversified Corporation and Subsidiaries
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
East Coast Diversified Corporation and Subsidiaries
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
East Coast Diversified Corporation and Subsidiaries
Consolidated Statements of Operations
See accompanying notes to consolidated financial statements.
East Coast Diversified Corporation and Subsidiaries
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
Continued
East Coast Diversified Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
See accompanying notes to consolidated financial statements.
East Coast Diversified Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
For the Year Ended December 31, 2013
East Coast Diversified Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
For the Year Ended December 31, 2012
See accompanying notes to consolidated financial statements.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 1 - Nature of Business, Presentation, and Going Concern
Organization
EarthSearch Communications International, Inc. (“EarthSearch”) was founded in November 2003 as a Georgia corporation. The company subsequently re-incorporated in Delaware on July 8, 2005.
On December 18, 2009, East Coast Diversified Corporation's (“ECDC” or the “Company”) former principal stockholders, Frank Rovito, Aaron Goldstein and Green Energy Partners, LLC (collectively the “Sellers”), entered into a Securities Purchase Agreement (the "Purchase Agreement") with Kayode Aladesuyi (the “Buyer”), pursuant to which the Sellers beneficial owners of an aggregate of 6,997,150 shares of the Company's common stock (the “Sellers' Shares”), agreed to sell and transfer the Sellers' Shares to the Buyer for an aggregate of Three Hundred Thousand Dollars ($300,000.00). The Purchase Agreement also provided that the Company would enter into a share exchange agreement with EarthSearch.
On January 15, 2010, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with EarthSearch, pursuant to which the Company agreed to issue 35,000,000 shares of the Company's restricted common stock to the shareholders of EarthSearch. On April 2, 2010, EarthSearch consummated all obligations under the Share Exchange Agreement. In accordance with the terms and provisions of the Share Exchange Agreement, the Company acquired 93.49% of the issued and outstanding common stock of EarthSearch. As a result of the Purchase Agreement and Share Exchange Agreement, our principal business became the business of EarthSearch. The Board of Directors of the Company (the “Board”) passed a resolution electing the new members of the Board and appointing new management of the Company and effectively resigning as their last order of business.
The Share Exchange was accounted for us 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, 2011, the Company acquired 1,800,000 additional shares of EarthSearch from a non-controlling shareholder in exchange for 439,024 shares of the Company's common stock. As of December 31, 2011, the Company owns 94.66% of the issued and outstanding stock of EarthSearch.
On October 23, 2011, the Company entered into a Share Exchange Agreement (the “RP Share Exchange Agreement”) with Rogue Paper, Inc., a California corporation (“Rogue Paper”), and shareholders of Rogue Paper (the “Rogue Paper Holders”). Rogue Paper is headquartered in San Francisco, California and is a developer of mobile and branded applications for major media enterprises. The Company acquired fifty-one percent (51%) of the issued and outstanding common stock of Rogue Paper in exchange for 2,500,000 shares of the Company’s Series A convertible preferred stock (the “Series A Preferred”).
Pursuant to the RP Share Exchange Agreement, no sooner than twelve months from the Effective Date, the Series A Preferred shares shall be convertible, at the option of the holder of such shares, into an aggregate of fifty million shares of the Company’s common stock, par value $0.001 per share. Beginning sixth months from the Effective Date, both the Company and holders of the Series A Preferred shares shall have the option to redeem any portion of such holders’ Series A Preferred shares, for cash, at a price of sixty cents ($0.60) per share. Additionally, commencing twenty-four (24) months from the Effective Date, the holders of the remaining, unsold shares of Rogue Paper common stock may require the Company to redeem such shares, for cash, at a price of three cents ($0.03) per share. 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 January 25, 2013. No legal action has been taken by either Rogue Paper or the Company. As financial records have not been available since September 30, 2012, the Company has treated the balance sheets and results of operations of Rogue Paper as a discontinued operation.
On January, 12, 2012, StudentConnect Inc., a Georgia corporation, was formed as a subsidiary of the Company.
On July, 4, 2012, WetWinds Inc., a Georgia corporation, was formed as a subsidiary of the Company.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 1 - Nature of Business, Presentation, and Going Concern (Continued)
Nature of Operations
The Company is a holding company for several subsidiaries offering products and services in several areas of technology. EarthSearch Communications is a Logistics and Asset Management Company. The Company has created an integration of Radio Frequency Identification Technology (“RFID”) and GPS technology and 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.
StudentConnect provides school transportation technology that would allow parents to receive real time notification about the status of their children. The company utilizes wireless communication between GPS and RFID to provide these services. The product is provided to schools and parents at zero cost. The Company’s business model allows it to charge business advertisers who sponsor alerts and messages to parents receiving the messages.
Wetwinds launched Vir2o, its social media platform, on April 5, 2012, and has commenced marketing of the platform to users globally. The Company offers users a Community Newsfeed, messaging module, Profile Wall and private rooms to share content with friends and families. Each user will have their own private photo, music, movie, game ecommerce rooms. Users can privately or publicly share content in these rooms with their friends and family. We also provide the interactive “JoinMe” technology that allows users and friends to engage in meaningful social activities online. All of our revenue from Vir2o will be advertisement driven.
Rogue Paper, Inc. (“Rogue Paper”), the Company’s majority owned subsidiary, offered second screen technology to media organizations and businesses. 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 January 25, 2013. No legal action has been taken by either Rogue Paper or the Company. As current financial records are not available since September 30, 2012, the Company has treated the balance sheets and results of operations of Rogue Paper in the same manner as a discontinued operation.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit of $21,096,462 at December 31, 2013, a net loss and net cash used in operations of $2,284,354 and $904,919, respectively, for the year ended December 31, 2013. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan, generate revenues, and continue to raise additional investment capital. No assurance can be given that the Company will be successful in these efforts.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management believes that actions presently being taken to obtain additional funding and implement its strategic plans will afford the Company the opportunity to continue as a going concern.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with 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.
Principles of Consolidation
The consolidated financial statements include the accounts of East Coast Diversified Corporation and its majority-owned subsidiary, EarthSearch Communications International, Inc., and its wholly-owned subsidiaries StudentConnect Inc. and WetWinds Inc. Due to the dispute with the management of Rogue Paper, the balances and results of operations of Rogue Paper, Inc. as of and for the nine months ended September 30, 2012 are presented in the consolidated financial statements in the manner of a discontinued operation as of and for the years ended December 31, 2013 and 2012. All significant inter-company balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At December 31, 2013 and 2011, respectively, the Company had no cash equivalents.
Concentration of Credit Risk
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. As of December 31, 2012, two customers account for 79% of the total accounts receivable.
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. Bad debt expense was $3,296 and $604,735 for the years ended December 31, 2013 and 2012, respectively. At December 31, 2013 and 2012, the allowance for doubtful accounts was $nil and $604,735, respectively.
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.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the assets estimated useful lives ranging from 5 years to 7 years. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations. Leasehold improvements are amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.
Depreciation expense was $3,861 and $6,704 for the years ended December 31, 2013 and 2012, respectively.
Goodwill and other intangible assets
Goodwill represents the excess of acquisition consideration paid over the fair value of identifiable net tangible and identifiable intangible assets acquired. Goodwill and other indefinite-lived intangible assets are not amortized, but are reviewed for impairment at least annually, in the fourth quarter, or earlier upon the occurrence of certain triggering events.
Goodwill is allocated among and evaluated for impairment at the reporting unit level. Management evaluates goodwill for impairment using a two-step process provided by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, Intangibles - Goodwill and Other. The first step is to compare the fair value of each of our reporting units to their respective book values, including goodwill. If the fair value of a reporting unit exceeds its book value, reporting unit goodwill is not considered impaired and the second step of the impairment test is not required. If the book value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit’s goodwill with the book value of that goodwill. If the book value of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Intangible assets with determinable useful lives are amortized using the straight-line method over the expected life of the assets.
Amortization of intangible assets was $nil and $114,750 for the years ended December 31, 2013 and 2012, respectively. Due to the dispute with Rogue Paper, the Company has deemed that the unamortized balance of the intangible assets as of September 30, 2012 of $624,750 and the goodwill of $742,107 have been fully impaired and charged to expense as of December 31, 2012.
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.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Policies (Continued)
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. Research and development costs charged to expense were $580,119 and $378,383 for the years ended December 31, 2013 and 2012, respectively.
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.
The Company capitalized no research and development costs during the years ended December 31, 2013 and 2012, respectively. The Company recorded amortization expense of $nil and $9,273 for the years ended December 31, 2013 and 2012, respectively.
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, 2012. 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.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Policies (Continued)
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.
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 has not granted any stock options as of December 31, 2013.
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.
Income Taxes
Income taxes are accounted for under the liability method of accounting for income taxes. Under the liability method, future tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between the amounts reported in the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantially enacted income tax rates expected to apply when the asset is realized or the liability settled. The effect of a change in income tax rates on future income tax liabilities and assets is recognized in income in the period that the change occurs. Future income tax assets are recognized to the extent that they are considered more likely than not to be realized.
The Financial Accounting Standards Board (FASB) has issued ASC 740 “Income Taxes” (formerly, Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” - An Interpretation of FASB Statement No. 109 (FIN 48)). ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with prior literature FASB Statement No. 109, Accounting for Income Taxes. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.
As a result of the implementation of this standard, the Company performed a review of its material tax positions in accordance with recognition and measurement standards established by FASB ASC 740 and concluded that the tax position of the Company has not met the more-likely-than-not threshold as of December 31, 2013.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Policies (Continued)
Basic and Diluted Loss Per Share
The Company computes income (loss) per share in accordance with ASC 260, “Earnings per Share”, which requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding during the period. Diluted EPS gives effect to all dilutive potential shares of common stock outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
As of December 31, 2013 and 2012, there were $532,958 and $364,459, respectively, of convertible notes payable which are convertible at various conversion rates and 285,487,091 shares of convertible preferred stock which are convertible into 5,709,741,820 common shares. However, these potentially dilutive shares are considered to be anti-dilutive and are therefore not included in the calculation of net loss per share.
Segment Information
In accordance with the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”, the Company is required to report financial and descriptive information about its reportable operating segments. The Company operates in only one operating segment as of December 31, 2013
Note 3 - Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2013-04,”Liabilities (Topic 405)”, which provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. ASU 2013-04 is effective for fiscal years beginning after December 15, 2013. We do not believe the adoption of ASU 2013-04 will have a material effect on the Company’s financial statements.
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires disclosure of the amounts reclassified out of each component of accumulated other comprehensive income and into net earnings during the reporting period and is effective for reporting periods beginning after December 15, 2012. We do not believe the adoption of ASU 2013−02 will have a material impact on the measurement of net earnings or other comprehensive income.
In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” and in January 2013, the FASB issued ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”. ASU 2011-11, as clarified, enhances disclosures surrounding offsetting (netting) assets and liabilities. The clarified standard applies to derivatives, repurchase agreements and securities lending transactions and requires companies to disclose gross and net information about financial instruments and derivatives eligible for offset and to disclose financial instruments and derivatives subject to master netting arrangements in financial statements. The clarified standard did not have a material effect on our financial position or results of operations.
In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update is effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 did not have a material impact on our financial position or results of operations.
Management does not believe any recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company’s present or future financial statements.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 4 - Disputed Subsidiary
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 management resigned January 25, 2013. No legal action has been taken by either Rogue Paper or the Company. As current financial records are not available since September 30, 2012, the Company has treated the balance sheets and results of operations of Rogue Paper as of and for the nine months ended September 30, 2012 in the same manner as a discontinued operation.
The following table shows the results of Rogue Paper included in the income (loss) from disputed subsidiary:
The major classes of assets and liabilities of disputed subsidiary on the balance sheet are as follows:
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 5 - Loans Payable
Loans payable at December 31, 2013 and 2012 consisted of the following:
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 5 - Loans Payable (Continued)
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 5 - Loans Payable (Continued)
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 5 - Loans Payable (Continued)
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 5 - Loans Payable (Continued)
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 5 - Loans Payable (Continued)
Note 5 - Loans Payable (Continued)
The Company accrued interest expense of $64,580 and $126,284 for the years ended December 31, 2013 and 2012, respectively, on the above loans. Accrued interest is included in the loan balances.
The Company borrowed $281,000 and $851,711 during the years ended December 31, 2013 and 2012, respectively. The Company made payments of $5,000 and $12,600 on the loans during the years ended December 31, 2013 and 2012. During the year ended December 31, 2013, the Company converted $257,267 of loans payable into 1,975,718,232 shares of the Company’s common stock. During the year ended December 31, 2012, the Company converted $875,433 of loans payable into 3,693,754 shares of the Company’s common stock and $57,000 of loans payable into 1,000,000 shares of the Company’s Series A preferred stock.
Note 6 - Related Parties
Loans payable - related parties at December 31, 2013 and 2012 consist of the following:
Frank Russo, a shareholder and former Director of the Company, is a holder of an unsecured non-interest bearing note of the Company. At December 31, 2011, $409,979 was due to Mr. Russo. The Company repaid $5,000 to Mr. Russo during the year ended December 31, 2012. During the year ended December 31, 2013, the Company borrowed $6,450 from Mr. Russo. During the year ended December 31, 2012, the Company converted $50,000 of the note to 13,750,000 shares of Series A preferred stock and $10,000 of accrued board compensation due to Mr. Russo into 102,041 shares of Series A preferred stock. During the year ended December 31, 2013, the Company converted $60,000 of the note into 9,166,667 shares of Series A preferred stock. Additionally, during the year ended December 31, 2012, Mr. Russo converted 6,922,685 shares of common stock owned by him into 346,134 shares of Series A preferred stock.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 6 - Related Parties (Continued)
Edward Eppel, a shareholder and Director of the Company, is a holder of a note of the Company which bears interest at 10% per annum. At December 31, 2011, $189,319 was due to Mr. Eppel. The Company borrowed $71,377 from Mr. Eppel during the year ended December 31, 2013. $13,643 and $15,611 of interest was accrued and included in the loan balance for the years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2012, the Company converted $20,000 of the note to 2,500,000 shares of Series A preferred stock and $10,000 of accrued board compensation due to Mr. Eppel into 102,041 shares of series A preferred stock. During the year ended December 31, 2013, the Company converted $80,000 of the note to 19,166,166 shares of Series A preferred stock.
Robert Saidel, a shareholder of the Company, is a holder of notes of the Company which bear interest at 10% per annum. The Company borrowed $179,333 from Mr. Saidel during the year ended December 31, 2013. $2,985 of interest was accrued and included in the loan balance for the year ended December 31, 2013. During the year ended December 31, 2013, Mr. Saidel purchased 7,000,000 shares of the Company’s Series A preferred stock for $45,000.
At December 31, 2011, $31,000 was owed to Mr. Anis Sherali, a shareholder and Director of the Company. During the year ended December 31, 2012, the Company borrowed an additional $56,500 from Mr. Sherali and converted the $87,500 balance of the note and issued 2,592,898 shares of Series A preferred stock to Mr. Sherali. During the year ended December 31, 2012, Mr. Sherali purchased 19,905,075 shares of the Company’s Series A preferred stock for $150,500 and the Company converted $10,000 of accrued board compensation due to Mr. Sherali into 102,041 shares of Series A Preferred stock. Additionally, during the year ended December 31, 2012, Mr. Sherali purchased 533,333 shares of common stock for $40,000 and converted 64,842 shares of common stock owned by him into 1,621,047 shares of Series A preferred stock. During the year ended December 31, 2013, Mr. Sherali purchased 10,000,000 shares of the Company’s common stock for $20,000 and 14,862,035 shares of the Company’s Series A preferred stock for $55,500. Additionally, during the year ended December 30, 2013 Mr. Sherali agreed to purchase 15,000,000 shares of common stock for $4,500 and 51,250,000 shares of Series A preferred stock for $117,500. These amounts are included in common stock issuable and preferred stock issuable, respectively, at December 31, 2013.
During the year ended December 31, 2012, the Company converted $10,000 of accrued board compensation due to Mr. Kayode Aladesuyi, the Company’s Chief executive Officer and a Director, into 102,041 shares of Series A preferred stock, issued 14,583,333 shares of Series A preferred stock as a bonus award to Mr. Aladesuyi and issued 32,500,000 shares of Series A preferred stock in conversion of $110,000 of accrued compensation. During the year ended December 31, 2013, the Company converted $260,000 of accrued salaries due to Mr. Kayode Aladesuyi, the Chief Executive Officer and Director of the Company, into 98,333,333 shares of the Company’s Series A preferred stock.
On October 5, 2011, the Company entered into a license with BBGN&K LLC (“BBGN&K”) for the rights to use certain patented technologies of which BBGN&K owns the patents. Mr. Aladesuyi is the managing member of BBGN&K. The license agreement calls for royalty payments beginning in 2012 of 8% of EarthSearch’s revenues to be paid quarterly. Also on October 5, 2011, the Company's Board of Directors approved the issuance of 1,428,572 shares of Series A preferred stock to Mr. Aladesuyi as payment of $200,000 initial license fee. Royalty fees were $4,013 and $44,441 for the years ended December 31, 2013 and 2012, respectively.
On August 5, 2012, the Company entered into a license agreement with Web Asset, LLC (“Web Asset”) for the rights to use certain social media concept and idea created by Mr. Kayode Aladesuyi. Mr. Aladesuyi is the managing member of Web Asset. The license agreement calls for royalty payments of 49% of the revenues earned by the Company in its use of the social media concept after the Company has earned its first $2,000,000 of revenue, payable quarterly. In addition, the Company was required to pay to Web Asset a one-time fee of $150,000. $85,327 of the one-time fee has been paid during the year ended December 31, 2012 and the remaining $64,673 was paid during the year ended December 31, 2013.
Andrea Sousa, Comptroller of the Company, is the wife of Kayode Aladesuyi. On January 12, 2012 the Company issued 7,500,000 shares of the Company’s common stock in exchange of salaries payable to Ms. Rocha of $22,500.
During the year ended December 31, 2012, Mr. Aladesuyi, his five children, and BBGN&K converted a combined 46,027,281 shares of common stock owned by them into 2,301,363 shares of Series A preferred stock.
During the year ended December 31, 2012, Ms. Sousa converted 1,119,436 shares of common stock owned by her into 55,971 shares of Series A preferred stock.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 7 - Amounts Payable in Common Stock and Derivative Liability
During the year ended December 31, 2012, Ironridge Global IV, Ltd. (“Ironridge”) purchased $826,367 of accounts payable and $241,978 of loans payable, for a total of $1,068,345, from certain creditors of the Company. On April 20, 2012, the Superior Court of the State of California for the County of Los Angeles, Central District approved a Stipulation for Settlement of Claims (the “Settlement of Claims”) in the favor of Ironridge. The Settlement of Claims calls for the amount to be paid by issuance of the Company’s common stock. The number of shares of the common stock is to be calculated based on the volume weighted average price (“VWAP”) of the common stock over the calculation period, not to exceed the arithmetic average of the individual daily VWAPs of any five trading days during the calculation period, less a discount of 35%. The calculation period is defined as the period from the approval of the Settlement of Claims until the settlement is completed.
As the terms of the settlement include issuing common stock at a 35% discount to the conversion price, a derivative liability for the discount was established at the time of the Settlement of Claims of $575,263, which was charged to operations during the year ended December 31, 2012 as a loss on conversion of debt. The derivative liability is revalued at the end of each reporting period with any change in the liability being charged to operations. For the years ended December 31, 2013 and 2012, the change in derivative liability of $154,277 and $(12,099), respectively, has been recognized (expensed).
As common stock is issued in installments on the settlement, the Amounts Payable in Common Stock and the Derivative Liability will be reduced accordingly. During the year ended December 31, 2013, 101,300,000 shares of common stock, with a market value of $113,000, were issued to Ironridge in settlement of $173,730 of the liability, resulting in the reduction of the derivative liability of $105,270. During the year ended December 31, 2012, 1,610,400 shares of common stock, with a market value of $1,201,930, were issued to Ironridge in settlement of $773,390 of the liability, resulting in the reduction of the derivative liability of $416,441.
Note 8 - Stockholders’ Deficit
Authorized Capital
On September 17, 2010, the Board authorized the creation of a common stock incentive plan (the “2010 Stock Incentive Plan”) for our management and consultants. The Company registered twenty five million (25,000,000) shares of its common stock pursuant to the 2010 Stock Incentive Plan on Form S-8 filed with the Commission on September 27, 2010. As of September 30, 2012, no options have been granted under the plan.
On October 19, 2012, the Company filed a certificate of amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to increase the Company’s authorized capital stock to 6,000,000,000 shares, par value $0.001 per share, including (i) 5,900,000,000 shares of common stock, par value $0.001 per share and (ii) 100,000,000 shares of preferred stock, par value $0.001 per share.
On December 1, 2012, the Company’s Board of Directors elected to increase the Company’s authorized shares of Series A preferred stock to 400,000,000 shares, par value $0.001 per share and on May 9, 2013, filed a certificate of amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to increase the Company’s authorized shares of preferred stock to 400,000,000 shares, par value $0.001 per share.
Stock Splits
On December 20, 2012, the Company's Board of Directors declared a one for five hundred reverse stock split of all outstanding shares of common stock and series B preferred stock. All common share and per common share data in these consolidated financial statements and related notes hereto have been retroactively adjusted to account for the effect of the reverse stock splits for all periods presented prior to December 31, 2012. The total number of authorized common and preferred shares and the par value thereof was not changed by the split.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 8 - Stockholders’ Deficit (Continued)
Preferred Stock Issued for Cash
During the year ended December 31, 2013, the Company issued 54,208,334 shares of Series A preferred stock in private placements for a total of $184,000 ($0.0034 per share average). During the year ended December 31, 2012, the Company issued 21,256,384 shares of Series A preferred stock in private placements for a total of $197,900 ($0.0093 per share average).
Preferred Stock Issuable for Subscriptions
During the year ended December 31, 2013, the Company entered into subscription agreements for 161,137,035 shares of its Series A preferred stock to be issued for a total of $442,500. $248,000 cash was received for 74,812,035 shares, $15,000 of loans from related parties was converted into 7,500,000 shares, $60,500 of accrued salaries was converted into 27,500,000. As of December 31, 2013, there were 51,325,000 shares of Series A preferred stock, representing $119,000, remaining to be issued.
During the year ended December 31, 2012, the Company issued 1,500 shares of series B preferred stock in a private placement for a total of $1,500,000 ($1,000 per share). During the years ended December 31, 2013 and 2012, $42,500 and $344,002 of the subscription receivable was received in cash, respectively.
Preferred Stock Issued in Conversion of Debt
During the year ended December 31, 2013, the Company issued 28,333,333 shares of Series A preferred stock in the conversion of $140,000 of notes payable to related parties. During the year ended December 31, 2012, the Company issued 18,842,898 shares of Series A preferred stock in the conversion of $157,500 of notes payable to related parties (see Note 6 - Related Parties) and 1,000,000 shares of Series A Preferred in the conversion of $57,000 of notes payable to unrelated parties (see Note 5 - Loans Payable).
During the year ended December 31, 2013, the Company issued 100,833,333 shares of Series A preferred stock in the conversion of $290,500 of accrued salaries.
Preferred Stock Issued for Services
During the year ended December 31, 2012, the Company converted $40,000 of accrued compensation to its board of directors to 408,164 shares of Series A preferred stock and issued 14,583,333 and 32,500,000 shares of Series A preferred stock to its Chief Executive Officer as a bonus award and in conversion of accrued compensation, respectively, (see Note 6 - Related Parties), issued 607,487 shares of Series A preferred stock to an unrelated party for services at the fair value of the services rendered of $45,000, and issued 613 shares of Series B preferred stock to an unrelated party for services at the fair value of the services rendered of $125,000.
Preferred Stock Issued in Conversion of Common Stock
During the year ended December 31, 2013, the Company issued 164,286 shares of Series A preferred stock to an unrelated party for the conversion and return of 6,572 shares of common stock.
During the year ended December 31, 2012, the Company issued 4,324,515 shares of Series A preferred stock to related parties for the conversion and return of 172,981 shares of common stock and issued 372,000 shares of Series A preferred stock to unrelated parties for the conversion and return of 14,880 shares of common stock.
Preferred Stock Purchased for Cash
During the year ended December 31, 2013, the Company purchased 1,375,000 shares of its Series A preferred stock from two shareholders for $5,000 cash.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 8 - Stockholders’ Deficit (Continued)
Common Stock Issued for Cash
During the year ended December 31, 2013, the Company issued 130,000,000 shares of common stock in private placements for a total of $32,000 ($0.0002 per share). During the year ended December 31, 2012, the Company issued 833,833 shares of common stock in private placements for a total of $56,000 ($0.07 per share).
Common Stock Issuable for Subscriptions
During the year ended December 31, 2013, the Company entered into subscription agreements for 15,000,000 shares of its common stock to be issued for a total of $4,500.
Common Stock Issued in Conversion of Debt
During the year ended December 31, 2013, the Company issued 1,975,718,232 shares of common stock in the conversion of $257,267 of notes payable to unrelated parties. During the year ended December 31, 2012, the Company issued 3,693,754 shares of common stock in the conversion of $875,433 of notes payable to unrelated parties (see Note 5 - Loans Payable).
During the year ended December 31, 2013, the Company issued 101,300,000 shares of common stock, with a market value of $113,000, to Ironridge in settlement of $173,730 of amounts payable in common stock. During the year ended December 31, 2012, the Company issued 1,610,400 shares of common stock, with a fair value of $1,201,930, to Ironridge in settlement of $773,390 of amounts payable in common stock (see Note 7 - Amounts Payable in Common Stock and Derivative Liability).
Common Stock Issued for Services
During the year ended December 31, 2013, the Company issued 1,319,444 shares of common stock to two unrelated parties for services of $12,900, or an average price of $0.01 per share based on the fair value of the shares at the time of issuance. During the year ended December 31, 2012, the Company issued 29,638 shares of common stock to unrelated parties for services of $82,205, or an average price of $2.77 per share based on the fair value of the shares at the time of issuance. 25,638 of these shares were issued under the 2010 Stock Incentive Plan (“2010 Plan”) dated September 17, 2010. As of December 31, 2012, 460 shares remain unissued under the 2010 Plan.
During the year ended December 31, 2012, the Company converted $22,500 of accrued salaries due to Ms. Rocha to 15,000 shares of common stock, at a price of $0.042 per share based on the fair value of the shares at the time of issuance (see Note 6 - Related Parties). During the year ended December 31, 2011, the Company converted $230,000 of accrued salaries due to Mr. Aladesuyi to 65,714 shares of common stock, at a price of $3.50 per share based on the fair value of the shares at the time of issuance (see Note 6 - Related Parties).
The Company’s Board of Directors unanimously agreed to grant 4,000 shares to Mr. Kayode Aladesuyi, the Company’s Chief Executive Officer and Chairman, under the 2010 Plan, in lieu of unpaid salary of $87,500 out of an accrued aggregate of $175,000. Mr. Aladesuyi declined the acceptance of the shares and, accordingly, the issuance was cancelled.
During the year ended December 31, 2012, the Company issued 1,200 shares of common stock to an unrelated party for an incentive to enter into a loan agreement, at an average price of $1.80 per share based on the fair value of the shares at the time of issuance (see Note 5 - Loans Payable).
Common Stock Issued in Conversion of Preferred Stock
During the year ended December 31, 2013, the Company issued 6,219,000 shares of common stock to unrelated parties for the conversion and return of 39,050 shares of Series A preferred stock resulting in a reduction in the acquisition liability related to the RP Share Exchange Agreement with the shareholders of Rogue Paper of $23,123.
During the year ended December 31, 2012, the Company issued 622,566 shares of common stock and 56 shares of Series B preferred stock to an unrelated parties for the conversion and return of 1,046,739 shares of Series A preferred stock.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 8 - Stockholders’ Deficit (Continued)
Common Stock Purchased for Cash
During the year ended December 31, 2013, the Company purchased 1,500 shares of its common stock from a shareholder for $5,000 ($3.33 per share).
Note 9 - Income Taxes
The income tax expense (benefit) differs from the amount computed by applying the United States Statutory corporate income tax rate as follows:
Deferred income taxes reflect the tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The components of the net deferred income tax assets are approximately as follows:
The amount taken into income as deferred income tax assets must reflect that portion of the income tax loss carry forwards that is more likely than not to be realized from future operations. The Company has established a full valuation allowance on its net deferred tax assets because of a lack of sufficient positive evidence to support its realization. The valuation allowance increased by $619,330 and $1,430,990 for the years ended December 31, 2013 and 2012, respectively.
No provision for income taxes has been provided in these financial statements due to the net loss for the years ended December 31, 2013 and 2012. At December 31, 2013, the Company has net operating loss carry forwards of approximately $20,715,000, which expire commencing 2024. The potential tax benefit of these losses may be limited due to certain change in ownership provisions under Section 382 of the Internal Revenue Code (“IRS”) and similar state provisions.
IRS Section 382 places limitations (the “Section 382 Limitation”) on the amount of taxable income which can be offset by net operating loss carry forwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. Generally, after a change in control, a loss corporation cannot deduct operating loss carry forwards in excess of the Section 382 Limitation. Due to these “change in ownership” provisions, utilization of the net operating loss and tax credit carry forwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. The Company has not concluded its analysis of Section 382 through December 31, 2013, but believes the provisions will not limit the availability of losses to offset future income.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 9 - Income Taxes (Continued)
The Company is subject to income taxes in the U.S. federal jurisdiction and the state of Georgia. The tax regulations within each jurisdiction are subject to interpretation of related tax laws and regulations and require significant judgment to apply. As of December 31, 2013, tax years 2009 through 2012 remain open for IRS audit. The Company has received no notice of audit from the IRS for any of the open tax years.
Note 10 - Commitments and Contingencies
Operating Leases
The Company leases its office facilities in Marietta, Georgia. The term of the lease is 66 months with escalating lease payments beginning at $2,163 per month. At December 31, 2013, future minimum lease payments under the lease are as follows:
Rent expense was $30,727 and $23,186 for the years ended December 31, 2013 and 2012, respectively.
Acquisition Liabilities
Pursuant to the RP Share Exchange Agreement with Rogue Paper, Inc., commencing six months from October 23, 2011 (the “Execution Date”), both the Company and the holders of the Preferred Shares shall have the option to redeem any portion of such holders Preferred Shares for cash, at a price of sixty cents ($0.60) per share, or $1,075,000. Commencing twenty four (24) months from the Execution date, holders of the remaining forty-nine percent (49%) of Rogue Paper Common Shares, have the option to have such shares redeemed by the Company for cash, at a price of $0.03 per share, or $29,973. During the year ended December 31, 2013, the Company issued 6,219,000 shares of common stock to unrelated parties for the conversion and return of 39,050 shares of Series A preferred stock resulting in a reduction in the acquisition liability of $23,123.
License Agreements
On October 5, 2011, the Company entered into a license with BBGN&K LLC (“BBGN&K”) for the rights to use certain patented technologies of which BBGN&K owns the patents. The license agreement calls for royalty payments beginning in 2012 of 8% of EarthSearch’s revenues to be paid quarterly. Royalty expense was $4,013 and $44,441 for the years ended December 31, 2013 and 2012, respectively (see Note 3 - Related Parties).
On August 5, 2012, the Company entered into a license agreement with Web Asset, LLC (“Web Asset”) for the rights to use certain social media concept and idea created by Mr. Kayode Aladesuyi. The license agreement calls for royalty payments of 49% of the revenues earned by the Company in its use of the social media concept after the Company has earned its first $2,000,000 of revenue, payable quarterly. No royalty payments have been made as of December 31, 2013 (see Note 3 - Related Parties).
Note 11 - Subsequent Events
On January 3, 2014, the Company issued 3,750,000 shares of its Series A preferred stock to a related party for $7,500 in cash.
On January 4, 2014, the Company issued a $20,050 unsecured promissory note to Edward Eppel. The note bears interest at 7% per annum and is due December 31, 2015.
On January 6, 2014, the Company issued 189,739,800 shares of its common stock in conversion of loans payable in the amount of $9,487.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 11 - Subsequent Events (Continued)
On January 8, 2014, the Company issued 200,000,000 shares of its common stock in conversion of loans payable in the amount of $10,000.
On January 9, 2014, the Company issued 5,000,000 shares of its Series A preferred stock to a related party for $10,000 in cash.
On January 21, 2014, the Company issued a $7,700 unsecured promissory note to Andre Fluellen. The note bears interest at 10% per annum and is due June 21, 2014.
On January 21, 2014, the Company issued 1,000,000 shares of its Series A preferred stock to a related party for $2,000 in cash.
On January 22, 2014, the Company issued 20,000,000 shares of its Series A preferred stock to an unrelated party for $40,000 in cash.
On January 27, 2014, the Company issued 220,844,765 shares of its common stock in conversion of loans payable in the amount of $11,042.
On February 10, 2014, the Company issued 110,385,400 shares of its common stock in conversion of loans payable in the amount of $4,967.
On February 11, 2014, the Company issued 462,812,001 shares of its common stock in conversion of loans payable in the amount of $23,141.
On February 13, 2014, the Company issued 294,000,000 shares of its common stock in conversion of loans payable in the amount of $14,700.
On February 14, 2014, the Company issued 231,904,000 shares of its common stock in conversion of loans payable in the amount of $11,595.
On February 22, 2014, the Company issued 2,500,000 shares of its Series A preferred stock to an unrelated party for $10,000 in cash.
On February 21, 2014, the Company issued 155,000,000 shares of its common stock in conversion of loans payable in the amount of $6,975.
On February 24, 2014, the Company issued 280,000,000 shares of its common stock in conversion of loans payable in the amount of $14,000.
On February 25, 2014, the Company issued 100,548,000 shares of its common stock in conversion of loans payable in the amount of $5,027.
On February 28, 2014, the Company issued 293,519,800 shares of its common stock in conversion of loans payable in the amount of $14,676.
On February 28, 2014, the Company’s subsidiary, Student Connect, Inc. (“Student Connect”), entered into a 5 year licensing agreement with Nueva Tech, LLC (“Nueva Tech”). Under the terms of the agreement, Student Connect will receive a one-time licensing fee of $100,000, of which $50,000 has been received and the remaining $50,000 is due within 90 days of the date of the agreement. Nueva Tech is appointed a Master Distributor of the Company’s products and granted an exclusive license to sell the products in the state of California, as well as a non-exclusive license to sell the Company’s products in Arizona, Washington, Oregon, Nevada, New Mexico, and Hawaii. All advertisement revenue generated will be shared, net of communication costs, 40% to Student Connect and 60% to Nueva Tech.
On March 3, 2014, the Company issued 36,000,000 shares of its common stock in conversion of loans payable in the amount of $1,800.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 11 - Subsequent Events (Continued)
On March 5, 2014, the Company issued 169,000,000 shares of its common stock in conversion of loans payable in the amount of $9,000.
On March 6, 2014, the Company issued 177,400,000 shares of its common stock in conversion of loans payable in the amount of $5,000.
On March 11, 2014, the Company issued 294,000,000 shares of its common stock in conversion of loans payable in the amount of $14,700.
On March 17, 2014, the Company issued a $29,000 unsecured convertible promissory note to LG Capital Funding, LLC. The note bears interest at 8% per annum, is due March 17, 2015, and is convertible at a 50% discount to the lowest closing bid price during the fifteen day period prior to the conversion date.
On March 20, 2014, the Company’s subsidiary, Student Connect, Inc. (“Student Connect”), entered into a service agreement with a school district in Texas to provide its proprietary school transportation monitoring system. The agreement is cancellable by the school district upon 30 days’ notice. Student Connect provides the equipment and monitoring service at a no cost to the school district. The system provides instant notification to schools and parents about students riding on the school buses. Messages are delivered to schools and parents at no cost and are funded through advertisers who sponsor each message sent to the parent about their child.
On March 21, 2014, the Company issued 194,000,000 shares of its common stock in conversion of loans payable in the amount of $9,700.
On March 24, 2014, the Company issued 100,000,000 shares of its common stock in conversion of loans payable in the amount of $7,000.
On March 25, 2014, the Company issued 572,190,277 shares of its common stock in conversion of loans payable in the amount of $33,796.
On March 26, 2014, the Company issued 314,285,714 shares of its common stock in conversion of loans payable in the amount of $16,400.
On March 27, 2014, the Company’s subsidiary, Student Connect, Inc. (“Student Connect”), entered into a 5 year licensing agreement with Smart1st, a Beirut, Lebanon corporation. Under the terms of the agreement, Smart1st is appointed a Master Distributor of the Company’s products and granted an exclusive license to sell the products in the country of Lebanon. All advertisement revenue generated will be shared, net of communication costs, 40% to Student Connect and 60% to Smart1st.
On March 27, 2014, the Company issued a $23,000 unsecured promissory note to Frank Russo. The note is non-interest bearing and is due October 1, 2014.
On March 27, 2014, the Company issued a $18,000 unsecured convertible promissory note to Tangiers Investment Group, LLC. The note bears interest at 8% per annum, is due March 17, 2015, and is convertible at the lower of i) $0.0001 or ii) a 50% discount to the trading price during the twenty day period prior to the conversion date.
On March 28, 2014, the Company issued 369,872,800 shares of its common stock in conversion of loans payable in the amount of $18,494.
On March 28, 2014, the Company filed a certificate of amendment to the Company’s Articles of Incorporation with the Secretary of State of Nevada to increase the Company’s authorized capital stock to 13,500,000,000 shares, par value $0.001 per share, including (i) 13,000,000,000 shares of common stock, par value $0.001 per share and (ii) 500,000,000 shares of preferred stock, par value $0.001 per share.
On March 31, 2014, the Company issued 200,000,000 shares of its common stock in conversion of loans payable in the amount of $5,904.
On April 1, 2014, the Company’s subsidiary, Student Connect, Inc. (“Student Connect”), entered into a service agreement with a school district in California to provide its proprietary school transportation monitoring system. The agreement is cancellable by the school district upon 30 days’ notice. Student Connect provides the equipment and monitoring service at a no cost to the school district. The system provides instant notification to schools and parents about students riding on the school buses. Messages are delivered to schools and parents at no cost and are funded through advertisers who sponsor each message sent to the parent about their child.
East Cost Diversified Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2013
Note 11 - Subsequent Events (Continued)
On April 1, 2014, the Company issued 250,000,000 shares of its common stock in conversion of loans payable in the amount of $12,500.
On April 1, 2014, the Company issued 15,000,000 shares of its common stock to a related party for $4,500 in cash received in 2013. The amount was recorded as common stock issuable at December 31, 2013.
On April 1, 2014, the Company issued 75,000 shares of its Series A preferred stock to a third party for $1,500 in cash received in 2013. The amount was recorded in preferred stock issuable at December 31, 2013.
On April 7, 2014, the Company issued 821,007,589 shares of its common stock in conversion of loans payable in the amount of $39,541.
On April 10, 2014, the Company issued 46,500,000 shares of its Series A preferred stock to a third party for $108,000 in cash received in 2013. The amount was recorded in preferred stock issuable at December 31, 2013.
On April 8, 2014, the Company issued a $12,500 unsecured convertible promissory note to Microcap Equity Group LLC. The note bears interest at 12% per annum, is due October 8, 2014, and is convertible at a 50% discount to the lowest bid price during the ninety day period prior to the conversion date.
The Company has evaluated subsequent events through the date the financial statements were issued and filed with Securities and Exchange Commission. The Company has determined that there are no other events that warrant disclosure or recognition in the financial statements.